WHAT’S HOT
Flight to Safety
US Treasury bonds remain one of the best options for investors looking for safe haven
W
hile global equity markets, along with oil, weakened last month US Treasuries advanced, pushing
yields lower. Long-term 10-year Treasury yields reached their lowest level since last October, hitting 1.95 per cent before bottoming out. As investors exited global equity markets, one safe haven was US Treasuries. Other government bonds also gained favor. Eventually the recovery rally in global equities and oil is likely to end, where again US Treasuries and other government debt will be seen as a safe haven. As billionaire investor George Soros noted in interviews last month, he expects US government bonds to benefit from a further slowdown in China, the global economy, and downward pressure on global equities.
The recovery rally in global equities and oil is likely to end, where again US Treasuries and other government debt will be seen as a safe haven
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US dollar stays strong The US Dollar Index remains close to its highest level in over 12 years. That high of 100.51 occurred two months ago in early-December, leading to a pullback and then a slow and grinding advance, where it remained as of the last week in January. Most commodities, including oil have continued their declines during the advance in the dollar. It’s interesting to note that the current multi-week advance has similarities to the rally that ended in December, although at a larger scale. The current rise has lasted longer and volatility is higher, but the general pattern is the same. Therefore, the current short-term uptrend may end in a similar fashion to what we saw in early-December – a sharp sell-off, leading to a second leg down off the 100.51 high. Further supporting such a scenario is
the low volatility environment witnessed in January. Using the high-to-low range, January had the lowest range in over a year, even as global equity markets and crude were roiled. Higher volatility follows low volatility. If a breakdown is to occur it should happen within weeks. The downside target would then be around 96.60. Keep in mind that the long-term trend
continues to be up, with a rally above the high needed for a new bullish signal. It’s still possible that volatility increases to the upside instead of the down. This also means that if a drop of some significance does occur in the near-term the odds favor an eventual continuation of the long-term uptrend.
Boost to commodities A declining dollar could give a boost to oil, as well as other commodities. Oil fell for most of the first three weeks of January before finding a bottom at $27.08 for Brent crude and $27.54 for WTI, and then bouncing. The initial bounce or relief rally off the bottom was significant enough to indicate that oil could see a multi-week advance. This doesn’t indicate that a final bottom has been established, but investors looking to catch a rally can watch for pull-backs to enter at lower prices in anticipation of a continuation higher in the coming weeks. The most recent two advances in oil, one that began in March and the other in August of last year, lasted from eight to fourteen weeks. If last month’s lows hold, then we can estimate an overall advance of at least eight weeks. On the flip side, a drop below last month’s lows that occurs before eight weeks, would be even more bearish than otherwise.
By Bruce Powers, CMT, Chief Market Analyst at
MarketsToday.net, and President at WideVision
www.wealth-monitor.com | February 2016
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