slow
Someone is buying the dips as we haven’t made new lows in four weeks and what once put pressure on stocks has improved, namely rising Treasury yields and high commodity prices.
There has been a dramatic slump in Treasury yields over the past month and an equally dramatic drop in energy, metals and soft commodities. Such an environment can cause stocks to rally all the way to the 200-day moving average of the S&P 500 Index, as is usual with such countertrend rallies, and that would represent a very nice medium-term bottom, which we might call “a ” below.
for us to see”the” Bottom marking the end of this sell-off, we need a dovish turn from the Fed as well as an end to hostilities in Ukraine – or at least a truce. The final rally attempt will either fail or succeed, and the big test is likely to come this week. This chart shows that it’s time for the S&P to make it or break it.
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The situation in Ukraine has many unknowns as it is a major driver of financial markets and there is no end in sight as to when the fighting could end. It can override a fairly legitimate stock bottoming process with a one-day rise in oil or natural gas prices, as gas supplies to Europe can be used by Russia as a counter-sanctions weapon. The natural gas situation and the war in general are reasons why the euro is lagging behind the Fed to reach parity with the dollar, alongside the ECB’s monetary policy.
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Borrowing costs for highly indebted countries with weaker fiscal positions – like Italy – are rising sharply, but so far we are not in the same situation as in 2011 when government bond yields fell and Italian bond yields rose. The spread between German bond yields and Italian government bond yields has widened and is likely to widen further should Europe face a severe recession due to rising energy costs. Depending on how the war goes, there could be a repeat of the old crisis in the eurozone this year.
Graphics are for illustration and discussion purposes only. Please read important disclosures at the bottom of this comment
Meanwhile, the US Treasury 2-10 spread has reversed and the 3-month/10-year spread will narrow shortly after the Fed’s next rate hike of 75 basis points, which is expected on July 27th. turning back. The 2-10 spread has reversed before every recession since 1980 (chart). As for the bond market, a recession is looming that may be very superficial and not necessarily problematic for the US economy as businesses and consumers are in better financial shape compared to previous recessions in the 21st century.
The gold market looks interesting here
I doubt gold can stage a meaningful rally while we have such a strong dollar as gold is hovering around $1700 an ounce despite very high global inflation. Still, it’s worth noting that the last time the dollar was at this level was 20 years ago, gold was near $300/oz. As far as maintaining the purchasing power of an ounce of gold, the Midas metal has done more than a fair job.
Graphics are for illustration and discussion purposes only. Please read important disclosures at the bottom of this comment
Remember that gold moves in spurts. It can stay flat for a long time or even fall during periods of rising inflation like now, but over 10 or 20 years that tends to correct itself. I think gold will stage a monster rally once the dollar peaks, which should probably coincide with a truce in Ukraine.
Silver bullion, on the other hand, is much more volatile and economically much more sensitive. It tends to fall more when gold sells off and recover more when bullion is strong. Right now, I wouldn’t nibble on silver bullion or silver stocks until the gold market bottoms.
All of the above content reflects the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures in the About section of the Navellier & Associates profile that accompanies this article.
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Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
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