Equities (SPY) look to be in a process of correction, and with all of the uncertainty surrounding earnings, and European progress, a move back to the trend line looks warranted. Yields of both Italian and Spanish sovereigns have felt the brunt of immaterial European rhetoric leaving markets in seemingly identical positions week after week. Although there was a concerted effort of easing at the end of last week from China, BOE, and ECB, this kind of relief is only a slice of the overall pie.
Continued idleness by the European council with respect to direct injection into Spanish banks, clarifying ESFS/ESM flexibility in stabilizing markets such as Italy, and progression towards a supervision mechanism will only keep markets volatile. A consequence of this behavior has led to an Iron Curtain of sorts dividing yields of both Northern and Southern regions. As banks look to draw their lines, the Northern region is experiencing a move to negative yields, while Southern regions are reaching crisis level yields, this only looks to heighten the strife. On an earnings level, analysts have gradually been revising downwards their estimates in preceding weeks. This action looks to provide increased probabilities that companies surprise to the upside. Overall, a correction in equities looks to be in the mix, but after the head and shoulders bottom seen a few weeks ago, look for a move to 1400 along the trend line.
Aside from what has been said above about the Euro (FXE), the dollar (UUP) seems to be developing a theme of its own. Fed officials have come out recently suggesting that more expansionary measures should be implemented. After easing took place in other countries last week and poor employment numbers have been commonplace lately, the probabilities of Fed action have been heightened. Wall Street has revised its likelihood of Fed action to 70% from a previous 50%. Lower global growth looks to have already tampered inflation in China, and may do the same across the board, which would allow for more stimulation as needed.
Treasuries (TLT) saw a move higher out of its rectangle on the calls for more stimulation. Continued weak data and lowered inflation expectations could also give it a bid. On another note, the correlation between TLT and volatility has been on the decline lately, so treasuries could see movement based on their own accord rather than just as a hedge to volatility.
Another story that is in play is the exponential rise of grains (JJG) recently due to an overwhelming heat wave and dry spells. It has affected much of the US, especially Midwest, which has tampered projected crop yields. Both soybeans and corn have been encompassed in the mess and have both skyrocketed. A slight cool down is forecasted for this week, but look for elevated temperatures to remain throughout the summer.
Similar to grains, natural gas (UNG) has appreciated due to the increased temperatures. The warmer winter and large supply led to overhead resistance, but with the commencing heat wave across the US this summer, air condition demand is on the rise. Again, temperatures look to tamper off this week, but the prolonged elevated temperatures should keep air conditioning demand in play.
A labor strike in Norway has led to brent crude (USO) appreciation off of yearly lows, but the commodity could run into overhead resistance soon. Although the strike looks to be deepening, rhetoric out of Iran looks to be suppressing the prices. The geopolitical risk has been a source of support for crude lately, but word that the shutting down of the Strait of Homutz may not be on the horizon, as many may have thought, has led to decreased conflict. In the same, Iran may be more accepting to talks regarding its enriched uranium program, which is another relief to perceived risk.
Lastly, gold (GLD) gets the spotlight. It has been in a declining channel for much of the past few months, but with a weaker dollar, or prolonged inflation of commodity prices, it could catch a bid. Further rhetoric behind the implementing of QE3 will be bullish for the commodity, as well as its role in being an inflation hedge. If both grains and/or energy remain elevated their could be a break from the channel.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
