by Kevin Klombies, Senior Analyst TraderPlanet.com
Tuesday, September 2, 2008
Chart Presentation: Macro Thoughts
LONDON (Reuters) – Oil plunged more than $4 Monday as concerns that Hurricane Gustav would cause lasting damage to the U.S. oil sector eased after the storm weakened before hitting the Louisiana coast.
It is difficult to know at time of writing whether Monday’s futures marketstrading was significant or not. Obviously crude oil, gold, and copper were lower but remain well above the August lows whilecurrencies like the Australian dollar and euro have actually declined far enough to be viewed as potential break downs. With both the U.S. and Canada closed for the Labor Day holiday we imagine that today will serve as a better test.
At right is a comparison between the U.S. 10-year T-Note futures and copper futures from early 2002 through to the end of last week.
The chart shows that the 2003 peak for bond prices went with the start of a rising price trend for copper. From 2003 into the spring of 2006 copper prices pushed upwards as bond prices declined.
From 2006 into 2008 the trend reversed as copper prices essentially moved sideways as bond prices pushed upwards.
On the 10-year T-Note futures chart we have included the words ‘Option A’ while on the copper chart we have added ‘Option B’.
The argument is that eventually we should either see new highs for the bond marketor new highs for copper prices. These two markets tend to move inversely so new highs for copper would obviously create downward pressure for bond prices and upward pressure for interest rates. On the other hand new highs for bond prices would likely have to go with actual weakness for copper prices. In other words the T-Notes can continue to rise back towards 121 on ‘flat’ copper prices but a move above 121 would suggest that the trend for copper has shifted from neutral to negative.
The current trend is based on a flat trend for copper prices below the 4.00 level and a rising trend for bond prices. New highs for the 10-year T-Notes will argue for a prolonged correction in base metals prices while new highs for copper prices will argue instead for a cyclically driven markets cycle that will include several years of rising long-term interest rates.
Below is a comparative chart that we have shown in one form or another on many occasions over the past year or so. The chart begins at the bottom with the biotech etf (BBH) and then progresses through AMR, refiner Valero (VLO), gold miner Barrick (ABX), and finally natural gas producer Chesapeake (CHK).
The argument is that the markets are working through a series of 6-month cycles with the first half of the year dominated by the energy theme and the second half of the year dominated by ‘something other than energy’.
The second half of 2006 included weaker commodity prices and a nice rally in tech, pharma, and biotech with real strength in the airlines (AMR) beginning after the Labor Day holiday oncecrude oil futuresprices moved below the 200-day e.m.a. line.
Our point- strangely enough- is that if the pattern persists we should stay positive on the non-commodity sectors through the balance of the year and then shift back to the refining theme in early 2009. The idea would be that refined products margins will remain tight through the balance of this year before widening out in 2009. Then… if this continues to work and make sense it would be back to the golds a year from now before switching over to natural gas and coal around the start of 2010.
All of this will likely make much more sense if commodity prices continue to decline through the third and fourth quarters of this year.
Below is a comparative view of the U.S. Dollar Index (DXY) futures and the ratio between the Brazil (EWZ) and Japan (EWJ) etfs.
In a strong commodity/weak dollar trend the Brazilian equity market clearly outperforms Japan. This makes sense given that Japan is an commodity ‘user’ while Brazil is a commodity ‘producer’. Now that the dollar has started to rise, however, the ratio has begun to swing back in favor of Japan. If crude oil and copper break below the August lows then we would expect to see the EWZ/EWJ ratio move nicely lower as Japan continues to outperform.
