The stock market is facing a unique set of risks:
First, the Federal Reserve is starting to raise interest rates, with the first quarter-point hike coming last Wednesday and many more on the way. Then there’s Russia’s war with Ukraine, which is creating a humanitarian crisis in Europe and destabilizing financial markets around the world. Meanwhile, oil prices are soaring past $ 100 a barrel and threatening to further stoke inflation, which is already at a 40-year high. And parts of the Treasury yield curves are inverting.
Let’s add some detail. The Fed has only engineered one soft-landing since WWII. All other rate hikes have preceded a recession. The War in Ukraine is further hindering supply lines while also spiking commodity prices. On that front, oil prices have been a contributing factor in many post-WWII recessions. Finally, the 10-2 yield curve is quickly tightening, which is also a solid recessionary precursor. Overall, there are a number of concerning developments occurring at once.
And on the treasury market front:
Traders are betting that 10-year Treasury yields will drop below those on 2-year bonds in three months, a sign that’s widely viewed as a potential precursor of a recession.
Treasury forwards are pricing in that two-year yields will be at about 2.29% by June, one base point more than the expected yield on 10-year bonds in similar contracts. That gap is up slightly from 0.4 basis points on Friday, when the forward market priced in such an inversion in that segment of the yield curve for the first time since 2007.
This is not a bad bet:
The 10-year-2-year spread is currently 17 basis points. Also, notice that an inversion has preceded all recessions since 1980 save the last one.
Oil prices are not the only commodity prices challenged by the Ukraine War:
The war in Ukraine has delivered a shock to global energy markets. Now the planet is facing a deeper crisis: a shortage of food.
A crucial portion of the world’s wheat, corn and barley is trapped in Russia and Ukraine because of the war, while an even larger portion of the world’s fertilizers is stuck in Russia and Belarus. The result is that global food and fertilizer prices are soaring. Since the invasion last month, wheat prices have increased by 21 percent, barley by 33 percent and some fertilizers by 40 percent.
This obviously compounds the Fed’s policy challenges.
Let’s take a look at three sets of charts:
The big question raised by last week’s activity is this: are we looking at a new bull run higher? The top charts show that prices broke above the 200-day EMA – a bullish development. Today, prices broke last week’s uptrend (5 and 10-day chart) but are still above key levels (30-day chart).
The difference with the QQQ charts is that today prices closed a tad below resistance (30-day chart).
The IWM fell back from resistance today (3-month chart) and could be forming a head and shoulders top short term (5-day chart).
The jury is still out on whether or not we’m seeing a new bull run. Today was more of a pause than a continuation.