From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
As we near the close of another month, crude oil is once again front and center.
At the end of October, black gold was ripping to new seven-year highs while interest rates rose and cyclical stocks kicked back into gear.
Today, this picture has dramatically changed.
Crude oil is currently about 20% off its highs, as prices have collapsed back below our risk level.
Crude dropped $10 during last Friday’s volatile session and continues to slide lower this week. Just look at this bearish candlestick on the monthly chart:
Welcome to our latest RPP Report, where we publish return tables for various asset classes and categories, along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching to profit in the weeks and months ahead.
We consider this our state of the union address, as we break down and reiterate both our tactical and structural outlook on various asset classes. Our ultimate goal is to discuss the most important themes and developments that are currently playing out in markets around the world.
There's been plenty of action these past few weeks. Let's kick things off with stocks and try to make sense of what we're seeing.
For the Indian market participants, the currency section has been extremely range-bound. And it's been that way for a while now! Every time we talk about it, there's nothing new to say.
Stocks up and down the cap scale were breaking out to new highs and energy futures were resolving higher from multi-year bases -- all while emerging-market and commodity-centric currencies approached year-to-date lows.
Something wasn’t right.
We’d expect these risk-on currencies to catch higher given their strong correlation with other risk assets. But this hasn’t been the case. In fact, seeing as currency markets had been out of sync with other asset classes for months, we really didn’t want to overthink this development.
But what appeared to be another mixed intermarket signal proved a valuable warning.
Fast-forward to today and the weakness that was evident among emerging-market currencies is spreading to stocks and commodities. Small-caps and crude oil are retesting critical breakout levels, and cyclical stocks are failing to sustain their recent moves.
When we broke down the US Dollar Index last month, we pointed out that its strength was rather narrow in terms of how it was performing relative to most individual currencies. Long story short, the recent rally in DXY has been fueled primarily by its two largest components -- the euro and the yen. These two currencies make up more than 70% of the DXY weighting, and the fact that they are at new 52-week lows explains why the index is at new highs.
Although the inverse correlation is not as strong with equities, it still exists. But the USD’s resilience during the second half of this year hasn’t stopped stocks from screaming higher.
While we definitely aren’t in an environment where USD weakness is a tailwind, the evidence continues to stack up in favor of the bulls and risk assets.
The dollar is just one data point. But it’s a rather important one, as the direction of King Dollar has proven to have a profound impact on other asset classes.
Today, we’re going to highlight the decoupling of USD relationships and what it could mean for the rally in risk assets.
Energy futures are resolving higher from multi-year bases. Stocks are pressing to new highs all along the cap scale. And the more cyclical, value-oriented markets are catching a bid and becoming leadership groups again -- think financials and energy.
It appears everything is falling into place. But a few pieces are still missing…
For instance, you might assume the US dollar is under pressure as commodities and stocks outperform.
But it’s not.
In fact, the dollar made new 52-week highs not long ago and has since consolidated at the top of its range while riskier areas of the currency market have struggled to catch a bid.
We’ve highlighted the US Dollar Index and the mixed signals coming from developed currencies in recent posts.
As we progress into Q3 of Fiscal Year 2021-2022, this playbook outlines our thoughts on every asset class and our plan to profit.
This playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates, as well as outline our views on the major nifty indices and the sector/thematic indices.
We also cover individual stocks we want to be buying to take advantage of the themes discussed in the playbook.