I didn't trust Monday's reversal. This getting-long-in-the-tooth correction is not over, and corporate bonds aren't yet confirming. It has become a reasonable expectation of late that when the higher quality debt instruments (think LQD, TLT) have a good day, junk corporate bonds are put under pressure. What I am looking for is seeing (iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG)) performance more aligned with the S&P 500. That would be a rally rally on solid footing.
We are not seeing that yet. Just compare the tech performance to the rest of the market, especially when viewed from the declining new highs and new lows (yes, these closed higher on Monday). It‘s apparent that yesterday's S&P 500 upswing was the result of reallocation to tech to the detriment of much of the rest, in light of the key development of the day – falling Treasury yields.
The stock market simply keeps dealing with the rising nominal rates. Consolidation of their recent move appears under way, in fits and starts, as long-term Treasuries are:
(…) trading historically very extended compared to their 50-day moving averages. While they can snap back over the next 1-2 weeks, the 10-year Treasury bond yield again breaking 1.50% is a testament to the Fed not willing to do anything at the moment.
On one hand, the central bank is fine with commodities on the move, which aren't yet really showing in CPI, (today‘s 0.4% reading is a baby step in this direction) and which the Fed claims would be only transitory. On the other hand, the bond market is buying into this assertion to a degree, because otherwise the long-term bonds decline would continue rather unabated. As we are in the reflationary stage, when economic growth is rising faster than both inflation and inflation expectations, this laissez-faire approach to inflation isn't likely to bite the Fed now as much as to truly wake up the bond vigilantes.
The high rates we're experiencing currently do not compare to the early 1980s, which underscores the fragility of the current monetary order. The Fed knows that, and it has been evident in the long preparatory period.
The market will see through this, and the central bank will be forced to move to bring long-term rates down through yield curve control or a twist program, which would break the dollar, drive emerging markets and not exactly control inflation. Real rates will drop like a stone in such a scenario, turning around gold profoundly.
But we're not yet there, as inflation is still too low and economic growth too high to force this scenario to play out. Market players are already hedging against the rising inflation – and gold is still mostly on the defensive even as TIPS are starting to turn. What we're seeing in the miners-to-gold ratio are green shoots in obvious need of follow through to turn the yellow metal sustainably around.
Bottom line, if I had to pick only two markets to watch right now, it would be long-term Treasuries and the dollar. Nominal, long-term Treasury rates retreated yesterday, and so did the dollar. Emerging markets liked that more than their bonds, which means that the current reprieve in yields is more likely temporary than not.
Let‘s move right into the charts (all courtesy of www.stockcharts.com).
Gold in the Spotlight
Miners‘ outperformance of the yellow metal goes on, today illustrated with the stronger ARCA Gold BUGS. Given the CPI readings just in, the gold bulls have a good reason to run with the assumption that even Fed‘s own real inflation underestimating models are starting to reveal its slow appearance in the basket of consumer prices.
It was on Monday when I showed you this chart. We're within a gold rebound highlighting some relative strength in the yellow metal vis-a-vis the rising rates – in the latter half of the 7-month long correction. The key narrative shift would be one of focus on inflation, inflation expectations, which would be also manifest in the Treasury inflation-protected securities (TIPS) chart. Thus far, the presented big picture view is a reason for modest, guarded optimism (in need of constant monitoring).
Silver And Its Miners
Silver has turned higher yesterday, and so did platinum. It's, however, the silver miners (Global X Silver Miners ETF (NYSE:SIL)), which is making the upswing a little suspect.
Summary
The belated and thus far rather meek gold rebound can proceed. Should the mining stocks keep their outperformance (ideally accompanied by silver miners doing the same with respect to the white metal), that would be a hallmark of the unfolding rebound carrying on. For now, guarded optimism is still the name of the game in the precious metals arena.