Testing times for major markets
Charts: Nasdaq/XAU • US 30Y Yield • US 10s30s curve • Nasdaq/T-Bond Ratio
As we get into the last few weeks before the US election, a number of key markets are coming into focus. The charts below concentrate on the relative values of these markets against each other – Stocks, Gold and Bonds.
It is normal and natural to look at this year’s performance of equities as extraordinary. They initially peaked in February, crashed, and quickly made new all time highs; the Nasdaq by June and the S&P 500 by August. The rebound in equities occurred despite Covid-19 being very much alive and a huge number of people remaining unemployed. The rally was thanks to the massive money printing by central banks.
However, that is only if you measure those indices against the USD. When measured against Gold – the ‘true currency’ as some would argue – the picture is totally different. Equities actually peaked towards the end of 2018 and it is those highs that should be seen as the real pivots because it was then (late 2018) that yield curves inverted and central banks around the world started to cut interest rates throughout 2019 as manufacturing and trade took a hit well before the Covid panic.
It is with this in mind that we now turn to the Nasdaq against Gold and notice that we are trading just below that important Sept 2018 peak of 6.45.
Nasdaq in Gold terms daily chart since early 2018
What happens next is going to be important. A proper breach of that level would have to be respected as a bullish development, if and when we it is seen. However, it is as we turn to the Bond markets that the risk of a correction down in equities becomes a little more apparent.
US 30-year yield daily chart
US 30-year yield has held the key levels around 1.60% and is now on the 1.47% trendline support. Any lower in yield would indicate a move down to 1.31% if not 1.17% – something that is unlikely to happen if the Nasdaq is going to break higher.
A similar and consistent picture emerges when we look at the US 10s-30s curve which failed at the year’s high again and posted a weekly inverted hammer. This suggests a flatter curve down towards 62 basis points, something that is only likely to happen with falling yields at this stage i.e. a bull flattening.
US 10s-30s curve Weekly chart
The final chart below shows the Nasdaq against the T-Bonds price on the daily chart. Here we have retested the September high and, so far, stalled. Much like the Nasdaq versus Gold chart (the first chart above) we are at a pivot here with the risk seemingly pointing towards the 62 area i.e Bonds to outperform the Nasdaq 100.
Nasdaq versus T-Bond Daily chart
Overall, the Nasdaq is testing key levels against both Bonds and especially Gold. It is possible that we break higher in the short term though the picture in the fixed income market suggest that now may not be the time for that. Instead a correction down in equities and a bounce in bonds (price), even if temporary, seems more likely over the coming days and possibly weeks as we approach a delicate and potentially complicated period around the US general election.
If the above is correct and seen in a slightly more volatile market, the knock on implication could well be a short term bounce in the USD and a slip in the Gold price which should be seen as opportunities to establish short USD and long Gold positions down the line.
SKA