Posts tagged commodities
As you were

On a headline level, 2018 has started exactly as 2017 finished. Stocks are up, U.S. short term rates are up—but the dollar has traded heavy—and economic data continue to tell a story of a synchronised upturn in global growth. The bears are furious, or perhaps just confused. Hussman recently published a prepper’s guide to a hypervalued market. And value investor extraordinaire—and famed bear—Jeremy Grantham from GMO invokes the “highest-priced markets in US history,” but also proclaims that we’re now in the  “melt-up phase” of the bull market. I am all for holding opposing views at the same time, but markets demand a view and a position. So which is it Mr. Grantham? Long, short, or flat? I am not holding my breath for an answer. I have long since left the extremes behind. Picture a spectrum with Hussman and GMO at one end, and the wet-behind-the-ears trader, who have never experienced a sizeable drawdown in Spoos, at the other end. Hint: You want to be somewhere in between.

Separating signal from noise is an important skill in this game, and markets currently are throwing a number of curve balls at investors. What better way to kick off 2018 than by highlighting the ones that matter.

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Is it time to worry about low oil prices again?

Markets raised a lot of interesting questions last week, and most of them had nothing to do with the French presidential elections. The main talking points were the stumble in oil prices—and other industrial commodities—and the growing anxiety that the stop-go cycle in China is edging towards the former rather than the latter. The main question everyone is asking when the market breaks key levels is whether it is the beginning of a more prolonged move. I am no expert, but if pressed I think oil and commodities will snap back. The chart below shows trailing flows of the DBC commodity ETF, which have been depressed recently. This doesn't preclude a further rout, but it suggests that investors' positioning and sentiment don't favour it. This story is corroborated by CFTC data, which shows that spec positioning in oil have been reduced significantly. This doesn't look like a market which is being caught out complacently long as was the case last time oil was routed. 

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Has the S&P 500 run ahead of other major asset classes?

The sharp fall in oil prices was the most interesting market news last week. It sends a signal that investors are waking up the fact that the brittle OPEC output deal always was going to be challenged by U.S. producers restarting their drills as prices rose. I am no expert, but this does not come as a surprise to me. OPEC is an unstable alliance, and U.S. producers are governed by one thing and one thing only, price. Whatever detente exists in the global oil market, I am pretty sure that it is a fragile one.  A significant leg lower in oil could be significant for a number of reasons. It could herald the speedy end of the "reflation trade," which would suit me well. But if it morphs into something more dramatic, we're back to the story of stress in energy high yield debt, default risks, and perhaps liquidity/fund closure risk in the broader corporate bond market. I am not sure that would suit the portfolio one bit. 

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Treading water

Last week was docile compared with the fun and games we were treated to earlier this month; no imminent Lehman moment at a major European bank and no flash crash in the GBP or other G4 currencies. Still, we had a number of interesting moves in the major asset classes and indices. The continued squeeze in yields probably was the stand-out move. Starting with the benchmark, the U.S. 10-year yield broke range and a move to 2% is starting to look like a good bet in my view. For once, it appears that can we apply relatively plain-vanilla macroeconomic narrative here. Inflation in the U.S.—and indeed globally—is nudging higher and the Fed intends to act accordingly. The slightly more cynical interpretation is that the Federales are desperate to get another hike in before the end of the year, but that underlying fundamentals haven't really changed that much.

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