Round cotton modules line Arkansas field

Presidential election – Catalyst for “REFLATION TRADE?”

Near-term market winners and losers

Reflation Trade: Stocks Rallying, Treasury Yields Rising, and Dollar Rising

Global Market and Investment Landscape Transitioning

  • Up until now, there has been too much reliance on Monetary Policy to maintain economic momentum and not enough reliance on Fiscal Policy or stimulative government intervention activities, but change has already begun. 
  • Going forward the objective is for Fiscal and Monetary Policy to complement each other both domestically and globally to maintain viable global growth objectives.
  • Won’t aggressive reflation have negative economic side effects given domestic and global debt levels? Yes, but the negative economic side-effects, like possibly stagflation, at least near term are not as dangerous as chronically anemic domestic and global growth.  
    • Status-quo fiscal and monetary policy guarantees accelerated social unrest, major political and economic uncertainties and very dangerous military friction.  

Previous Global Market and Investment Landscape:

Pre-election, market participants assumed their future investment activity would remain in an ongoing domestic and global economic setting of chronic slow growth, low to negative interest rates and unsustainable debt.

  • Said differently, investors and investment managers globally assumed optimum returns must be achieved in a global economic setting of chronic slow growth, historic low-to-negative interest rates and building debt

Today’s Global Market and Investment Landscape:

“TODAY” market participants believe or “anticipate” near term reflation will be bearish for safe haven assets like U.S. Treasuries, utilities, gold, etc. as indicated by chart patterns, and bullish the dollar, U.S. equities and some other global equities as well as building support for future commodity price strength.

  • Expect a Fed rate increase in December and multiple times in 2017

Reflation Activities Did Not Start With Trump Presidency:

The market and investment landscape has been ever so slowly changing since July 2016 as fiscal and monetary policy-makers or governments and Central Banks position their activities to sustain, “inflate if you will”, domestic and global growth.

  • Fiscal and monetary policy-makers globally have been in a slow deliberate reflation throttle-up mode to address a dangerously weak domestic and global economy
  • A Nov. 8th win by Democrat or Republican at the Presidential and/or Congressional level would have likely had many similar “near term market results.”

What’s the Problem?

Why the changing market and investment dynamics?

  • Chronic slow domestic and global growth due to
    • Governments’ deficit spending that produces unsustainable debt in country after country around the world, leading to
      • Historic low and building negative interest rates;
      • Social anxiety yields to “Populists Movements:”
      • Current populist movements’ have the tendency to lead to dangerous levels of social, political and economic uncertainty and instability, not to mention military friction.

Is Current Fiscal and Monetary Policy Not Working?

  • Governments and Central Banks globally have done much.
  • Actually, what our and other governments and central banks have achieved maintaining economic momentum given political constraints is quite extraordinary given “OUR ADDICTION” to big government, building entitlement programs, and just our love and juvenile fantasy with “SOCIALISM” or “TOTALITARIAN REGIMES”, especially where socialistic and doctorial ideas are achieved through deficit spending to a point where there is no possibility of repayment.
  • These social, political, and economic challenges are not new to the world.
  • Countries individually or collectively always reach a point where deficit spending can no longer be sustained and debt has to be paid down, inflated away or defaulted upon.   
  • It certainty appears that current fiscal and monetary policy, assuming normal economic activity going forward, would lead the U.S. into a recession maybe as soon as the second half of 2017 and the global economy would likely fall into negative growth and dangerous social, political and economic uncertainty.
  • THERFORE TRANSITINING FROM STATUS-QUO FISCAL AND MONETARY POLICY ACTIVITIES TO MORE AGGRESSIVE STIMULITIVE FISCAL POLICY ACTIVITIES TO COMPLIMENT ON-GOING MONETARY POLICY IS REQUIRED.  Whether a Democrat or Republican leadership was elected Nov. 8, 2016 a more coordinated fiscal and monetary policy plan of action was already evolving.

Near Term Market Considerations Week Beginning Nov. 21, 2016 (To see charts, click on http://bit.ly/2gc03J9)

Charts 1 - 3. $UST10Y - 10-Year US Treasury Yield

Primary Consideration:

  • The Bond market topped (low yield) back in July anticipating domestic and global fiscal policy (infrastructure, etc.) stimulus activities would be elevated to a level to compliment ongoing monetary policy. Trump Presidency expected to be friendly to business and favor investing in equities, the dollar and commodities over bonds.
  • Near-term, the 10-Year Treasury likely consolidates, before searching for a higher yield.

Charts 4 - 6. Soybeans

Primary Consideration:

  • I remain more concerned about additional price weakness and the culmination of a bottoming process near term. Bottom Weekly Bollinger Band presently has risen from $8.95 to $9.20 per bushel as this market coils for a major price move. 

Alternative Consideration:

  • Considering global risks and uncertainties and required intervention activities argue a price bottom is in place or near.

Additional Thought:

  • Market participants appear to be building a risk appetite. Being short means at least having close mental stops. 

Charts 7 – 8. Corn

Primary consideration:

  • Near term bottoming process underway, likely a retest of the previous low at $3.15 per bushel

Alternative consideration:

  • Bottom in place and upside consideration to $4.15 per bushel

Charts 9 - 10. Rice

Primary consideration:

  • A bottoming process is underway

Charts 11 -12. Cotton

Primary Consideration:

  • Bullish prices likely into the 84-cent area 

Charts 13 - 14. Wheat

Primary Consideration:

  • Forming a price bottom
  • Price weakness into the $3.80 area a possibility

Charts 15 - 16. Copper

Primary Consideration:

  • Prices likely need to correct their upside price move for a period, higher prices will be a function of demand expectations 

Charts 17 - 18. $WTIC

Primary Consideration:

  • A challenging market for a number of economic and geopolitical reasons
  • Trump Presidency likely bullish U.S. production
  • OPEC guidance likely defines price low near term
  • Global uncertainties supportive of prices
  • Range bound market 

Charts 19 - 21. CRB Index

Primary consideration:

  • Near term corrective action lower likely remains underway before moving higher. In the equity markets the financial, industrial, and materials sectors are likely beneficiaries of anticipated reflation fiscal and monetary intervention activities.  

Charts 22 - 23. Power Shares US Dollar Index

Primary Considerations:

  • Dollar running into fairly strong resistance, consolidation likely, but expect more dollar strength than weakness 
  • Global interventionist government and Central Bank activities will define dollar strength or weakness over the next 3 to 12 months

Charts 24 – 25. SPDR S&P 500 ETF

Primary Consideration:

  • Acting bullish

Charts 26 - 27. QQQ NASDAQ Power Shares

Primary Consideration

  • Consolidating
  • Price uncertainty near term, as money moves into industrials, materials, and financials

Goldman Sachs Maps Out Its Top Ten Market Themes for 2017

They're heavily influenced by President-elect Trump (by Luke Kawa, Bloomberg Markets,

Nov. 17, 2016)

“It's not even Thanksgiving yet, but Goldman Sachs Group Inc. is already preparing for 2017. In a note to clients on Thursday, a team led by Chief Credit Strategist Charles Himmelberg released its top 10 market themes for next year.

"High growth, higher risk, slightly higher returns," is how the strategists view the year ahead — and it's clear that their outlook has been heavily influenced by the pending regime change in Washington, D.C.

Here's a brief summary of each of the 10 themes Goldman sees as forming the backdrop for investing in 2017.”

Expected returns: only slightly higher

“Relative to its 2016 forecasts, the team says owners of financial assets can reasonably able to expect more upside — but stress that these returns will still likely remain low.

"The best improvement in the opportunity in global equities is in Asia ex-Japan, where we forecast returns of 12.5 percent (versus 3.8 percent for 2016)," the strategists write. "At the other end of the equity spectrum, in Japan we are forecasting declines of 3.7 percent on the Topix (versus 5.2 percent for 2016).’”

Charts Book Index – Link

Weekly Charts and Accompanying Daily Charts

Chart 1. $UST10Y - 10-Year US Treasury Yield, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 2. $UST10Y - 10-Year US Treasury Yield, Daily Chart, November 2014 – Nov. 18, 2016

Chart 3. $UST10Y - 10-Year US Treasury Yield, Monthly Chart, November 2014 – Nov. 18, 2016

Chart 4. Soybeans, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 5. Soybeans, Daily Chart, May 2016 – Nov. 18, 2016

Chart 6. Soybeans, Monthly Chart, May 2016 – Nov. 18, 2016

Chart 7. Corn, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 8. Corn, Daily Chart, May 2016 – Nov. 18, 2016

Chart 9. Rice, Weekly Chart, October 2013 – Nov. 18, 2016

Chart 10. Rice, Daily Chart, February 2016 – Nov. 18, 2016

Chart 11. Cotton, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 12. Cotton, Daily Chart, May 2016 – Nov. 18, 2016

Chart 13. Wheat, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 14. Wheat, Daily Chart, May 2016 – Nov. 18, 2016

Chart 15. Copper, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 16. Copper, Daily Chart, May 2016 – Nov. 18, 2016

Chart 17. $WTIC, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 18. $WTIC, Daily Chart, May 2016 – Nov. 18, 2016

Chart 19. $CRB Reuters/Jefferies CRB Index, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 20. $CRB Reuters/Jefferies CRB Index, Daily Chart, September 2013 – Nov. 18, 2016

Chart 21. $CRB Reuters/Jefferies CRB Index, Monthly Chart, September 2013 – Nov. 18, 2016

Chart 22. Power Shares US Dollar Index, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 23. Power Shares US Dollar Index, Daily Chart, November 2014 – Nov. 18, 2016

Chart 24. SPDR S&P 500 ETF, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 25. SPDR S&P 500 ETF, Daily Chart, November 2014 – Nov. 18, 2016

Chart 26. QQQ NASDAQ Power Shares, Weekly Chart, September 2013 – Nov. 18, 2016

Chart 27. QQQ NASDAQ Power Shares, Daily Chart, May 2016 – Nov. 18, 2016

Dr. Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]

TAGS: Outlook
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish