Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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ST note - copper and crude oil divergence
Junvum Kim
Sales Trader
Summary: Divergence began to appear since last month as both XAU and HG looked to have bottomed out and make multi months swing highs but CL continued to decline making a fresh low for the year breaking the double bottom $75 this week.
My sales trading team members well and truly know that I am a fan boy of Cathie Wood whose flagship fund ARKK generated huge 149% return in 2020 but this year so far YTD return of -64% on the back of QT and challenging macro backdrop as real yield soared from -1% all the way upto 1.59%, highest since 2009. I remember this tweet from Cathie that flagged the inflation expectations by looking at commodities such as gold (XAU), copper (HG) and oil (CL) which were already on their way down after all three peaking in March 22 while CPI peaked later in July at 9.1%. However divergence began to appear since last month as both XAU and HG looked to have bottomed out and make multi months swing highs but CL continued to decline making a fresh low for the year breaking the double bottom $75 this week. On the other hand, silver (XAG) and iron ore (SCO) are also showing reversal to the topside with +32% and +49% respectively so in line with the recent house view from Steen, resurgence of major commodity strength may have already begun in the anticipation of China reopening.
Some findings
- Correlation based on weekly for 2 years: XAU vs CL (0.3), XAU vs HG (0.5), HG vs CL (0.5)
- YTD return: XAU -1.88%, HG -13% , CL -4%
- EUR seasonality historically shows December is the best month since 2010 on year end $ selling.
- S&P 500 santa rally could also play out post Nov CPI (est 7.3%) and FOMC (est 50bps hike) next week as previous 11 average monthly return being +0.6% with only three occasions being negative (2018, 2015 & 2014) but median having nearly +1%.
- S&P500 forward EPS estimate is 225.52 +9% growth vs current 206.84.
- Since Covid low 14 in March 2020, S&P500 forward PE is 18 currently with recent 2022 low 16 and 2020 high ~28.
- Credit spread may have topped out at 600bps and now hovering at around 500bps with 2021 low ~200bps and 2020 high ~1,100bps
- Yield curve between 3 months and 10 year inverted to -80bps that implies the recession probability of 50% according to the old article (The Yield Curve as a Predictor of U.S. Recessions) from NY Fed.
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