Happy Father’s Day! Hope everyone had a great weekend.
The markets took an ugly turn following Wednesday’s FOMC meeting. Fed Chairman, Jerome Powell essentially blinked — implying that they would have to adjust monetary policy (more hawkish) in response to persistently higher inflation. In response, the markets reacted in a risk-off manner.
weekly performance by asset class
Global Equities: The tech-heavy Nasdaq ($NDX, +0.51%) was the only major index to finish the week off in the green. Developed International ($EFA, -2.96%) and Emerging Markets ($EEM, -2.11%) underperformed the S&P 500 ($SPX, -1.75%). The Dow Jones Transports ($DJT, -4.62%), the Russell 2000 ($RUT, -4.67%), and the S&P 400 Mid-Caps ($MID, -5.17%) led to the downside.
Equities by Sector: The risk-off action was evident from the sector performance this week. The value and cyclical sectors of Industrials ($XLI, -3.67%), Materials ($XLB, -5.85%), Financials ($XLF, -5.96%) and Energy ($XLE, -6.14%) all led to the downside.
The real question is whether the recent rotation to technology from cyclical and defensive stocks is simply a rotation where tech leads the way and we march higher, or whether the rotation to the large tech leaders should be viewed as a move to relative safe havens in the market.
Fixed Income & Rates: Bonds also showed a similar reaction. Shorter-term bonds fell, while the longer-term bonds rallied as 10 and 30-year rates dropped. The yield curve flattened as investors priced in the prospects of higher short-term rates coming sooner than expected, while the long-end on the curve fell on the prospects of slower economic growth and inflation down the line.
Commodities: Commodities ($DBC, -2.67%) sold off across the board while the U.S. Dollar Index ($DXY, +2.02%) rallied.
Were Copper Futures ($HG1!) foreshadowing the end of week risk-off sentiment in advance of the FOMC Meeting Wednesday? We covered the weakness in copper in the prior post here.
Has the inflation trade ran its course? It may be too soon to say, but we can watch the following two charts for guidance.
Inflation-Protected Bonds ($TIP) versus Treasury Bonds ($IEF): If this relative relationship is below the mid-2018 highs, the market likely isn’t pricing in persistently higher inflation.
Thomson Reuters Core Commodity CRB Index ($TRJEFCRB): Same goes for the CRB Index below $207.
quick note on bitcoin
Bitcoin ($BTCUSD) continues to gyrate between the levels outlined in the fibs in practice post, $30,098 and $46,766, and can’t seem to hold over the early January highs ( blue line). Here’s the daily chart for reference. Maybe we’re a seeing a much larger head and shoulders pattern is emerging? A sustained move below $30K would be quite bearish for the crypto-leader.
We discussed the merits of using Bitcoin as a risk sentiment gauge in the useful or useless post. The direction of resolution outlined above may offer guidance for the risk-on trade going forward.
takeaway
While the markets showed clear risk-off sentiment following the Fed’s comments this week, we should continue to let the charts guide us. The levels outlined in the overhead supply post and here can provide a simple guide for us going forward.
That’s it for tonight. Lots to watch this week!
Cheers!