Market review 24.09.28

The Intermarket is set beautifully for a broad-based rally.

Hello everyone,

In today’s report, I want to discuss the Intermarket setup over the coming months/quarters:

• Bullish broad equities (across sectors and global regions)

• Bullish various commodities (copper, steel, gold, uranium, and agriculture)

• Bearish short-term rates; bullish long-term rates (a unique steepener).

• Bearish US Dollar

While equities are bullish for the next while, I’ll briefly reiterate why the equity rally eventually runs into trouble in the closing notes.

None of the analysis here is new, but it helps to continually zoom out and summarize the market’s message with updated charts of key areas.

Global Equities

Monthly charts for three major global equity indices are telling us to be bullish.

#1) S&P 500 Equal-Weight Index is powering higher after retesting a 2-year base breakout in recent months.

A key development this week was the Consumer Discretionary Equal-Weight ETF making a breakout relative to the S&P 500 Equal-Weight ETF (link).

The market believes that the Fed has engineered a soft landing (rates were raised long enough to curtail inflation before aggressively starting a cutting cycle to save the economy). Whether this narrative proves correct is a separate matter, but that’s what the price action suggests for now. 

#2) MSCI World (Developed) ex-USA Index is powering higher after a significant 17-year base breakout in August.

Europe and Japan account for most of the above index. Japan’s Nikkei is sitting on 35-year base support after this quarter's enormous volatility (link). EWJ (unhedged Japan ETF) looks beautiful on both the monthly and weekly timeframes.

#3) MSCI Emerging Markets Futures. The soft-landing narrative that was already in motion got kicked into high gear this week when China announced its most extensive stimulus package since the Covid shutdowns. Emerging Market indices are now up 8% this month, following the retest of a 2-year base breakout:

(Note: The above two charts are priced in USD and exclude dividends).

There were clues ahead of this week’s giant 18% rally in FXI (Broad large-cap China ETF):

1. Commercial hedgers went record-long EM futures in late 2022, as seen in the chart above. They remained near their bullish positioning extreme throughout this year.

2. Southeast Asia is tied heavily to China’s economy. We saw how the ASEA ETF made a 7-year breakout in July and has been on a tear for the past two months.

3. Sentiment: Large outflows from China ETFs all year (link).

US Dollar

In August, the US Dollar made a 2-year breakdown relative to the British Pound. It’s now doing the same relative to the Euro:

This weakness in the US dollar is consistent with:

1. The risk-on message given by stocks (the Dollar peaked in late 2022 when stocks bottomed)

2. The relative strength of Foreign Equity ETFs and gold

3. Falling short-term rates

US Yields & Rates

Short-end Treasury yields have fallen since April and can continue to fall for many quarters to relieve parts of the economy. This helps explain why the Consumer Discretionary sector has been thriving.

Meanwhile, long-term rates have likely bottomed. The US 15- and 30-year Mortgage Rates are tagging their lower monthly Bollinger Bands:

A bottom in long-term rates is consistent with inflation trades perking up (discussed in the next section).

The resulting yield curve steepening also explains why financials and gold have been thriving and can continue to do so. Update Sep 29th: I elaborate on this message in this tweet thread: link.

Overall, rates across the yield curve explain why we’re now getting a broad-based equity rally.