Commodities had an upward bias early in the week but were slapped down on Friday when US first quarter GDP came in below expectations. Representative of the entire industrial commodity complex is the updated weekly chart of the Dow Jones UBS Industrial Metals Index. We've broken long term support:
While I've been emphasizing the negative relationship between deflating commodity prices and a weakening global economy there is a brighter side to this as the Wall Street stock jockeys continually remind us. Lower commodity prices generally lead to lower input costs and expanding profit margins on corporate balance sheets. The wider thesis is that so long as the US economy can keep its head above water lower commodity prices are not only good for corporations but also the consumer. To this I would not argue so long as our economy can keep it's head above water. I think growth in an inter connected global economy could be a very formidable challenge unless the Euro zone starts to come out of recession. And there is no sign of that yet.
Last week I posted a weekly chart of the iShares MSCI Emerging Markets ETF (EEM) and explained that the ETF had firmly bounced off a long term support line and that therefore commodity weakness may not be foretelling a global recession. Here's an update of the same chart:
China had a down week and after an encouraging bounce at the end of last year the index appears to be floundering. As representatives of global exporting strength, these two charts will speak clearly on where the global economy is going in the coming weeks.
Of biggest note this week has been the upward move in Treasuries. Here's a daily chart of the Dow Jones CBOT Treasury Index which measures the performance of three Treasury futures contracts traded on CBOT (Chicago Board of Trade). It includes the price of the front-month future contracts for 5-year and 10-year notes as well as the T-bond (30 year):
The index is currently at the top end of a multi month trading range. No doubt central bank purchases (mainly the Fed) has buoyed these contracts but I believe there's a lot more to the story than just Fed purchases.
As per our inter market correlations, rising Treasury prices and rising stock prices cannot continue in unison. Either Treasuries have to sell off or stocks have to. However, there's a good chance that central bank distortions are finally impacting this traditional inter market relationship as well.
Here's a weekly chart of the 10 Year Treasury yield:
In last week's commentary I pointed to the pressure the Bank of Japan (BoJ) monetary policy is putting on global financial markets; not only in the FOREX (foreign exchange) but international bond markets as well. Supposedly, data being released is showing that Japanese institutions have been net sellers of international bonds this year. Well then, who's buying European bonds? Here's a weekly chart of the Powershares DB Italian Treasury Bond Futures ETN (Exchange Traded Note) which has been representative of the entire European Bond market for some months:
Pretty good for a country and a region in the throes of recession/depression! Italy and Spain are basically comatose economies! And the ECB is not in the market propping up these bonds.
Global bond strength is partly a reflection of behavior in a yield starved world. As of Friday's close you could buy a 5 year BTP (Buoni del Tesoro Poliennal) that yields 2.8%. It's US counterpart closed on Friday yielding 0.686%!
The appreciation in European bonds has been facilitated in the last week by the rising expectation that the ECB (European Central Bank) is finally going to relent and cut it's key lending rate. And, of course, actions in the past by Draghi have taken the extreme "Armageddon scenario" tail risk out of the market with the result that investors feel safe investing in what would otherwise be considered "junk".
Money is flooding into global bonds. Another bubble ...
I want to point out two more quick things. Last week, I noted that Gold was in the process of making a "dead cat" bounce after the drubbing it took earlier in the month. Well, it's a bit more than a "dead cat" bounce. Below is a daily chart of the SPDR Gold Trust Shares ETF. I'm using this ETF instead of the spot price for a specific reason. The spot price chart is a continuous contract that trades 24 hours a day except between 5PM EST on Friday and 6PM EST on Sunday. As such, you'll never see a gap on a continuous contract: