Around the Financial Markets in Eight Charts

This is the second in our weekly series - financial markets in 8 charts. We have been using this internally for a quite awhile now and want to bring it to a wider audience. We take a look at the major indices of the equity, commodity, currency and bond markets and, using intermarket analysis, attempt to identify long term trends and underlying themes.

We see the multi-week highs of silver and the Aussie dollar as demonstrations of inflation hedge and high-yield instruments.

We expect this to continue for many months to come.

Equities

What happened in China recently? A straight line rise, then a bit of a collapse. How often have we seen that in equity markets. We think that little bubble has "popped" and now shall see a series of higher highs and higher lows in world equity markets. There has been no collapse in the high risk small caps, which gives us confidence that this rally still has away to go.

One of our recent articles, Market Exuding a General Bullish Tone, resulted in some incredulous comments. All we are doing is reflecting what the market is telling us.

Fixed Income

US long dated Treasuries anyone? Who wants yields of less than half of the Dow? Someone is accumulating here; who the parties are we don't know. Our experience tells us that junk bonds and US Treasuries rarely travel in the same direction for long. We do think that yield seeking is truly alive and well in the bond market.

Commodities

We have been commodity bulls for awhile now, however clearly the CRB index is not looking bullish, but nor is it bearish. The recent rises in gold and silver should see the CRB take a more bullish position; however, other commodities are showing signs of weakness.

Rising equities with commodities not quite rising in tandem, in conjunction with the Baltic shipping and rail car rates, leads us to think that perhaps global equities are slightly ahead of economic activity. However, we cannot see any weakness in equity prices at the moment; we can only trade the markets as they are, not what we think they should be.

Currencies

Oh dear.. look at the USD index. What is causing this? We think that the recent increase in money supply is the most obvious cause, but as is usually the case with financial markets, the cause end effect relationships is quite complex. DBV, the high yield currency ETF is close to breaking into a multi-week high. Again, we see that investors are seeking yield rather than risk aversion.

This appears to be very much a tradable trend and may be a factor in demand for US Treasuries.

We use DBV as one of our leading indicators for market movements. The currency markets, being the most liquid, tend to show trends before other asset classes.

When we wrote last weeks article, we were expecting a pullback in global equity markets of around 5%. Even we, bullish as we are, were a little surprised that there was not more downwards momentum (..it may still yet come..). However, we still feel that these market trends or themes will be with us for many months to come.

Bullish: Equities, commodities, corporate bonds and high yield currencies.

Bearish: US Treasuries, the USD and low yield currencies.

Disclosure: Long EEM, TBT, DBC, UDN, DBV

Comments

[NUCLEAR1929:]

nice

Sep 08 08:24 AM

[geohjr:]

very interesting you're long TBT. I don't have the courage here.

Even you indicate "Someone is accumulating here; who the parties are we don't know"; makes no sense given predominate long term inflation sentiment. The Fed maybe actually pulling this off?

regards and thanks for your articles

Sep 08 10:32 AM

[Jeff Diercks:]

Nice piece.

Sep 08 08:55 PM

[mbkelly75:]

What the charts show is VERY interesting. Please keep up the good work. I will be checking to see the changes next week. Thank You!

Sep 08 09:32 PM