The Weekend Edition # 34

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Here’s what we cover:

• Market Recap - Indices, Vix, Bonds, Yield Curve, Europe & Oil

• Chart of the Week - GOLD

• Earnings of Week - Snapshot

• Around the Markets - Agri Tracker & Fertilizer prices

• The Week Ahead - Fed Meeting

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - March 07 - 11, 2022

The market has become tiresome with increased volatility, and sharp movements driven by geopolitical news. The S&P500 and the Nasdaq both had quite the decline into the close on Friday.

The Vix still remains in the 30ish range. The Vix Futures Curve is still downward sloping indicating people are fearful of the near future compared to the more distant future. As long the Vix curve remains this way, sellers are usually in control, i.e. more selling than buying.

And all of this is before the Fed meeting on Wednesday when we expect a rate hike to be announced. The consensus is firmly leaning toward a 25bps (0.25%) hike.

Bonds are looking like a safety trade again. As I discussed last week, the yield curve is the flattest it has been compared to the previous two rate hike cycles and this trend continues into this week. The put-call ratio for bonds has been coming down steadily, i.e, more people are buying bonds than selling. They expect bond prices to go up (yield down = bond price up). The 7yr and the 10yr has already inverted as of Friday.

With the long end of the curve coming down, financials & banks, particularly the regional financials will get hit. Banks with lending to corporates and consumers (vs. fee based investment banking) will be most negatively affected.

European markets have been hit particularly hard. Here’s a one-month chart showing the performance of the FTSE 100 (UK), DAX (Germany) and the CAC 40 (France). While the overall performance seems smooth, all the indices had violent intraday price movements.

And finally… oil. Earlier this week, I did a YouTube chat hosted by my friend and oil industry expert, Sachin Sharma discussing the oil price shock and what could happen next. Interestingly enough, the very next day, the UAE announced that they would be asking OPEC+ to increase production and the price dropped drastically.

The fundamental factors contributing to a supply crunch still remain though, and there’s still the possibility that prices start to rise again. OPEC+ would need to release significant supplies for prices to come back down below $100/bbl and it doesn’t look like they are ready to do that just yet. We still haven’t gone back to pre-pandemic levels of demand either and it remains to be seen what happens when more countries start to re-open properly.

Charts of the Week: Gold

Gold’s been a hot topic for the last few weeks and it doesn’t seem like there’s any chance of slowing down. We all know Gold is a safe haven asset, despite what Crypto advocates have to say. Gold is almost back at all time highs and let’s see what the market is telling us about where the price is going.

Looking at the technicals, if you zoom out, it’s pretty clear that we’re forming a cup and handle pattern, that signals an upward move. Zoom in a little and the picture is slightly different. It looks like Gold is forming a double top, which is a bearish signal. But it hasn’t formed yet, and if they can possibly exceed the previous high, the price could continue higher.

A few other factors to consider:

• The geopolitical issue is not abating and as long as tensions remain, commodity squeezes are in play. This is bullish for gold.

• Fund flows into Gold have been increasing. So Money Managers are bullish.

• And finally we have a whole lot of call buying as well for the SPDR Gold Trust ETF - GLD. Yet another bullish signal.

So we see what the Money Managers are doing. But, what about the commercial hedgers. The people who actually trade in Gold and need to hedge against price movements. Interestingly enough, they are biased short - which means that they are hedging against the price of Gold going down. The problem with this information is that I don’t have enough detail to tell you how long these hedges are for so we don’t know when they expect the prices to go down.

There’s quite a lot of evidence to be bullish on Gold for the short to medium term. My price target is around $2050 (although I could be totally wrong). And the Fed raising rates is in fact good for Gold as well, albeit with a time lag of 6-8 months.

The big picture is also bullish for Gold. With a decrease in investments over the last few years, we’ve come to a position where the supply has not kept up with the demand. So, we will probably see a permanent increase in the price of Gold over the long term. If you look at the 40-year chart again, you’ll notice the price has never really retraced levels before the Global Financial Crisis of 2008.

Earnings of the Week (no commentary)

Around the Markets

Agri Tracker Update

“Bread Basket” Prices still remain elevated and with the current supply crunch, this is not going to get resolved too soon. It’s concerning. Soybeans are not linked to the geopolitical events but rather, poor harvest due to weather conditions. There’s a shortage there as well.

Fertilizer Prices

Fertilizer prices still remain elevated as Russia is a major exporter of low-cost nutrients that go into fertilizers. Most of the major listed fertilizer companies have also been at or near 52-week highs - Nutrien (NTR), Mosaic (MOS), CF Industries (CF).

The Week Ahead

Economic - Fed Rate Announcement on Wed at 2pm ET

Tue 15 - Wed 16 - FOMC Meeting and Rate Announcement

Tue 15 - PPI

Wed 16 - Retail Sales

Thu 17 - Housing Starts and Permits

Fri 18 - Quadruple Witching - Options Expiration

Fri 18 - Existing Home Sales

Earnings

Closing Thoughts

Next week will be eventful. But, then that’s sort of become the norm now. Still, I think we will see some reaction to the Fed announcement.

I wrote about oil earlier but the bigger concern at the moment is probably Natural Gas. Natural Gas supplies are much more constricted than oil, and Russia cutting off gas supplies is just going to keep driving the price higher.

Personally, I think for the stock market, a terrible omen is Apple breaking down. AAPL was down -5.17% for the week and -12.22% for the month, and it’s not looking good. Apple has the power to pull the entire market lower.

The news is not good and I have not been making any long term moves waiting for the Fed Meeting. In the shorter term, inverse ETFs and Commodity ETFs could be ideas to look at.

Here’s wishing you a happy weekend and safe investing. 

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Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $GLD $WEAT $CORN $AAPL as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.