RISING COMMODITY PRICES ARE PULLING BOND YIELDS HIGHER -- BASE METALS ETF HITS NEW HIGH FOR THE YEAR -- S&P METALS AND MINING ETF OUTPERFORMS -- STRONG GDP FAVORS ECONOMICALLY-SENSITIVE STOCKS OVER BONDS -- SO DOES RISING STOCK/BOND RATIO
RISING COMMODITY PRICES ARE BOOSTING GLOBAL BOND YIELDS... I find it amusing listening to TV talking heads trying to explain why global bond yields have started to rise (pushing bond prices sharply lower). They don't seem to have noticed that commodity prices have risen more than 20% since February which is one definition of a bull market. That's potentially inflationary which usually results in higher bond yields. That's also encouraging central bankers to scale bank quantitative easing and, in the case of the U.S., start raising short-term rates. My April 26 message carried the headline: Commodity ETF Challenges 200-day Average Which May Start Pulling Treasury Bond Yields Higher. Chart 1 shows the PowerShares Commodity ETF (DBC) clearing its 200-day high in late April/early May (red circle). Its 50-day average rose above its 200-day in late May, which is another definition of a bull market. The green bars show the 10-year Treasury Yield ($TNX) bottoming in early July. I suspect that bottom was postponed by the June 23 Brexit vote in the UK. The TNX has since cleared its 200-day average (as have the 10-Year British and German bond yields) on higher inflation numbers.
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Chart 1
BASE METALS FUND IS ALSO IN A BULL MARKET... I've written several messages about the inflationary impact of rising energy prices. Earlier in the week, I mentioned rising base metals which I'm focusing on again today. It's a sector that gets less attention than energy and precious metals. Chart 2 shows the PowerShares Base Metals ETF (DBB) trading at the highest in a year. The DBB includes aluminum, copper, and zinc and has outpaced energy during 2016. Recent buying of base metals in China is giving an added boost to the group and stocks related to them. Chart 3 shows the S&P Metals & Mining ETF (XME) also in a 2016 uptrend. The rising XME/SPX ratio (top of chart) also shows the group to be an outperformer. [Big gains in iron ore and steel in Asia are also supporting global mining stocks]. To the extent that rising base metals point to more inflation and economic strength, that also supports higher global bond yields.
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Chart 2
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Chart 3
RISING RATES FAVOR STOCKS ... There are two ways to view rising interest rates. One way is that it's bad for stocks. In time, that's probably true. The recent rise, however, doesn't appear large enough to sidetrack the global bull market in equities. Rising rates also mean lower bond prices which could actually benefit the stock market. Some money coming out of bonds should find its way back into stocks. That's already starting to happen. Chart 4 plots a relative strength ratio of the S&P 500 divided by the 20+Year Treasury Bond iShares (TLT). The falling ratio shows stocks underperforming the long bond since the middle of 2015. That was primarily due to a couple of bouts of stock selling that summer and the start of this year. Falling bond yields also helped boost bond prices. Stocks, however, have been doing better since the February bottom. The stock/bond ratio has already broken its falling trendline from mid-2015 and appears to be turning higher. Falling bond prices are part of the reason why. A stronger economy also favors stocks over bonds. Today's better than expected 3rd quarter GDP reading of 2.9% is better for stocks than it is for bonds. Sector-wise, rising yields should continue to hurt rate-sensitive dividend paying stocks while helping economically-sensitive groups, especially those that benefit from rising commodity prices.
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Chart 4
S&P 500 TRIES TO REBOUND... Stocks are trying to end the week on a strong note. Chart 5 shows the S&P 500 trading higher while remaining above chart support along its September low. A close above its 50-day average would be a positive sign. Ten sectors are trading higher with healthcare the only loser. The three strongest sectors are industrials, materials, and technology. Seasonal patterns are also turning more friendly. A lesser known part of the "sell in May" maxim is to "buy on Halloween". And, as we all know, that's this coming Monday. Chart 6 shows the 20+Year Treasury Bond iShares (TLT) ending the week below its 200-day average. That may cause some rethinking of asset allocation strategies over the weekend -- in favor of economically-sensitive stocks.
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Chart 5
