Our North Star: Rates
Commodities have the longest chart and price history. Many technical precepts date, literally, back to Ancient Greece and their conscious attempts to profit from trends in present and past price data, using sentiment and cycles to gauge the trajectory of economic 'data' based first on changes in asset prices.
Equities have the most detailed price history dating back to Charles Dow in the late nineteenth century while FX volatility makes it a chart favourite. However, the truest charts, in our opinion, in terms of respecting levels, trends, patterns, sentiment, etc, have always been rates – US rates specifically. As such, the Q2 bearish break in Treasuries specifically from a multiyear range is our dominant
focus in Q3.
Early stages of a corrective bear market in rates are often accompanied by a stronger US dollar. We have seen steady appreciation (albeit at a slower pace) for the USD over the past quarter and continue to expect further gains. However, this is unlikely to transpire in a consistent manner against all currencies.
While USD/JPY was the favourite earlier this year, USD strength is likely to be in the spotlight against several EM and commodity currencies over the coming months. Our systematic TRENDS Heatmap and volume (VolT) readings both favour these trends.
Gold was one of the first hard assets to respond to a potential rise in US yields and remains an important market to monitor if these themes are to persist. Gold just completed one of the strongest quarterly drops in our chart history and this is in keeping with our view of a 10-year cyclical shift in the S&P 500 vs. Gold ratio where stocks have the potential to outperform for several years to come.
US equities are one of the most stable equity bull trends globally, and this is likely supportive of US rates being able to maintain an offer. Given the similarity with historic instances of kick-starting the year with approximately 12% gains in the Dow Industrials, we look for a corrective period over the Northern Hemisphere summer (consistent with the past three years). We view such a period as temporary as investors adjust to the higher levels of US yields. Such a development would be a refreshing change as several developed equity markets have had only a choppy advance but ultimately should be able to withstand bearish winds from rates as the medium-term equity bull market marches on.
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Download:Barclays: Top Ten charts for Q3
