Tuesday, October 4, 2016
Limited major trends but some selected opportunities in commodities
Each month we look at the major trends in market sectors to determine the current macro signals within prices and the effectiveness of trend following. Last month, our view was that monetary policy uncertainty left the markets with few clear trends. October looks like a potentially good market in the fixed income, rates, and commodities. The best market potential for October as of the start of the month is in base metals and the energy complex. Nevertheless, the trend signals in base metals are significantly at odds with bond signals and with the talking head stories that global growth will continue to be modest. Maximum opportunity and risk occur when trends are at odds with general market commentary or conventional wisdom. The energy complex is trending higher on OPEC news, but the ability for these trends to last will be subject to OPEC members holding to some production limits.
Global rates have headed higher based on Fed expectations. The continuation of these trends will be based on any further actions by the BOJ and ECB. Bonds have moved higher albeit with higher volatility. Generally bond trends are not connected with short-term rate moves without a common catalyst.
Opportunities in commodities are concentrated outside the grain markets. Unfortunately active trend-followers often do not place significant risk weights in these markets. In precious metals, there are strong opposing trends in platinum and palladium. Gold has been more muted since a post-BREXIT surge.
Equity indices do not show any strong signals even with some gains after the FOMC meeting. Global bonds have trended higher after the FOMC but have moved lower since the beginning of the month. Signals are becoming mixed.