Commodity Markets Review The U.S. Dollar Index declined rather impressively yesterday as long-term yields moved higher but this appeared a bit ‘random’ to us given that the longer-term trend has included a stronger dollar with rising yields.
At right we show a comparison between the Swiss franc futures and the yield index for 10-year Treasuries (TNX).
The TNX and the Swiss franc have been moving inversely so higher yields should go with a weaker franc which, in turn, should then be a negative for metals prices.
It may be that yields have to move through the November highs before the franc will be ready to break down below the November lows. In March, 2005 10-year yields reached 4.693% while this past November the highs were 4.682% compared to yesterday’s peak of 4.668%.
In other words, we would look for a much better dollar if yields manage to move up through 4.70%.
We are perhaps understandably fixating on the ‘crash top’ potential for the current market. Why? Because these sorts of trends take years to develops, months to create divergences, and weeks to make a ‘top’.
Even then the offending market will work higher on virtually a daily basis into the start of the decline putting short or defensive positions increasingly under water.
Anyway... the premise is that roughly 5 to 7 months AFTER the bond market begins to trend lower the equity markets tend to decline.
In the current case the weakest bond market would be Japan’s and, as we have argued, weaker Japanese bond prices tend to reflect an end to rising energy prices.
If we line up the start of Japanese bond price weakness last year with the start of U.S. bond market weakness in the autumn of 1993 and then compare crude oil prices today with the U.S. equity market into March of 2004... we get the two charts below.
The point here is that the chart for crude oil appears amazingly similar to that of the SPX in March, 2004 but it is the nature of ‘crash tops’ to rally day after day after day before snapping lower which, of course, is precisely what is happening at present (although the ‘snapping lower’ part is obviously still more hope and thesis than reality).
Short Term Views The euro rallied rather sharply upwards yesterday as commodity prices recovered after testing the 200-day exponential moving average line in February. The chart at right shows that the CRB Index corrected down to this moving average line at the end of November and by mid-December the euro was back into an uptrend that lasted into the second half of January.
The point here is that if our thesis is wrong then the euro is going to trend higher as the CRB Index moves back up towards the resistance line currently pushing up towards 355.
Now... if it is business as usual then the dollar looks lower as the euro and commodity prices move upwards. A positive equity market could develop from steady commodity prices with weaker energy and metals compensated by strength in commodities like coffee, lumber, and the grains but that is not exactly what we would call a ‘high odds’ outcome.
In any event... support for the euro remains around 1.1860 with similar support for the CRB Index at 320.
When we look at the comparison between the S&P 500 Index from 1987 and the current chart of the Canadian TSX Index (below right) we keep finding reasons to believe that we are ‘simply’ in between the price peak and the eventual ‘up and out’ top that leads into a major correction. Below we show the stock price of Micron (MU) held and rallied right into the start of the 1987 stock market ‘crash’ so that we can compare it visually with MTU in the current time frame. If we take this literally it may still take another week or two before downward pressures show up in earnest.
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