Bonds and Gold in Unusual Correlation

By Tom McClellan

Bonds and Gold in Unusual Correlation

Bonds and Gold in Unusual Correlation
December 10, 2016

Gold prices have shown an unusually strong correlation to bond prices this year.  This is not normal, and the two are not usually marching in lockstep like this.

The strong correlation began around May 2016.  It may just be a coincidence that May 2016 was when Saudi Arabia started selling off the holdings of T-Bonds from its sovereign wealth fund, an effort to fund their governmental expenditures in an era of low profits on oil sales.  See http://ticdata.treasury.gov/Publish/mfh.txt.

Whatever the explanation is, the phenomenon is real, down to even a day to day basis.  So if you are a trader or investor who is interested in gold, you had better also be interested in T-Bonds, at least for as long as this correlation lasts.

It is not a normal correlation that we are seeing right now.  Here is a longer term chart, which shows that while there may occasionally be some coincident price turns, the two plots are not generally well-correlated.  Often they move inversely, which makes more sense since gold is supposed to benefit from higher inflation, while bonds get hurt by it.

T-Bond and Gold Prices

So what lies ahead for bonds and gold?  If you believe the big money (smart money) “commercial” traders of T-Bond futures, there should be a big rebound coming.

T-Bond COT Report

Back in July 2016, these smart money traders were holding an all-time record net short position in T-Bond futures.  They correctly anticipated the big price decline which unfolded.  Along the way, they have unwound those shorts, and now they are at a multi-year extreme net long position, betting on a big rebound.

That presumptive rebound should also lift gold prices, assuming that the correlation continues.  And as I discussed back in August, that should also presumably bring a rebound for the Japanese yen.

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Chart In Focus Archive

Trump, Bonds, Peripheries, China and Italy

By Doug Noland

Credit Bubble Bulletin: Trump, Bonds, Peripheries, China and Italy

The trading week saw WTI crude surge 12.2%. The GSCI commodities index jumped 5.8%. Wheat dropped 3.6% and corn fell 3.1%. Italian 10-year yields fell 18 bps, and Greek yields dropped 37 bps. Meanwhile, Portuguese yields jumped 13 bps. In U.S. equities, Bank stocks (BKX) jumped 1.5%, while the Morgan Stanley High Tech index dropped 3.4%. The Biotechs (BTK) sank 6.4%. The DJIA was little changed, while the small caps fell 2.4%. Just another week for unstable global markets.

Pre-election trepidation morphed into post-election market exuberance, in only the latest demonstration of the power of an over-liquefied market backdrop. Here in the U.S., the bullish imagination has been captivated by the Trump administration’s pro-growth agenda, with its focus on tax and health-care reform, deregulation and infrastructure spending. The DJIA this week added slightly to record highs.

Meanwhile, a decidedly less halcyon reality seems to be coming into somewhat clearer focus: Trump’s victory likely marks a major inflection point for global markets. Bond yields have shot higher, while inflation expectations are being reset. The U.S. dollar has surged, while the emerging markets have come under pressure. From U.S. equity and bond ETFs to international financial flows, “money” is sloshing about chaotically.

There’s an extraordinary amount of confusion throughout the markets. For over a year I’ve posited that the global Bubble has been pierced. This view was in response to faltering EM, mounting Chinese instability, the collapse in crude and energy-related debt problems (from U.S. junk to global corporates and sovereigns). Especially in response to early-2016 global market instability, the Fed froze its baby-step “tightening” cycle, while the Bank of Japan and European Central Bank (and others) ratcheted up what were already desperate QE measures. In China, officials threw up their hands and set the Credit floodgates wide open.

It’s worth noting that the S&P500 rallied 22% from February 2016 lows. U.S. bank stocks (BKX) have surged a stunning 60%. From January lows to November highs, Brazilian stocks jumped 75%. Emerging Market equities (EEM) rallied almost 40%. Chinese stocks recovered 25%. Basically, EM stocks, bonds and currencies rallied sharply from Asia to Eastern Europe to Latin America.

Waning badly early in the year, confidence in central banking was rejuvenated by an audacious display of concerted “whatever it takes.” I believe history will view ECB and BOJ QE moves as dangerously misguided, while the Fed (again) failed to heed the lessons of leaving policy way too loose for too long. Forces that central bankers set in motion early in the year may have largely run their course.

Continue reading Trump, Bonds, Peripheries, China and Italy

These Two Debt Instruments Pose Peril to Millions of Investors

By Elliott Wave International

These 2 Debt Instruments Pose Peril to Millions of Investors
A billionaire says the search for yield is overriding credit judgment

Stay informed. Stay prepared. See what we see ahead for U.S. markets — now, via this risk-free offer to the Financial Forecast Service.

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[Editor’s Note: The text version of the story is below.]

In a world of low and even negative rates, bond investors are so hungry for yield they’re willing to accept high levels of risk.

For example, bond investors are increasingly embracing debt instruments known as covenant lite loans, which provide minimal protection should the issuer get into financial trouble.

Investors should pay close attention to this development, because this is exactly what happened before the 2007-2009 financial crisis.

Our April 2007 Elliott Wave Financial Forecast warned subscribers beforehand:

The only reason that the crisis has yet to spread to the corporate debt market in general is that lenders continue to slacken underwriting standards, just as they previously did in the mortgage sector. Consider, for instance, the latest boom instrument, a corporate product known as “covenant lite,” bank loans that “subject borrowers to few of the usual performance requirements that have been standard in the past.” Standard & Poor’s says that $41 billion in lite loans have already been issued in 2007, a figure that is greater than that of the last 10 years combined.

Remember, cov-lite loans free the debt issuer from meeting normal fiscal disclosures and financial metrics, so the risk to lenders is high.

With that in mind, consider this (Bloomberg, Sept. 27):

Just 35 percent of new leveraged loans issued in 2016’s first half had traditional covenants that require regular financial check-ups, compared with 100 percent in 2010.

A billionaire investor noted that “the fact that there are no covenants tells you that people are substituting yield for credit judgment.”

But financial optimism is also reflected in the popularity of yet another high-risk debt instrument.

Here’s a chart and commentary from our October Financial Forecast:

Another bond market revisitation from the last credit mania is the “red-hot” market for payment-in-kind (PIK) bonds. … PIK bonds allow the issuer to pay interest in additional debt rather than cash. September is set to become the busiest month ever for PIK issuance, led by German auto component maker Schaeffler AG’s $1.5 billion issue, the largest in history. Similar to the heightened risk associated with buying cov-lite loans, seasoned investors acknowledge the peril of buying PIK bonds.

As we’ve noted before, credit implosions develop when lenders relax credit standards and investors reach for yield.

This might well be the time to play it safe.


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This article was syndicated by Elliott Wave International and was originally published under the headline These 2 Debt Instruments Pose Peril to Millions of Investors. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Stocks Trying to Break Out Relative to Bonds

By Chris Ciovacco

Energy Stocks Above Prior Resistance

When investors are more confident about economic and market outcomes, they typically prefer to own growth-oriented sectors, such as energy, over more defensive-oriented bonds. The chart of energy stocks (XLE) relative to long-term Treasury bonds (TLT) is trying to hold above an important point of prior resistance. The longer XLE can hold the breakout relative to TLT, the more meaningful it becomes.

Deterioration In Numerous Asset Classes

Many interest rate sensitive assets, including gold, bonds, and REITS, sold off last week. This week’s video looks at the deterioration in the context of risk management. Updated longer-term charts are also covered for the S&P 500 and broad NYSE Composite Index.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video

Video

Stocks vs. Bonds

The chart of stocks (SPY) relative to bonds (TLT) is sending similar messages to those seen in the energy/bonds ratio. The SPY/TLT ratio was rejected at the thick blue trendline three times in 2015 (see orange arrows) and again in September 2016. The longer SPY can hold the breakout relative to TLT, the more meaningful it becomes.

Tech Trying To Clear A Long-Term Box

The chart below shows the performance of technology stocks relative to intermediate Treasury bonds (IEF). The ratio entered the long-term orange consolidation box in December 2013 (almost three years ago). The ratio was near the lower end of the box as recently as June 2016. The breakout sends signals about the economy and interest rate expectations.

Rate Hike Odds

On October 4 following some strong economic data, asset class behavior started to signal two things: (1) the odds for a Fed rate hike in December were increasing, and (2) the economy and markets might be able to withstand the hike this time. Obviously, with quite a bit of time between now and the Fed’s December meeting, 1 and 2 above fall into the TBD category.

Similar Messages From High Beta

The High Beta ETF (SPHB) has higher weightings in materials (XLB), energy (XLE), and financials (XLF) relative to the S&P 500’s weightings (SPY). As shown in the chart below, this economically-sensitive investment is trying to hold the recent break above an area that has acted as resistance for a year. As recently as June 28 (point A below), SPHB looked to be on the ropes. Since then, SPHB has made a higher low (point B) and a higher high above point C.

The longer SPHB can hold above point C, the more meaningful it becomes.

Two Bond Guys, Post-FOMC

By Biiwii

A smart bond guy speaks, post-FOMC.  Amazingly, this interview is jumping right to a foregone rate hike conclusion in December and speculation about the Jawbone-o-rama we are going to be subjected to in the interim.  Always good to hear Gundlach, though.  Other good observations here.

“The bond market is sniffing out a pivot to fiscal stimulus…”  Gee, where have I heard that before?  Oh yes, in my own post at NFTRH.

Also, rock star bond guy Bill Gross weighs in, post-FOMC.  I didn’t say smart, I said rock star.  There’s a difference.  I see rock stars and promoters (cough… Gartman… cough cough) all over the financial market media landscape but very few smart people.  Anyway, I have not yet listened to Gross, but he’s Bill Gross… always worth a listen if not a laugh.

Bond Bubble Has Finally Reached its Apogee

By Michael Pento

Boston Fed President Eric Rosengren recently rattled markets when he warned that low-interest rates were increasing the temperature of the U.S. economy, which now runs the risk of overheating. That sunny opinion was echoed by several other Federal Reserve officials who are trying to portray an economy that is on a solid footing. And thus, prepare investors and consumers for an imminent rise in rates.But perhaps someone should check the temperatures of those at the Federal Reserve, the idea that this tepid economy is starting to sizzle could not be further from the truth.

In fact, recent data demonstrates that U.S. economic growth for the past three-quarters has trickled in at a rate of just 0.9%, 0.8%, and 1.1% respectively. In addition, tax revenue is down year on year, S&P 500 earnings fell 6 quarters in a row and productivity has dropped for the last 3 quarters.  And even though growth for the second half of 2016 is anticipated with the typical foolish optimism, recent data displays an economy that isn’t doing anything other than stumbling towards recession.

The Institute for Supply Management Purchasing Manager’s index for the manufacturing sector during August fell into contraction at 49.4, while the service sector fell to 51.4 compared to 55.5 in July, which was the lowest reading since February 2010 and the biggest monthly drop in eight years. And the recent jobs report was also full of disappointment too, with just 151,000 jobs created in August and a decline in the average work week and aggregate hours worked.

Continue reading at TalkMarkets →

Key Charts for Fed Day

By Chris Ciovacco

The 1994 case demonstrates the longer stocks go sideways, the bigger the move we can expect after a successful breakout. However, even under the successful breakout scenario, a retest of prior resistance may be in the cards, which is exactly what happened in early 1995. In 2016, the Dow Jones Industrial Average (below) may be in retest mode.

Reflation Trade

Given the high levels of global debt, the lesser of the evils alternative typically is to try to inflate it away. The chart below, showing the performance of materials stocks (XLB) relative to Treasuries (TLT), is one way to monitor the battle between inflation and lingering concerns about deflation.

Like the XLB/TLT ratio above, the ratio of energy stocks (XLE) to Treasuries (TLT) also has some work to do. With a Fed statement coming Wednesday and one from the Bank of Japan before the end of the week, these ratios should provide some insight into the market’s reaction.

Stocks vs. Bonds

The S&P 500 (SPY) has not yet broken out relative to long-term Treasuries, but has made some progress relative to intermediate-term Treasuries (IEF). If the SPY/IEF breakout below holds, it will improve the odds of the S&P 500’s recent push above 2,134 holding.

The Bond Market: Beware of Junkyard Dogs

By Danielle DiMartino Booth

Having spent a chunk of his youth “shopping” them, Jim Croce came to know a thing or two about junkyards. In those youthful days, should his clunker de jour be missing some vital part or parts, a trolling expedition through South Philly’s scrap heaps was always the enterprising Croce’s preferred method of procurement.

Amid all of Croce’s parts foraging, it was a universal joint for a ‘57 Chevy and a ‘51 Dodge transmission, two must have and must-be-cheap or, better yet, free, parts that the legendary folk singer still recalled. He also reminisced that junkyards could and would provide a no frills, but highly motivated and easy way to get in some cardio, as in running for your life.

Money Strong LLC, The Bond Market: Beware of Junkyard Dogs

“I got to know many junkyards well, and they all have dogs in them,” the late Croce said in a 1973 interview. “They all have either an axle tied around their necks or an old lawnmower to keep ‘em at least slowed down a bit, so you have a decent chance of getting away from them.”

So was born the junkyard dog yardstick by which to measure the meanness of one Bad, Bad Leroy Brown, Croce’s hit which landed at the top of the charts 42 years ago this week.

As for high yield bond analysts, they aren’t exactly known for catchy turns of phrase. However, in recent weeks, they’ve shed the dry and donned the dramatic, as you’ll soon see. Such is the overheated state of the junk bond market this sweltering summer.

In his latest missive, Deutsche Bank’s Oleg Melentyev, arguably the best in class high yield analyst among his sell-side peers, warned of the perils of investing in this “frenzied market.”

Continue reading at TalkMarkets →