Carlsquare weekly market letter: Commodities on the move again

• There is an ongoing shift in investor interest as equities appear to be taking a breather, but commodities are back in the game. This is usually of little interest to equity traders but be aware that it could create a new wave of inflation in the market. That would be bad news for equities.
• We are still positive about 2024 because it is a global election year and the incumbent government tends to spend money to be voted in to stay in power. But it is always good to be at the exit door when something dirty hits the fan.

The chart below shows Cacao, which has seen a parabolic move in recent days.

Difficult weather conditions with heavy rains and disease have affected cocoa production in West Africa. This has led to a global shortage of cocoa. Obviously, this has also attracted a lot of speculators to the commodity, creating a parabolic move. Such moves are always interesting because they challenge Newton’s law of gravity. At some point, the rally has to end and on that day, everyone who piled into the asset will try to get out. But as we say every week, don’t fight the trend. It is better to wait for a sell signal. This can be any news. But more often than not you will find the sell signal on the charts. The price is now following the EMA5 and the upper Bollinger Band. The day that cocoa closes below the EMA5 or EMA9 may be a good day to exit the trade and eventually take the opposite position.

But it is not just cocoa that has seen an increase in demand.

The whole complex of agricultural products is in high demand at the moment. As the war in Ukraine continues, the market is concerned about supply this season.

Even more worrying is the rising trend in oil. As we wrote last week, in order to win the battle against Russia, Ukraine has started bombing Russian refineries in Russia with drones. It is estimated that 50 per cent of the larger refineries have been affected and perhaps 5-10 per cent of production has been halted.

We hope this will help Ukraine win the war, but the fact is that it is also pushing up the price of oil. We were early with this story and there was a lot of writing about it last week after our weekly letter.

Since oil is the main price of energy, and energy is a component of virtually all products and services worldwide, a higher oil price pushes up inflation.

RINF is an ETF that allows investors to profit from the market’s rising inflation expectations. As you can see, RINF is on the rise again, even when, for example, the US Federal Reserve expects inflation to continue to fall. Let us see who is right. A note from the sidelines: the market is rarely wrong, especially when it goes against the macroeconomists. The Fed also has a structural problem. If the Fed wants inflation to fall, it must also have a forecast for falling inflation, because the Fed’s inflation forecasts tend to be self-fulfilling…

In a world where oil and other commodities trade well, oil companies will also be winners. Above, the XLE energy companies ETF is in the midst of a strong rally.

A few years ago, the trend was towards alternative energies and investment in new oil fields was more or less at a standstill. Now the trend in oil services is also positive. The pendulum has really swung to the other side.

If you are trading commodities, you also need to keep an eye on the USD as all commodities are priced in USD. A higher USD tends to push commodities lower and vice versa. The USD has also been rising for the past two weeks, which is a bit of an anomaly. We will see if the USD can take out the recent top at 104.87 or not. Either way, the USD needs to go lower for commodities to go higher.

The S&P 500 is still trading in a rising wedge.

Eventually it will break down, but there are no sell signals yet, so it is best to let the trend be your friend. The dotted red line is a technical measure of how far down the break could go from a purely technical perspective. The 100-day moving average (MA100) would then be a perfect support and can also be a perfect position to re-enter the market. But let us take one day at a time.

Happy trading!

Week Ahead

Reports and event on Wednesday, 27 March: H&M, Cintas and Tencent.

China releases industrial profits for February at 2.30 CET. At 8.00 CET, Statistics Sweden will release trade balance and household credit for February. This is followed by the French Household Confidence Indicator for March at 8.45 CET and the Spanish CPI for March at 9.00 CET. After that, we have the Swedish Riksbank’s interest rate announcement at 9.30 CET and the Eurozone’s economic barometer for March at 11.00 CET. Finally, oil inventories (DOE), weekly statistics from the US at 16.30 CET.

Reports on Thursday, 28 March: Walgreens Boots Alliance.

UK Q4 GDP will be released at 7.00 CET. An hour later we get Sweden’s and Germany’s retail sales for February. This is followed by Germany’s unemployment rate for March at 9.55 CET. After lunch, we have Canada’s GDP for January and from the US, Chicago PMI for March, GDP for Q4, weekly jobless claims, the Michigan index for March, pending home sales for February and the Kansas City Fed index for March.

Reports on Friday, 29 March:  –

Japan is first up with unemployment for February at 0.30 CET, followed by industrial production and retail trade also for February at 0.50 CET. We get March CPI from France at 8.45 CET and from Italy at 11.00 CET. US personal consumption and inflation (PCE) for February is due at 13.30 CET, which will be an important figure that is likely to influence interest rate levels. Several western stock markets will be closed on Good Friday.

Reports on Monday, 1 April:  –

From Japan, we have the Q1 Tankan at 0.50 CET and the March Industrial PMI at 2.30 CET. Also from China, we get the March Industrial PMI at 2.45 CET and from the US at 15.45 and 16.00 CET (one of which is the ISM). US construction spending data for March will also be released at 16.00 CET.

Reports on Tuesday, 2 April: Paychex.

Tuesday’s macroeconomic agenda is dominated by the March industrial PMIs from Spain, Italy, France, Germany, the Eurozone and the UK. We also get March CPI from Germany. The US will contribute with weekly Redbook retail data, JOLTS job openings and industrial orders for February, as well as weekly oil inventories (API).

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