Corn futures have fallen by 18% from the highs made in mid-June and have now made a bottom extension at a daily scale. This is an opportunity to buy some hereabouts. In the bigger picture, corn has been falling for some years, from all-time highs above $8 made in 2008, matched in mid-20012. At $3.60 the front-month price is not yet 'cheap' although it is as low as it has been since the dip between those two peaks at just above $3. Buy for a bounce at least.
Crude oil has compressed in both the Brent and WTI contracts. This is the first such signal since the rally from the lows of January ended and means that a new direction will soon emerge.
Competing fundamental analysis exists - some point to the continued glut caused by the enduring rivalries between Saudi Arabia, Iran and Russia over territory, ideology and market share, compounded by Iran's re-emergence as a major producer. Others look more at demand, which has an underlying uptrend even as China's economic growth, moderates from eye-popping to merely fast. Other far-Eastern economies are also growing well and much is made of India being 'the new China' - although it is much harder in a democracy to impose the policy of prioritised economic growth on an opinionated people all of whom have interests that may clash with this aim. There have been false starts before but yes, world energy demand is growing at an inexorable pace.
It seems to us that the lows have been made in Crude oil. There were monthly-scale bottom extensions in the WTI contract and in the energy-intensive commodity indices at the beginning of this year. Here is an update to the crude chart:
We have been thinking since early June that a price range would form and these new compression signals indicate that a new expansion of this range is about to occur. This may take the form of a new trend, but a wider range is just as likely. We will advise as events unfold - be ready for some more volatility.
Equity markets have diverged one from another since the two-day Brexit panic. US equity indices have shot back up, after making bottom extensions but only in some sector indices, as we reported in the 28th June edition. We have been too flat-footed here as we were waiting for some more important 'buy' signals and so missed this rally. Prices are still inside the area of those weekly-scale compressions that we saw last week - here is an update:
This opens the interesting question - what happens if these compressions break upward? We have been warning for some time of the risk of a bubble in US equities - and by implication other markets too. This is based on our view that the Federal reserve has abandoned its former defined role in limiting excessive enthusiasm and gloom in the US economy by looking at the world outside. This interaction between the natural tendency of a vibrant economy to grow and the Fed's attempts to manage it are the principal establishing cause of the 'business cycle' and when a feedback loop like this that has led to cycles is abolished, dramatic change is likely. In this case, the world outside the US has enough problems to inhibit US rate rises for the foreseeable future, especially in this timorous age when avoidance of immediate harm takes priority over longer-term responsibilities. This is the perfect condition for equity prices that are already high by most measures to start bubbling yet higher. We cannot tell if this is the moment when such a bubble will start to inflate - we have been premature in the past - but if it happens it will start with the upward break of weekly-scale compressions like these. We watch carefully.
European equity indices have also bounced and the FTSE100 has been the strongest market since the post-Brexit panic lows on the day of the referendum result. It is now comfortably above the pre-vote levels, but all is not what it seems. An important reason for the strength is that a disproportionate amount of the earnings of companies in the FTSE100 are in foreign (non-£) currencies - many are not even British but have gained a listing in London for other reasons. The fall in the £ on the referendum news has boosted these earnings in £ terms and so their index. The two markets involved:
The FTSE250 better reflects the fortunes of UK domestic businesses, whether they export or not. There the rally has been much less robust:
This performance is much more like that of the other principal European equity markets - here are the Eurostoxx, German Dax and French CAC that have also rallied but not by as much as the FTSE:
None of these other Europeans have produced any signals yet, so we remain sidelined, with the urge to buy suppressed for now.
Bond markets rallied fast, as equities dropped but they have not reversed. The rally quickly produced top extensions in 10-year US notes and Bund futures and now the BTP has made a fresh extension signal in the last 24 hours. These markets are signalling that a new short-sale is appropriate but we sold the last top extension in 10-year notes (1st pink tip in 1st chart) and were stopped out so we may not take this trade.