The charts that matter: markets don’t know which way to turn

With investors continuing to worry about the coronavirus and the threat of higher inflation in the US, John Stepek looks at what that's done to the charts that matter most to the global economy.

Welcome back.

Some very exciting news for you this week. MoneyWeek will be holding not one but two events this year.

We’ll have more details for you very, very soon, and tickets aren’t on sale yet, but I wanted to let you know the dates so you can stick them in your diary.

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Our first event will be on Friday 22 May, and the second will be on Friday 27 November. So put those dates in your diary, keep them free, and watch out for more news on our fantastic speaker line-up and early bird ticket deals very shortly.

And to give you a flavour of what to expect, here’s the audio of one of our favourite analysts, Russell Napier, speaking to the audience at the MoneyWeek Wealth Summit in November. (I don’t have the charts to go with it – you had to attend the summit to see those – but I think it’s worth a listen even so, as Russell really does paint a worrying yet convincing picture of the risks ahead).

I also recorded another podcast with The Week Unwrapped team this week, in which I discuss BP’s ambition to go carbon neutral and whether this signals that we’re firmly in “green bubble” territory. You can listen to it here.

Here are the links for this week’s editions of Money Morning in case you missed any.

Get 40% off my book: Buy The Sceptical Investor and type in the code SCEPTIC40 at the checkout. Or get it free on audio if you join Audible at the same time.

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Tim Price also wrote about coronavirus and how investors should insulate themselves from the potential fallout.

The charts that matter

Investors are still worried about the coronavirus. However, economic data from the US – higher-than-expected inflation in particular – also appears to have them a bit concerned that the Federal Reserve might feel forced to raise interest rates earlier than expected.

The gap between the yield on the ten-year US Treasury (government bond) and the two-year narrowed. The ten-year still yields a bit more than the two, which is what you’d expect in a growing economy, but it’s very close to inverting (where the two yields more than the ten).

Why would these have narrowed? Well, in the short term, the Fed might have to raise rates, so the two-year yield goes up. But then the market worries that’ll cause a recession which will mean rates have to come down again – so the ten-year yield comes down. That’s it in a nutshell.

The yield curve already inverted last year, which is a recession signal. But that could happen within the next 18 months and still count as a valid signal – so it’s not something to use for market timing (well, not yet anyway).

(The gap between the yield on the ten-year US Treasury and that on the two-year: three months)

Gold (measured in dollar terms) remained solid this week, despite the stronger US dollar. Again, signs that inflation is higher than markets had expected helped, but it’s also because data elsewhere (the eurozone in particular) was so mediocre.

(Gold: three months)

The US dollar index – a measure of the strength of the dollar against a basket of the currencies of its major trading partners – kept on strengthening. Looking at the price action on other key assets, and commodities in particular, I have to conclude that this is mostly to do with investors believing that the US economy is the strongest player around just now. That’s probably true, especially compared with Europe.

Also, they increasingly expect Donald Trump to win the election in November, and markets view that as a positive because they hate change and despite everything you can say about Trump, he hasn’t done anything to disrupt the rally in the S&P 500 in the last four years.

(DXY: three months)

The Chinese yuan (or renminbi) continued to hold the line below seven to the US dollar. Above seven (which means the yuan is weakening) is seen as a sign that global markets are worried about deflation.

(Chinese yuan to the US dollar: since 25 Jun 2019)

The yield on the ten-year US government bond ticked a little lower, suggesting that investors aren’t willing to emerge from “safety” altogether just yet.

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year fell back this week too.

(Ten-year Japanese government bond yield: three months)

The yield on the ten-year German bund dipped somewhat as the data out of the eurozone continues to be poor.

(Ten-year Bund yield: three months)

Copper continued to rally, which is interesting, given that few commodities are more vulnerable to a slowdown in China.

(Copper: six months)

By contrast, the Aussie dollar continues to struggle, partly due to the sheer strength of the US dollar. This does suggest that the US dollar strength is driven by something more than just coronavirus “safe haven” flows.

(Aussie dollar vs US dollar exchange rate: three months)

Cryptocurrency bitcoin rallied this week. Again, I’m never quite sure what’s driving the crypto but it does appear that Dominic called the bottom very accurately when he suggested last week that bitcoin was a “buy”.

(Bitcoin: ten days)

US weekly jobless claims rose a little to 205,000 (from 203,000 – the previous week’s figures were revised higher by 1,000 claims). As a result, the four-week moving average now sits at 212,000, unchanged on last week.

When the four-week moving average troughs, the market often tops soon after. The number last hit a bottom in April last year. But the jobs data continues to beat expectations, and it’ll be interesting to see if the four-week can get even lower before this cycle is out.

(US jobless claims, four-week moving average: since January 2016)

The oil price (as measured by Brent crude, the international/European benchmark) started to claw back some ground this week. That’s despite some fairly grim statistics (for oil producers, at least) on how badly oil demand will be hit by the coronavirus outbreak. When a price goes up on ostensibly bad news, that often suggests we’re near some sort of bottom.

(Brent crude oil: three months)

Internet giant Amazon is still soaring following its forecast-trouncing fourth-quarter results.

(Amazon: three months)

And electric car group Tesla – it keeps on coming back, even after the company decided to do the sensible thing, and exploit the soaring share price to raise more money from shareholders, to the tune of $2bn.

(Tesla: three months)

Have a great weekend. And don’t forget to stick those dates in your diary!

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.