US Treasuries continue to collapse. On Friday not only did the long dated US Treasury ETF (TLT) fall but the medium term (IEF) and short term US Treasury ETF (SHY) also fell by rather significant amounts. Falling US Treasury prices (higher yields) suggest that the market is factoring in higher interest rates, higher economic growth rates and inflation. This has very important ramifications for equities in general, commodities and high yield currencies.
We could see this relationship unfold on Friday with the Value Line Index closing another 0.75% higher, The CRB index 3% higher and the USD Index lower by 0.20%
The equally weighted Value Line is now at another multi-week high. Furthermore, there does not appear to be any breakdown in upside momentum. A multi-week high (in fact a 7 month high) suggests that fundamentals are improving, or at least not as bad as everyone was expecting:
Note how the USD Index is starting to break down. For some 8 months the USD acted like a gauge of fear. Every time equity markets took a dive the USD advanced….now that is all starting to unwind. We see considerable downside in the USD over the coming weeks/months.
Finally commodities are starting to react the way we thought they would. The broad CRB Index almost closed above the 1st line of resistance at 230 on Friday. We believe that the CRB Index will break to a multi-week high (245+) over the coming days:
We now have a clear breakout to a multi-week high in commodity related stocks as per the Morgan Stanley Commodity Related Equity Index below:
On a sector level we have bullish break-outs in; Agriculturals (MOO), Steel (SLX), Coal (KOL), Metals and Mining (XME), Oil Services (OIH), and Timber (CUT). We believe that the breakout in commodity stocks has just begun. Over the coming weeks we should see commodity stocks claw back all their losses in sustained in late Sept/early October last year (another 40% upside before year end).
How long will the rally in commodities, commodity stocks, and equities in general last? We don’t know (seriously). We are riding the risk-seeking mood of the market. While high yield bonds, emerging market small caps, and high yield currencies continue to advance and US Treasuries fall, expect more upside in “risky” assets.
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