Crude Oil Continuous Contract (CL.F) & BMO Long-Term US Treasury Bond Index ETF (ZTL.NEO) 

The cautious turn in sentiment highlighted in last week’s edition of the Equity Leaders Weekly has accelerated in the last week with capital fleeing from equities and commodities and moving back into defensive havens including US bonds, the Japanese Yen, and gold. Investors had already been on tenterhooks heading into the US Thanksgiving holiday and sentiment quickly worsened on the sudden arrival of the new COVID Omicron variant which sparked a new round of international travel restriction and a stampede out of oil in particular. A Monday rebound turned out to be a dead cat bounce with another wave of selling rocking the markets on Tuesday. The start of December has brought another relief rally but it is unclear if upward momentum may continue or if the bears are continuing to circle.

In addition to renewed COVID uncertainty, a number of factors have combined to weigh on the markets. Even while the economic outlook has become more uncertain and the sharp dive in oil and natural gas prices has eased commodity inflation pressures for the moment, wage inflation remains an issue and Fed Chair Powell has hinted this week that accelerating tapering could be on the agenda at the next FOMC meeting later this month.

The one bright light this week has been Canadian bank earnings. Even though results have been a bit mixed, that has been offset by the announcement of big dividend increases and new share buybacks, with half of the Big Six still set to report over the rest of this week. After that, earnings season is pretty much over with only a handful of companies reporting next week headlined by Dollarama and lululemon in Canada and Costco in the US.

There are a number of potentially significant economic reports on the way this week, particularly tomorrow’s US Nonfarm Payrolls and Canada’s monthly jobs report. In addition to headline job growth, the wage component may also be of significant interest to investors. Next week, the main events are Bank of Canada and Reserve Bank of Australia meetings, plus Chinese trade and inflation reports.

In this issue of Equity Leaders Weekly, we look at the state of the oil market amid recent volatility and at renewed interest in US bonds.

As crude oil (CL.F) retested and then exceeded its 2017 peak near $77.50/bbl, which at the time had been President Trump’s political pain threshold (because rising gasoline prices are unpopular with voters), we had been wondering what President Biden’s pain threshold would be. In the second half of November, we started to get a better idea.

Calls from the US and others on OPEC+ to accelerate production increases were ignored, partly because some member countries have been struggling to ramp up production as it is. Prices had started to come back off a bit as the US, UK, China, India, Japan agreed to release supply from strategic stockpiles. New lockdowns in Europe had started to put pressure on oil, but selling really accelerated when new travel restrictions were launched last week.

Oil may also remain active in the coming days. OPEC+ meets today to consider whether to speed up, slow down or maintain their production restoration program, with political pressure from the US and its allies and the impact of travel restrictions on demand to consider. This decision may also impact the price at the pumps. Meanwhile the arrival of winter has sparked significant swings in the price of natural gas as well.

Last month, crude oil broke through its 2018 high to trade at its highest levels since 2014. While it was able to carry up toward $85.00/bbl briefly, this turned out to be a false breakout and CL.F has subsequently slumped back into the mid $60s. CL.F now appears to be settling into a wide range between $60.00 support and resistance somewhere between $76.00 and $79.00. With a bearish SMAX score of 5, CL.F is exhibiting weakness against the asset classes.

When equity markets crashed in the winter of 2020, bonds soared as capital fleeing stocks sought out a safe haven in bonds. As investor confidence bounced back and equity markets rebounded from mid 2020 to mid 2021, capital moved back out of cash and fixed income investments, sending bond prices downward and the Bond asset class tumbling to the bottom of the SIA Asset Class Rankings where it has remained to this day.

Trading action in the BMO US Long-Term US Treasury Bond ETF (ZTL.NEO) suggests that bonds have started to attract renewed interest from investors. After bottoming out in June, ZTL.NEO bounced back in the summer

and have been consolidating their gains since August.

With investors becoming more cautious again and equity market volatility increasing, has broken out to the upside over $59.15, completing a bullish Quadruple Top pattern and signaling the start of a new upleg. This breakout not only reflects an increase in US bond prices, but also a gain in the US Dollar relative to the Canadian Dollar that may have implications for the relative performance of other asset classes, particularly US Equity versus Canadian Equity.

Based on vertical and horizontal counts, next potential resistance for ZTL.NEO appears near $65.35 and then $66.25, followed by a previous column high near $68.00. Initial support appears near $56.85 based on a 3-box reversal.