The five charts below depict more or less all that one needs to know about the behaviour of the five big asset classes. We have a strong upward trend in equities and real estate, inconclusive action in commodity and treasury markets and what appears to be a change in trend (from bullish to bearish) in the USD Index. Again to a large extent the fate of commodity and US treasury markets lies with the behaviour of the USD Index. Bearish sentiment against the Euro and GBP (heavy weights in the USD Index) is at “unprecedented” levels and we believe that this will act as a ceiling to the USD Index’s advance. We would not be surprised to see the Euro trade at above the 1.38 level over the coming days and once it does that it will likely spark a powerful short covering rally taking it way past the 1.4 level. Of course it does not take a rocket scientist to figure out that if this happens the big heavy weight commodities (namely gold and crude) break to multi-week highs and in so doing drag the CRB Index and components along with it. Yes there are a number of commentators out there who believe that the inflation trade is history, but perhaps this “school of thought” merely reflects the fact that US treasuries and commodities have seemingly gone nowhere for the last 6-8 months. Ultimately the dramatic increase in government debt will weigh heavily on treasury prices and the perceived value of paper currencies.
