The bread and butter of global macroBefore you trade stocks, bitcoin, FX, bonds or anything you have to try and understand how our monetary system works not to miss the big picture.
This video helps you by providing a 10.000 foot view of the global macro landscape. Don't miss the forest for the trees.
Tune in and enjoy!
Yields
The second possibility for goldSo there is one instance where gold price and US Yields have convergence in direction... The 4 years leading up to the housing market bubble. I would be very concerned if we were only now entering a 4 year cycle to the top.
Another case againt goldThis chart shows that Gold is currently at or nearing a high in comparison to the US Real yields cycle, and not at the buying price that many think it is. A possible 24% correction is in order IMO.
US10Y Strong rejection on the 1D MA50. Long-term bearish sign?A perfect Channel Down has been formed for the US10Y on the 1D time-frame. The 1D MA50 and 1D MA100 have already been broken. The 1D MA150 (yellow trend-line) is exactly within the Higher Lows Zone from the very bottom of August 2020. Will the 1D MA200 (orange trend-line) get tested right on the 0.382 Fibonacci retracement level?
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10 Yr Yields About to Break?When looking at the 10 Yr Yield chart, the price is currently sitting at a key area of support. A breakdown of that support could lead to a massive move to the downside. This would be enough to send equities and commodities soaring.
A bounce from here should take yields right up to two big areas of resistance - first, the recent high around 1.75 and long term resistance at ~1.98-2.00. A breakout of those levels, although highly unlikely, would signal the market actually pricing in rate hikes in the near future. If that were to happen, I'm also assuming equities and commodities would not like that one bit.
Another probable scenario is a temporary bounce up towards the resistance areas, followed by a rejection of those levels. Then, the most logical place for price to move would be down, down, down.
Don't underestimate how important this move in the TVC:US10Y will be for equities and commodities, regardless of which direction it will be.
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US10Y Direction Will Influence NAS100The US10Y started trending up in February. This adversely affected the NAS100 as growth stocks started to feel the pinch of higher discount rates. The 10-Yr reached a high of around 1.75% at the end of March and then began to pull back (red vertical). This supported the NAS100 and growth stocks in general at first, but yields started to drift and the NAS100 followed. However, from 3rd June (blue horizontal), yields started to decline. Again this has supported the NAS100, which charted an all-time high yesterday. Currently, the correlation coefficient is sitting at -0.88, which shows a strong inverse relationship. Tomorrow's Fed decision is likely to have a large influence on the direction of the 10-Yr and as such growth stocks, through their discount rate adjustment.
The Economic Cycle: Painting The Full Picture. This is a very complex topic but I will try to keep it as simple as possible.
This whole story began when the US government printed money to help the economy going and the reserve bank infused money into the market by buying back bonds. These actions did help for a while and the stock market recovered from March 2020 mini-crash, but that printed money caused the dollar index to drop significantly. Consequently, the price of commodities kept rising.
After a while, people started to worry that all those printed money are going to cause huge inflation. Therefore, they started dropping bonds showing their lack of confidence in the economy causing the yields to go up. They instead bought Bitcoin to maintain the value of their money and hedge against a possible crash. That was a good choice because with a limited supply and a high demand Bitcoin acted like gold and went straight up beating other asset classes in returns.
After the election and reopening of the economy, the feds persisted that this inflation is transitory. There are many reasons why they say that including stable inflation expectations, disinflationary technologies, and so on. Due to a phenomenon called “cultural lag” investors believed the feds after a while and when June’s CPI report came out, they almost didn’t react to a whopping 3.5% inflation rate.
This week at the FOMC meeting everyone expects to hear the same thing because Jerome Powell has been pretty consistent with what the feds are going to do in the case inflation got out of hand. They see economic growth in such good health that they are going to start tapering. Unlike, 2013, this tapering is expected to be a relief and lead to a massive bull market.
That said, inflation is going to be around for a couple of years but in the long run, it should go down. And feds are going to stay consistent with their plan to help the economy stabilize over the tapering period.
But what does it all have to do with Bitcoin? A stable economy doesn’t need gold or bitcoin because people would rather have a stable ROI in a productive economy than having their funds held in a volatile asset with a risk of losing 40% of it in a matter of a month.
Of course, the economy won’t stay stable forever and new struggles will come along our way. Whether it’s due to presidential cycles or bitcoin halving or other events, there will be a day that bitcoin will worth 400k.
There is still much to be discussed here, so please feel free to share your thoughts and comment your analysis.
How do you think FOMC meeting is going to affect the market? Are we going to have another Taper Tantrum?
Thanks
The end game is inflation, but the path is unclear.Currently, I think we are in the final stages of this corrective phase. The yield objective is based on the Fibonacci retracements from the second wave, expressly, by the 0.382 to the 0.618 levels.
Detailed decomposition of the current correction in the following picture:
If this labeling is correct, inflation expectations may increase during the rest of the year. Although the title of the publication says long on TNX, the reality is that bonds will lower their prices. Therefore, investors and traders may add risk to their portfolios to hedge their purchasing power (e.g., gold, financial stocks, value-based ETFs, Bitcoin, etc.). Analogous the analysis for yields going down (Government Bonds, Investment-grade corporate bonds, etc.).
Early Warning signal: Yields falling, market crash?Yields falling have been a good predictor of past market corrections. Look at Feb Jan 20, Oct-Nov 18, Jun-Aug 11. Yields falling indicates a flight to safety. Are we in for a stock market crash/correction in the next few months?
Not sure where bottom is, this is just the current trend. Not Fin advice, do you own research!
Gold vs bond yeilds possible breakout and yearly cyclesShows the ratio of gold to bond yields, some symmetry seems to suggest that there could be a break out his sunner,
Gold vs bond yeilds possibly breakout and yearly cyclesShows the ratio of gold to bond yields, some symmetry seems to suggest that there could be a break out his sunner,
Gold vs bond yeilds possibly breakout and yearly cyclesShows the ratio of gold to bond yields, some symmetry seems to suggest that there could be a break out his sunner,
Credit - TLT ShortIdea for TLT:
- Short downtrend which retested median line high.
- PT: 112
GLHF
- DPT
US Treasury Yield Curve and Inversions.This chart shows three times during the past three decades in which the yield curve inverts. An inversion is when the rate of a shorter term debt security is higher than the rate of a longer term debt security. This is identified on this chart in 2000, 2006, 2019.
Treasury Debt Securities:
Bill; less than one year to maturity at issue.
Note; greater than one year but less than 10 years to maturity at issue.
Bond; greater than 10 years to maturity at issue.
In 2000 the yield of the 3 month US Treasury Bill was about 6.3% while the yields of both the 5 year Note and 30 year Bond were around 5.8%.
In 2006 the yield of the 3 month US Treasury Bill was about 5.1% while the yields of both the 5 year Note and 30 year Bond were around 4.9%.
In 2019 the yield of the 3 month US Treasury Bill was about 2.3% while the yield of the 2 year Note was around 1.8%.
Why is this an almost 100% trade???Hello Traders!
Because we have a central bank divergence and yield divergence between AUD and NZD after last week RBNZ.
Wait for it!
TP-s labelled with green line.
Have a great day and a greater week!
Best wishes,
Vitez
Are bonds driving the ship?Liquidity is the whole ballgame
As I've watched the market rip higher amid massive federal deficits, extremely low taxes, and extremely low interest rates over the last several years, I've experienced a growing conviction that "liquidity is the whole ballgame" where markets are concerned. You can chart stock market performance largely as a function of how "tight" or "easy" monetary policy is. Even the US badly losing a trade war to China and then getting locked down by a global pandemic couldn't keep this market down.
Liquidity is controlled by the Fed and bond market, and inflation is the limit
To a great extent, monetary policy is controlled by the Fed, and the Fed's mandate is to control inflation. So investors have definitely reacted negatively to rising inflation and Fed talk of eventually "tapering" asset purchases and raising interest rates. To be sure, the private market ultimately sets bond rates. Bond investors may demand higher interest rates if they see inflation coming, and lenders may demand higher interest rates on mortgages and consumer credit, too. But the private bond and lending market responds to signals from the Fed, so Fed policy and bond investor behavior go hand in hand. The bond market tries to anticipate the Fed and can be viewed as a leading indicator of what the Fed will do.
Rising rates in early 2021 were bad for growth stocks and good for financials
In the first months of 2021, bond rates rose sharply as inflation expectations rose and investor demand for low-interest bonds dried up. Technology stocks, especially unprofitable growth stocks like those held by Cathie Wood's ARK funds, sold off along with bonds. (Higher interest rates make it harder for unprofitable growth companies to raise capital through low-interest debt.) Meanwhile, financial stocks and highly profitable "cash cows" outperformed. (These companies are net lenders rather than net borrowers, so they tend to benefit from higher yields.)
Basically, if you think the Fed will continue to pump liquidity into the system forever, you should bet on cash flow-negative bubble stocks like Cathie does. If you think liquidity's days are numbered, you should short ARKK and go long on Goldman Sachs.
Liquidity rebounded in mid-March, but can it last?
The bond selloff bottomed March 18, and since then, both bonds and growth stocks have made modest recoveries as yields eased. Partly this is just regression to the mean, and partly it may be that bond investors believed the Federal Reserve's narrative that inflation is "transitory" and that we won't need to taper asset purchases or raise interest rates until 2023.
But inflation expectations have continued rising, and official inflation data have lately been surprising to the upside. The Citi inflation surprise index is at its highest level in 13 years. The dollar has been weakening, and foreign purchases of US treasuries have almost entirely dried up. The Russian government announced today that it will sell its reserves of US dollars and replace them with other nations' currencies. The dollar reserve system that made the last decade of "easy" monetary policy possible looks to be at risk.
And the Fed is sluggishly beginning to respond to these warning signs. Regional Fed presidents Robert Steven Kaplan and Patrick Harker have been vocally calling for the Fed to start thinking about "tapering" bond purchases, and yesterday the Fed announced that it is, in fact, winding down one pandemic program to purchase corporate bonds. (But this is not a signal about tapering, they insisted to the press!)
For now, Fed funds rate futures continue to price the odds of an interest rate hike in 2021 at less than 10%. But in April alone we saw month-over-month inflation of 0.8%, bringing the trailing 12 months' inflation rate to 4.2%. And 0.6% seems to be the consensus for the next two months, which would bring July's trailing 12 months' inflation rate to 4.9%. The Fed probably can't ignore 5% inflation for long. (And really it's a 7-10% inflation rate right now if you annualize the rates for March-July instead of adding up the rates for the trailing 12 months.)
The technicals are flashing warning signs
Although bonds have rallied since March 18, they hit a ceiling in the $140.50 - $141 range. They've also been unable to hold above their 50-day EMA or their 200-week EMA. Presently TLT is below all its major moving averages not only on the hourly chart, as shown above, but also on the weekly and daily charts:
Note that TLT is still within the green triangle, but it is fast approaching a decision point. Also note the bearish hidden divergence on the RSI, which would tend to favor a downward breakout from the triangle. Recent strong economic data, including this morning's blowout payroll report, paint a picture of a strong economy and may lead to faster tapering by the Fed. That's one reason that both stocks and bonds sold off today despite the positive economic data.
Sentiment is bearish
I'm not the only one feeling bearish on bonds right now. The put/call ratio on TLT, is 1.8, significantly worse than the 30-day average of 1.4. And investors seem to expect the indices to sell off as well. SPY has a 1.9 put/call ratio, in line with the 30-day average, and QQQ has a 2.0 put/call ratio, only slightly better than the 30-day average of 2.1. The put/call ratio for ARKK has recently improved, down to 1.5 from the 30-day average of 1.8. But if I'm right that a bond sell-off would disproportionately affect growth stocks, then ARKK's put/call ratio may turn bearish again if TLT breaches the bottom of this triangle. ARKK's price action the last few days certainly doesn't look good:
XAUUSD dropped as Yields Adjusted to Inflation ExpectationsThe XAUUSD dropped markedly yesterday as yields adjusted on the initial jobless claims and ADP beats. This is an interesting and potentially telling reaction. The yield adjustment likely came as inflation expectations were altered by the market. We also refer to the USDOLLAR which appreciated as the US10Y adjusted. It is often said the XAUUSD is a hedge against inflation but yesterday’s move was contrary to this. Therefore, as and when nominal yields make further adjustments we consider it prudent to look at the XAUUSD response relative to the USDOLLAR reaction to help with the analysis of direction.
US YieldsOutlook
The Fed started raising the fed funds rate beginning in December 2015 but lowered it again in 2019 and 2020.
There are ongoing pressures to keep yields low. Economic uncertainty in the European Union, for example, can keep investors buying traditionally safe U.S. Treasuries. Foreign investors, China, Japan, and oil-producing countries need U.S. dollars to keep their economies functioning. The best way to collect dollars is by purchasing Treasury products.
In the long-term, these factors can put upward pressure on Treasury yields:
The largest foreign holder of U.S. Treasuries is Japan followed by China. China has threatened to purchase fewer Treasuries, even at higher interest rates. If this happens, it will indicate a loss of confidence in the strength of the U.S. economy. It would drive down the value of the dollar in the end.
One way the United States can reduce its debt is by letting the value of the dollar decline. When foreign governments demand repayment of the face value of the bonds, it will be worth less in their own currency if the dollar's value is lower.
The factors that motivated China, Japan, and oil-producing countries to buy Treasury bonds are changing. As their economies become stronger, they are using their current account surpluses to invest in their own country's infrastructure. They are not as reliant upon the safety of U.S. Treasuries and are starting to diversify away.
The US Dollar further downtrend risks in RSI divergenceDivergence among many momentum and strength oscillators could make it harder for the US dollar to continue lower.
The CFTC Commitment of traders report shows that net positions remain muted above 2500 net positions by non-commercial traders. This shows that speculators and hedge funds still remain bullish on the dollar.
However, a few chief market strategists and advisors have come forward with a view of a lower US dollar but higher yields threaten this macro view.
Credit - IEF ShortIdea for IEF:
- Short the downtrend, Head and Shoulders likely.
- TP1: 108
- PT: 100
GLHF
- DPT
Bullish Pennant on US10Y, Weekly, Target: 2.25 by July 2021The US10Y activity on the weekly chart has been forming a bullish pennant. This is consistent with the overall economic environment, which also supports rising interests rates. It will be interesting to see how this chart devleops, and if we can see interest rates approaching 2.25% by early July.
Negative Yields Coming, Unserviceable Debt !!Negative yields coming within 2026-2028 due to the high unserviceable debt,
Central bank digital currencies not considered whilst building this Analysis.
Risk is high for tech stocks and goldThe Nasdaq is looking like it may test its support line soon. The index has been responding very negatively to any whiff of rising interest rates (falling prices) on bonds. Bond rates fell (and prices rose) for five weeks straight, but then they hit the 200-day EMA like a brick wall, broke their trend, and have been trading sideways the last two weeks. This week it's looking like yields might resume their uptrend again. Here is an ETF of long-term government bonds, so you can see what I mean about the 200-day EMA resistance and the risk of a rollover:
If this falls, expect the Nasdaq to fall through its support line and perhaps to head downward to its 200-day EMA. Gold will drop as well. Note that gold has already perfectly hit the target I posted two months ago, and now looks ready for a pullback from resistance:
Similarly, the USD is at a support level after a six-week slide:
The market has a couple different ways to price in inflation. It can either sell the dollar (and buy gold and bonds), or it can sell gold and bonds (and buy the dollar). (If inflation gets really bad, the market could sell both bonds and the dollar at once. If that happens, it might be okay for gold and crypto but could be really bad for US stocks.)
Right now we're alternating between these two tools. If the dollar finds support and gold finds resistance here, then the market will rotate to selling bonds, and yields will go up. That's consistent with the price action we're seeing in $TLT, with its rejection from the 200-day EMA. Bottom line: we might be poised at a negative inflection point right now for gold and tech stocks.
