Interest Rates and Dollar Rising, Commodities Falling

I believe an edge I have developed as a global tactical investment manager over the past two decades is a strong understanding how markets interact with each other and their return drivers, but most important is the directional trend. Below I show that interest rates are rising. $FVX is the 5 year Treasury Yield and $UST2Y is the 2 year yield. If we define an uptrend as higher highs and higher lows, both are trending up.

source: http://www.stockcharts.com

You can probably see how when interest rates rise on U.S. Dollar bonds, that may also increase the yield on the U.S. Dollar. For U.S. investors, the rising rates are eventually reflected in money markets, CDs, and new bond issues. Below is a chart of the U.S. Dollar so you can see how it is trending up sharply since July.

When the U.S. Dollar rises, that usually drives just the oppose in Gold. Below is the directional drift of gold.

A rising U.S. Dollar (from rising interest rates) also drives down the price of some commodities. Below we see the price trend a broad based commodity index that includes a basket of many different commodities.

Looking closer at commodities, below we see that wheat, sugar, corn, cotton, and agriculture are trending down. So much for inflation! Those who have believed the U.S. would see strong inflation have been wrong. These commodity trends suggest prices have been falling the past year, not rising.

Finally, I’ll add that the direction of the U.S. Dollar also drives foreign currency relative to the U.S. Dollar. For example, the British Pound and Euro and drifting down as the Dollar is rising. Investors around the world have choices about where to invest their cash. When one currency yields more than another, or is expected to, it could attract demand for that currency. Demand leads to rising price trends.

You can probably see how these global markets are interconnected and driven by the same things. A strong understanding of how global markets interact with each other is an edge in global tactical trading and allocation. Of course, something that may be of concern for traditional stock and bond investors may be how rising rates drive their positions. If rates continue to rise, bond prices will eventually fall.

 

2 responses

  1. Pingback: Global Market Trends and Returns 3rd Quarter 2014 « Asymmetry Observations

  2. Pingback: Trend Change in Dollar, International Stocks, Gold? « Asymmetry Observations

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