Euclid Investment Advisory Blog

Market Update & Analysis Special Edition June 18, 2021


We are working to sort out the markets' twists and turns in recent days.  Shortly after Fed Chairman Powell spoke on Wednesday afternoon June 16, the markets we track (equities, interest rates, gold, currencies, oil, and industrial metals) reacted as we expected.

The Fed's comments were interpreted by the Market as "hawkish" when in fact the Fed only indicated that, based on economic developments, it may have to change its position of holding short-term rates flat for the next four years (seemingly "forever") to raising rates sometime in 2023. Also on that day, the Chinese National Food and Strategic Reserves Administration announced it would begin to sell major industrial metals (copper, aluminum, and zinc) from state stockpiles reserves to halt factory gate price increases that have hit a thirteen year high and are stroking fears of global inflation. We see the Chinese as naturally being concerned over losing price competitiveness and reduced exports.

The Market’s view of the US Dollar has been Bearish since March 2020. As the dollar rose on Wednesday afternoon those who had short positions had to cover by buying. A typical way to raise cash is to sell equities, particularly those that had good runs ups (e.g., financials, energy, metals mining, etc.), causing them to fall.

On Thursday, the Market began something of a taper tantrum. What is puzzling that as the US Dollar rose, long-term interest rates fell! It was short-term rates that spiked, rising from 0.163 to 0.230.

If inflation is a concern, we would expect long-term interest rates to rise, not fall. In a rising rate environment, banking and financial stocks should rise, not sell off.

As of noon today Friday, the markets appear short-term oversold, and we look to a relief rally next week. Our indicators show equities have fallen to their intermediate support levels and may hold there and reverse or decline further. This may be a low-risk entry point or an opportunity to reduce exposure further.

Of concern is what is happening with the Yield Curve, the difference between 10 and 2-year bond yields. It had been positive and rising. While far from inverting, its steepness is nonetheless flattening. Something to watch.

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