The recent journey has been out of a jittery summer filled with trade war anxiety, into a rally and breakout in the S&P 500 and a Q4 bounce in the global macro inflation/reflation trade that, if it remained a bounce only, could last into Q1.
Well folks, here we are well into January and some indicators are on the verge of turning negative. If they go that way the indication would be that disinflation, contraction and/or liquidity problems are surfacing again and caution should be exercised on commodities, related sectors like energy and materials and eventually the broader stock markets. If they hold bounce status, then it’s ‘as you were’ for now.
Doctor Copper (daily chart, click to enlarge for a clearer view) made a fake break above resistance only to pull back hard for a test of support and the 50 day moving average. A loss of 2.75/lb. heightens the caution.
The 30 year yield is on the verge of losing its ‘bounce’ status. The 10yr (not shown) is in a very similar condition. Rising yields would be part of a macro reflation bounce. Declining yields, not so much.
The Yield Curve has flattened back below its breakout point and below its trend line. A few points here.
- During the Q4 bounce it had been steepening under inflationary pressure, which it can do as long-term yields rise more than short-term yields.
- A flattening now would be consistent with failing inflation markets.
- However… the curve can steepen under deflationary pressure as well (ref. 2007-2008). So the plan continues to be for an eventual 2020 steepening, whether inflationary or deflationary. So any continued pullback here could be an unwinding of the inflationists prior to another steepening phase.
- Gold tends to benefit when the curve steepens, under either condition. An inflationary steepener could see gold a non-stellar performer on a relative basis, while a deflationary steepener could see it out perform most everything other than cash and equivalents. Gold mining fundamentals favor the deflationary scenario.
The Gold/Silver ratio (GSR) has furthered its slightly positive look. If it uses this as a base to rise from here the indication would be negative for the reflation/inflation trades and to the degree that the inflationists are in the precious metals, the precious metals too. Non-reflation sensitive stocks have proven over the last few years to be impervious to a rising GSR. That could persist for a while, but at some point Goldilocks likely runs out of porridge.
USD is not too unlike the GSR on the short-term. At the moving averages with a directional decision to make. A note here that my ‘2 Horsemen’ theme could engage if the macro shifts deflationary. The 2 Horsemen being the GSR and USD, riding along with liquidity destruction on the macro.
Finally, the Japanese Yen, which often acts as a risk ‘off’ vehicle due to global traders’ positioning dynamics. It remains bearish and so, a positive on the macro markets. But not necessarily the inflation-sensitive macro markets.