Happy New Year!
I hope that your first few days back have gone well. It is proving to be a trickier return for investors as a surge in bond yields moved the VIX to 20 and triggered a sell-off in equities with a violent rotation away from interest rate sensitive sectors. The benchmark 10-year US treasury bond yield is within touching distance of a 52-week high around 1.8%, which was seemingly driven by the release of the minutes from the Fed’s December meeting which confirmed that a series of 3 rate hikes this year are likely to commence in March.
Yet the coincident rally in crude oil suggest that there may be an element of inflation risk also contributing to this move higher in yields (sell-off in bonds). This is less clear to me, even if there will undoubtedly be economic disruption to supply chains as a result of workers being told to isolate as Omicron looks likely to sweep through the majority of the western hemisphere this month. Due to the nature of this latest variant, my view is that this disruption should be relatively short-lived as people are recovering from symptoms far quicker than Delta, and with lower levels of disease.
Here’s the chart of crude…
…and a rather nifty ratio showing the move relative to equities.
In light of the most recent CPI data coming in at an annual rate of 6.8%, perhaps then the market is focusing on the near term risks and repositioning all the more aggressively following the holidays. But I personally feel that these inflationary pressures have probably peaked, and will be soothed by the end of rounds of restrictions and infections which disrupted business greatly in the last couple of years, contributing to ever higher prices.
The Fed has made clear that it intends to proceed with the full withdrawal of its emergency stimulus, citing earlier this week that their balance sheet could return to “pre-covid levels”. This combined with higher interest rates suggests “disinflation”, not inflation, in the coming months…
Of course, it is all too easy to get caught up in the narrative (whether the consensus, or your own), and we should remind ourselves of our process for analysing various asset markets. Fortunately, we have just updated our Monthly Checklist Report for the new month which Trading Club members have immediate access to, and includes a new set of scores for many of our Checklists.
Here’s a quick preview of one of the Checklists that has caught my attention given the volatility seen in equities. Whilst I cannot reveal the scores to you here just yet, I hope to do so in the next couple of weeks. Members can of course view the unrestricted version at any time from the login area of our Trading Club page.
Only time will tell how this all plays out, but if you would like to learn more about our methods and join me for more analysis in real-time, head to milliondollartraders.com and check out MDT course and Trading Club pages where you can preview everything that we cover.
As always you can keep an eye on my personal portfolio here and follow me on YouTube for free video updates. As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing!
Have a great weekend,
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
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