Tuesday was a somewhat monumental day for financial markets but it appears that few are taking it seriously. We say monumental because a number of key levels were broken which, to our thinking suggests the next phase is under way because breaches of these key levels confirmed the macro trends that began back in October/November last year. The key levels were as follows:
USD Index: Break below 77.50. This was a new multi-week low. The next stop for the big USD Index is at the 70 level (10% away from current levels). One cannot stress how important this index is for world financial markets. Everything revolves around the USD Index.
Gold Futures: While futures did not close above $1000, a break above signalled that Gold has broken out of its long term consolidation pattern that began way back in March 28th 2008. It is interesting to note that Gold broke $1000 at the same time that a new multi-week low was made in the USD Index.
High Yield Currencies: Using the ETF “DBV” as a proxy for the performance of high yield currencies over low yielding (excluding the USD), a new high was made (DBV above 22.50).
So what are the implications of these three important breakouts? In essence they confirm the broad macro themes that began just after the big crash in October last year and perhaps somewhat before that.
Theme number one: Rising Inflation. Yes that is more or less the driving theme in financial markets right now. Putting it bluntly multi-week highs in the Gold price coinciding with a multi-week low in the USD Index spells inflation in its simplest form. Remember “KISS” (no that is nothing to do with a certain glam rock band).
Theme number two: the search for high yielding “assets”. Perhaps this is very related to the erosive effects of inflation, but either which way the market is clearly telling us that anything high yield (or at least has some chance of withstanding value destroying effects of high inflation) is in demand and unlikely to go out of fashion anytime soon.
Nice confirming indicators to have. There are two more “things” that we now need to see happen to confirm the action of the USD Index, Gold and high yield currencies, that is, a new relative high in TIPS vs. the US 10 year and a multi-week high in commodities (using the old CRB Index as a proxy for commodity prices).
We are confident that these nice to haves will in fact be reality over the coming days, as we have been saying now over the past few months (click here for previous articles).
