The essence of last week was a clear breakout in commodities (as per the CRB Index) and the simultaneous weakness of US treasury markets, particularly long dated US Treasuries. We now have clear trends in the following markets:
- World equity
- Commodity
- Precious metals
- Corporate bonds
- Currency – USD
- Currency – High Yield
We say clear trends because all the movements in major market indices (be it the Dow World or CRB) are broad based. That is, the strength is not being driven by just a relative few stocks/commodities or sectors thereof. Furthermore, inter-market dynamics are largely supportive of the trends (albeit confirming). This is particularly so with respect to commodity markets where the breakout in the CRB was met with multi-week highs in high yield currencies and multi-week highs in junk grade bonds.
The only place where we have no observable (albeit easily distinguishable) trend is in the US Treasury market. Yes there was some weakness in US Treasuries last week but it was not enough to signal a “breakout”. Given the behaviour of the commodity market we continue to believe that the next big move for US Treasuries is to the downside (yields up). Of course our wishful thinking will fall on deaf ears as the market will do what it wants when it is good and ready!
Both the Dow World and Dow World Small caps closed up for the week more or less at a multi-week high. With small caps mirroring what is happening in the Dow World and no loss in upward momentum we have little reason to believe that world equity markets are going to fall over anytime soon.
Well at least there was some weakness in US Treasuries and that weakness did coincide with the key 100 level on TLT and did occur in conjunction with the CRB breaking out. But US Treasuries have a long way to go (TLT below 88) before we get too excited about being right. We were rather amused by an article on Bloomberg titled: “Treasuries Show No Lost Appetite With Zero Dollar Returns”. To us the decisive strength in commodities and precious metals and the very weak behaviour of US Treasuries suggests that this time around US Treasuries are going to follow the lead of the CRB, Oil and Gold.
A new high for Junk grade bonds and no loss of upward momentum! This clearly demonstrates the crowd’s insatiable appetite for high yield assets. Junk grade bonds are to risk takers in financial markets as the proverbial canary is to coal miners. Whilst junk grade bonds are rising the canaries remain quiet!
Considering that the CRB Index has gone nowhere for 4 months, now that we have the breakout it is likely to be violent…..so far it has been!
Yes the big USD Index has depreciated somewhat over the last 3 months but it has done so in a seemingly “controlled” fashion. Until we see evidence of a collapse in the USD Index (like a fall of 5% in a week) which will exhaust selling pressure we are reasonably confident of more downside. We suspect that one of the hardest trades over the coming weeks/months will be holding on to short positions in the USD and resisting the temptation to “take-profit”.
DBV is the canary of currency markets! No chirping = expect more upside in high yield currencies…..emerging market currencies………high yield corporate debt………commodities………equities, and downside in US Treasuries and the USD Index. Yes DBV tells you more or less all you need to know in world financial markets.
Let’s see what happens with US Treasuries this week. Good things take time!
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