Markets are at important crossroads. We made our point earlier this week based on several data points, and showed that the next big move is brewing in stocks, precious metals, or both.
We see more evidence of our viewpoint in other strategic markets, in particular bond and currency markets. In this article, we pick out 4 important charts which have a strategic meaning: 20 Year Treasuries, High Yield Bonds, Yen and U.S. dollar.
First, the High Yield Bond chart has reached a secular trendline. Needless to say that this asset is an indicator for risk sentiment. It broke down last summer, indicating ‘risk off’ had entered the markets. After bottoming in February of this year, it is currently undergoing the first real test. As long as this vehicle does not break above the trendline, stock investors should remain cautious.
Second, the 20 Year Treasury chart is about to touch all-time highs, after a triple test since February of 2015. A break to all-time highs would suggest ‘risk off’. Investors should watch the combination of High Yield bonds and 20 Year Treasuries for an overall view and clear direction.
Next we look at two important currency charts: the dollar and the Yen. Both have a strategic importance, which is the reason why we prefer to look at both charts from a very long term perspective. They both underline our viewpoint that markets are trading at crossroads.
Third, the U.S. dollar is still trading above its secular breakout level. It arrived at an inflection point, but it has not broke down yet. A break below 92.50 would be highly deflationary. If the dollar stabilizes within its current trading range (between 92.50 and 102), it would be good for stocks and neutral for commodities. A breakdown would lit a fire below the commodities market.
Last but not least: the Japanese Yen, also known as the carry trade. As the last chart suggests, the Yen arrived at an important level. A continuation of the recent rally, to levels above 93 points, would suggest “risk off”. Alternatively, if the Yen falls back, it would offer a breather to stock markets.
The fact that all these charts arrived at inflection points underlines the critical state of all markets globally. It really is no coincidence that all charts reached secular resistance or support levels simultaneously. As said before, new trends are in the making, and it is a matter of weeks until we know which will be the next big move(s). We have a hard time forecasting how this will play out, so we prefer to let the markets speak, and we will respect the message(s) of the market.