Weekly Market Pulse: The Crypto Distraction

But we may have already seen the peak in the rate of change for growth and inflation expectations. The nominal 10 year Treasury yield has stalled since mid-March even as TIPS yields continued to fall – until last week when TIPS yields rose 9 basis points while the 10 year yield fell by a couple. The result was a drop in inflation expectation and a small rise in real growth expectations. Copper fell nearly 4% last week and is down 8% since making an all time high earlier this month. Gold, meanwhile, has been rallying, up another 2% last week and 6% since the beginning of May. The result was a drop in the copper/gold ratio of 6% just last week. Unless that reverses quickly I would expect the 10 year yield to follow the ratio down. Nominal growth expectations have stopped rising and if that turns out to be prophetic, stocks may be next to peak. If nominal growth has peaked, then earnings growth probably has too. There is also the small matter of a potential change in the corporate tax rate somewhere down the road although Biden seems to be having problems finding allies anywhere in the world on that front. While Biden seeks a hike in the US rate from the current 21%, the administration is negotiating a global floor that last week was revealed to be a mere 15%. And it seems likely that will fall to 13% if Ireland and a few other countries have their way. 



Commodities have had a great run recently and speculators have, of course, done their part in driving up prices. Large speculators are very long across the entire agriculture complex – still – even after a recent small correction in most. Commodity markets are not uniform though so I wouldn’t expect a big downdraft. Speculators are long the industrial metals too but the positioning is not extreme. But a correction in commodity prices seems overdue and with growth and inflation expectations potentially peaking would make perfect sense. 

Ultimately, a longer term bull market in commodities will depend, at least to some degree, on the course of the dollar. The dollar has struggled a bit too as the boom expectation gets rolled back a bit. The buck was down last week and we’re back to where we started the year. I am still calling the dollar neutral but if it falls much more I think we’ll have to acknowledge that it is in a more durable downtrend. I also watch futures market positioning in the dollar and right now sentiment appears fairly neutral. Large speculators are long the dollar index but only slightly (and remember market positioning is really only useful at extremes). The only currency where I could make a case for extreme positioning is against the Canadian dollar where both large and small specs are at their longest in about 18 months. Against most other currencies there doesn’t appear to be any conviction either way. The pound has rallied from 1.2 to 1.4 and large specs appear to have hardly noticed. The point is that there is no extreme short position in the futures markets against the dollar and a further fall therefore seems more likely than not.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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