Asian equities ended the week on a positive note, with 13 of the 16 markets we track closing higher overnight. Can’t quite say the same, however, for Europe, at least so far this morning; 11 of the 19 indices we follow trading lower. U.S. equities, while mostly green, continue to exhibit very concerning breadth (adding the S&P 500 Equal Weight Index herein to illustrate the point): Dow up 84 points (0.30%), S&P 500 up 0.11%, Nasdaq up 0.32%, Russell 2000 down -0.96%, S&P Equal Weight -0.36%.

The VIX (SP 500 volatility) is down -0.35% to 22.64, VXN (Nasdaq vol) is up 0.84% to 28.68.

Oil futures are down 2.94%, gold’s down 0.85%, silver’s off 3.32%, copper futures are down 1.98% and the ag complex is mixed (tinted red) this morning.

The 10-year treasury is once again rallying (yield falling) and the dollar is still in rally mode, up 0.68% (hence the commodities weakness).

Our core mix is expressing this morning’s lack of breadth and rising dollar; down 0.59% as I type. Our exposures to tech, emerging markets and industrials are the only 3 showing gains so far this morning. Leading the losers are silver, base metals, Eurozone equities, energy and gold.

As I’ve expressed herein we’ve been looking for commodity weakness to present us with an opportunity to leverage what we expect be a longer-term weaker dollar environment. 

While our very short-term base case is that there’s more to play out before we’re comfortable adding commodities exposure, we did make a shift among existing positions this morning.

Here’s the narrative that I entered into our internal log:

August 21, 2020, Friday

The dollar’s been catching a bid the past few days. This morning it’s as much about weakness in Europe as it is anything U.S.. Otherwise, I’m certain it’s largely a technical (tradable) bounce off of extremely oversold levels. I.e., not the potential strong bounce due to optimism stemming from a new fiscal stimulus plan, which btw would do an immediate number on interest rates (higher) as well; both would be negatives for commodities, which would give us that attractive entry we’re looking for.

The above is of course assuming that the next fiscal round will be viewed in markets as a positive. There’s real risk of a watered down plan that could hit equities and the dollar hard, forcing rates lower: While that event on the surface would be viewed as positive for, say, gold, we could see gold sell off initially on fears of another liquidity panic. That would be a misread by markets, as the Fed has liquidity risk properly backstopped right here.

Also, I should note that even a “strong” fiscal plan could absolutely be sold off soon after what would likely be a positive bounce in equities and the dollar. I.e., ultimately I suspect we’ll reach a sell-the-news event where virtually all potential positives are priced in and the “market” finally focuses on global economic reality.

With that (economic reality) in mind, this morning we’re cutting our base metals exposure by 40% and applying the proceeds to the ag complex.

When we feel we have a better entry point to add commodity exposure, we’ll be looking to commodity stocks in addition to, if at all, commodities/commodity futures themselves. While stocks pose an additional element of risk, they to some degree compensate with attractive dividend yield opportunities that are non-existent in the straight commodity ETFs.

Next up, our weekly macro update.

Have a great day!
Marty