This week will be another key test for the markets. The U.S. equity indices are right up against their year highs and there seems no let up in the momentum in crude and other commodity prices. This is surprising given the tightening cycle has begun in Europe and the Fed is turning more hawkish.
Furthermore, the 10-year Treasury yield is up 36 basis points in the past few weeks and Apple, the five star general of the current bull market, and tech are behaving badly. Earnings are going to have to beat expectations at a decent clip to keep the market momo going in order to offset the double hit of higher energy and interest rates.
That is, unless we’ve moved into a phase of total loss of confidence in the dollar where equities become an inflation hedge. A “Rory McIiroy collapse” in the dollar will likely be accompanied by spiking Treasury yields and commodity prices and a surprising rally in equities even as the Fed starts normalizing interest rates. Watch closely.
The politicos are playing with fire in Washington and are clueless to the costs if global markets lose faith in their willingness to construct a long-term fiscal plan. The risk they may just “posture” the U.S. into a crisis that makes the last one look like a picnic in Central Park is certainly not zero, in our opinion.
Silver appears to us to be in a speculative blow off phase and we just don’t like buying a commodity spike moving into a tightening cycle. We would also feel more comfortable if gold were leading the precious metal rally, which would give us more confidence in the the dollar crisis trade. The action in silver makes us think this move is totally based on spec and not a global wholesale move away from the dollar. The unwind could get ugly. Do central banks buy silver?
We have been distracted over the past few weeks and are in a wait and see mode and thus keeping positions light. The only trade we really have conviction in here is being short U.S. Treasuries. In our trading we always heed the advice of the great Todd Harrison, “Discipline always trumps conviction.” By the way, do you think a President Trump would have conviction in [fiscal] discipline? Just askin’.
Good luck out there!
(click here if charts are not observable)