In today’s briefing:
- How the Commodity Tail Wags the Stock Market Dog
- What Matters More, the War or the Fed?
How the Commodity Tail Wags the Stock Market Dog
- Commodities as a stock market timing indicator: As the Fed raises rates, the inflation-sensitive commodity bull will fade and take the stock market down with it as economic growth decelerates.
- One way of measuring the strength of the global inflation and commodity trade is the long producer/short importer country pair trades, which are in strong relative uptrends.
- Widespread breakdowns in these pairs would be a sign of a transition from a late-cycle market regime to a contractionary phase.
What Matters More, the War or the Fed?
- The markets are being battered by geopolitical risk in the short term, which is stagflationary, and a Fed tightening cycle in the long term.
- Current conditions call for a commitment to the stagflation trade, with an overweight position in late-cycle hard assets plays such as energy, materials, agriculture and real estate.
- The key indicator of a regime shift from stagflation to recession will be bond yields. If yields were to decisively decline, it would be a market signal of slower growth.
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