LOWER BOND YIELDS AND WEAK COMMODITY PRICES CAST DOUBT ON STOCK MARKET REBOUND --
BOND YIELDS AND COMMODITIES CONTINUE TO WEAKEN...One of the recent warnings that I wrote about was the drop in bond yields that has taken place since the start of January. Most of that drop in yields took place last week when a flight to the safety of government bonds suggested that investors were turning more cautious on riskier assets like commodities and stocks. And that was most likely caused by the spread of the coronavirus in China. A second warning was the drop in economically-sensitive commodities like copper and oil. All of which eventually led to some selling of global stocks late last week which was followed on Monday by the biggest drop in stocks in three months. Stocks have made back some of those losses over the last two days. But bond yields and commodity prices haven't. Which raises the question of which of them is telling the truer story. All of which suggests to me that the recent pullback in stocks may not be over, and that the rebound over the llast two-day rebound should be viewed with some caution. At least until some of the virus concerns have run their course; and confidence is restored across all asset classes.
BOND YIELDS HIT THREE-MONTH LOW...Despite a rebound in global stocks today, global bond yields continue to drop. That includes North America and Europe. Chart 1 shows the 10-Year Treasury yield falling -4 basis points today putting it below 1.60% for the first time since early October. That suggests that global investors are still seeking safety in government bonds. Economically-sensitive commodity prices are also continuing to drop.
COMMODITY PRICES REMAIN WEAK... Chart 2 shows the Invesco DB Commodity Index (DBC) trading at a nearly four-month low as well. The two hardest hit commodity groups during January are energy which lost -12% and base metals down -5%. Copper lost nearly -8%. The only commodity group that gained during January was precious metals. Safe haven gold gained +3% and reached a six-year high. Stock groups tied to those commodities acted in accordance. Copper and energy stocks fell hard, while gold miners gained. There are no signs of those trends changing direction. Energy is the market's weakest sector today. While gold miners are one of the day's strongest groups.
RISING COMMODITIES AND BOND YIELDS WOULD SIGNAL MORE OPTIMISM...There's a historical correlation between falling commodity prices and falling bond yields. Falling commodity prices imply lower inflation which causes bond yields to drop and bond prices to rise. Economically-sensitive commodities like copper and oil are also viewed as proxies for the global economy. Investors sell riskier assets when they're nervous about global growth (as they've been doing lately). When they get nervous, they also buy government bonds which pushes bond yields lower. Higher commodity prices usually coincide with higher bond yields and the selling of bonds. Those are signs of renewed confidence. An upturn in bond yields and commodities could signal that current concerns about the coronavirus and global growth may have run their course. That might also restore confidence in global stocks.
Until that happens, U.S stock indexes may continue to back and fill for awhile until confidence is restored.
