We are going to slow things down just a bit today so that we can show one of the most basic of the intermarket relationships.Below is a comparative chart of copper futures and 10-year U.S. Treasury yields from late 1996 through into 2002.

The chart makes the rather simple argument that the trend for copper prices is very similar to the trend for long-term interest rates. When copper prices are strong and rising long-term yields tend to be in an uptrend and vice versa.

We mention this because the key to the thesis that we have laid out over the past month or two has been that long-term yields hit bottom around the end of last year. As long as 10-year Treasury yields hold above the December lows of close to 2.05% then the U.S. will escape out right deflation and swing back to a period of rising asset prices that will do wonders for the balance sheets of the major banks. Fair enough.

Below we have included a comparison between the share price of base metals miner Rio Tinto (RTP) and the spread between copper futures price and 10-year U.S. Treasury yields.

The copper minus 10-year yield spread consists of copper prices in cents minus 10-year yields. With copper close to 1.72 (172) and yields around 3.0% (30) the spread is just over 140.

The argument is that while copper prices trend higher with yields the best time to own the major mining stocks is when copper prices are rising FASTER than yields. In other words back in 2005 the spread was just over 100 and the share price of RTP was also close to 100. By the time RTP peaked in price in mid-2008 around 550 the copper-yields spread had widened out to more than 350.

Through the recent correction the share price of RTP declined all the way back to and even well below 100 as the spread fell to around 100. As long as copper prices are stronger the ‘driver’ for RTP will also be positive although the ideal situation would be for copper prices to continue to rise at a faster pace than yields. Yesterday, for example, copper prices declined by a couple of cents while yields moved a bit higher which served to pull the spread lower. In response we noted that both FreePort McMoran and Rio Tinto were lower in what was other wise quite a perky equity markets session.



Equity/Bond Markets

We have argued (again and again) that a sustainable equity markets rally will likely begin when the ratio between the Amex Oil Index (XOI) and S&P 500 Index (SPX) starts to decline. We pointed out yesterday that the same should be true for the ratio between the gold miners (XAU) and the broad market (SPX) so at right we have put this all together in one chart.

The point? The SPX breaking below 1000 back in October went with a rising trend for both the XOI/SPX and XAU/SPX. To get back to the 200-day e.m.a. line the SPX will have to push back up to 1000 which should, in turn, be confirmed by significant weakness in both ratios. We are still waiting…

Quickly… below we show two charts of the Japanese yen futures.One chart is from the current time period while the lower chart is from 2004. The somewhat simple point is that a sharp correction back to the 200-day e.m.a. line for the yen relative to the dollar is not exactly a ‘trend changer’. Similar to 2003- 2004 the yen staged a nice rally from August into February and then fell sharply back to the moving average line into March. We mention this because many believe that yen weakness is a positive for global ‘risk’ but to us this still looks more like a correction in a rising trend than a confirmed trend change.

Below is a comparison between Japan’s Nikkei 225 Index from 1989-90 and the ratio between crude oil futures prices and the CRB Index from the present time frame.

This is a bit of stretch in that we are comparing two different and unrelated markets from two very different time periods. However, the argument is based on the rally by the crude oil/CRB ratio back to the 200-day e.m.a. line which is similar to the way the Nikkei recovered after its initial sell off back in 1990. We have argued that to truly change the trend (from commodity producers with an emphasis on energy prices to commodity users including the autos) the crude oil/CRB ratio has to break to new lows. Obviously it hasn’t which either means that the trend has not changed or… the rally will fade as we move into the second quarter.