Breaking The Spell Of Rising Yields

Markets didn‘t buy into the Fed messaging, and quite a few moves were reversed. Stocks declined, commodities got under pressure, and oil took it on the chin. Long-dated Treasuries plunged again as the dollar reversed Wednesday‘s losses. Overall picture is one of nervousness as the Fed‘s statements and their consistency are getting a second look. Plus, triple witching can exaggerate today’s trade swings, getting reversed in subsequent sessions too.

The greatest adjustment is arguably in the inflation projections – what and when is the Fed going to do before inflation raises its ugly head in earnest. There is still time, but the market is transitioning to a higher inflation environment already nonetheless.

In moments of uncertainty that hasn‘t yet turned into sell first, ask questions later, let‘s remember the big picture. Plenty of fiscal support is hitting the economy, the Fed is very accomodative, and all the modern monetary theory inspired actions risk overheating the economy later this year. As I wrote yesterday:

(…) Rates are rising for the good reason of improving economy and its outlook, reflation (economic growth rising faster than inflation and inflation expectations) hasn‘t given way to all out inflation, and stocks with commodities remain in a secular bull market. We‘re in the decade of real assets outperforming paper ones, but that will become apparent only much later into the 2020s.

The largely undisturbed rise in commodities got checked yesterday just as stocks did, but the higher timeframe trends (technical and fundamental drivers) hadn‘t changed, which will be apparent once the dust settles. As I‘ll lay out in today‘s analysis, the gold market is springing back to life, and the precious metals upswing rationale is still very much on the table, and the decoupling from rising nominal yields goes on – I view yesterday‘s selloff in the miners as partially equity markets driven.

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Monica Kingsley 3 weeks ago Author's comment

Stocks recovered from early session lows amid positive HYG and sectoral action. Gold and GDX remain largely in tune with each other, while oil went for yesterday's lows only to rebound next. Things appear calming down for today, and the gold upswing remains quite alive, increasing chances we saw the bottom. Copper is also supportive. Chart attached within my status.

Have a nice weekend!