"Were you listening to me Neo or were you looking at the woman in the red dress?"

THIS IS NOT INVESTMENT ADVICE. THE WRITER MAY OR MAY NOT HAVE POSITIONS IN THE SECURITIES OR MARKETS BEING DISCUSSED

A quick follow up to my last piece. In this case Morpheus is the Bond Market, Neo is the equity market and the woman in the red dress is NVIDIA.

The bond market continues to weaken. Some relief in the past 24-48 hours with the 10yr back under 4.8% yield after spiking to 4.9%. It does seem like a crowded speculativ short trade, but I do not think you can underestimate the amount of real money that has been buying this all the way down (up in yield terms). The 2-yr is still yielding more, so unless and until, the 10-yr gets closer to the cash rate of 5.25% bonds likely remain weak. Heaven forbid if the Fed keep hiking.

Equities have started to sell off. But we are long way away from bear market territory. For the SP500 that would be sub 3700 which is possible if the bond market really gets into trouble. It does seem the subdued demand that most were looking for in Q2 (including myself) is starting materialise. Whether that be in gasoline demand, same store sales or other consumer metrics. Cash balances, whilst still strong are much lower and the consumer is understandably being cautious.

I said last month that “The NASDAQ Index does seem to have run out of puff at the congestion zone I have been highlighting the past couple of months.” Looks worse now.

NASDAQ100

What has changed materially since only a couple of weeks ago is the oil price. The XLE ETF is right on its 52-week Moving average. From both a sentiment perspective and a technical perspective, the sector has looked overdone in the short term. I still like the sector for 2024 but acknowedge that if prices move much lower, the flow from systems and speculators will be strongly negative.

Well the fire in the energy markets definitely blew out this week. A steep reversal on Monday has not let up. Whether this is a healthy pullback in a bull market or the reversal lower due to a weakening demand picture is very hard to tell. The gasoline market remains under pressure and most energy related markets seem to have building stocks.

Whilst acknowledging that the energy sector generally looks good, you cannot ignore the price action this week in crude oil. If prices can stabilise around $80 base WTI then I think it take another leg higher. If it breaks the orange line below (~$78) then I think it could get very ugly, very quickly. Which is ultimately good for consumers, and takes the pressure off the bond market, and equities can stabilise. Energy equities however, will not like this.. so be warned.

So that leads me back to my comments from a few months ago. Everyone is looking for armageddon or a melt up. I don’t see either. If crude bounces between $70 and $90 that is probably a healthy enough price to ensure supply and not too high to kill the economy. It would allow CB’s to keep rates where they are +/- 25 bps and slowly deflate the COVID bubble that is still perculating.

The other thing to consider is US politics. If spending is reigned in more than expected in 2024 does that slow things faster and the government does the Fed’s work for it?

Ag commodities remain firmly on sale. The USDA report last week confirmed more stocks than expected causing the soybean and veg oil complex to sell off. Even soft commodities such as sugar have had a rough week on the back of the lower crude oil prices. As you can see from the last 3 months, its only really cotton and sugar hanging in there. Wheat, as usual, has continued to disappoint the bulls.

This bodes well for lower inflationary impulses. At the same time the USD has been stronger and energy (and fertilizer) markets lower. So the farmer is getting some relief on input costs despite the lower commodity prices in USD terms.

I think the equity market continues to sell off but I don’t think it goes much beyond a 12-15% decline from the highs. It could get a lot worse if oil rebounds, bonds take another wave lower and then it becomes a liquidity & collateral issue which is out of my wheelhouse of expertise.

With this in mind, remember most front end bills/bonds and cash are paying 4-5% to sit and wait. Not a bad strategy as volatility picks up.

NONE OF THIS IS INVESTMENT ADVICE.

PLEASE SPEAK TO A FINANCIAL ADVISOR BEFORE MAKING ANY FINANCIAL OR INVESTMENT DECISIONS.