Currencies and Commodities Breaking Down

Bottom line: Stocks are in trouble

Video Transcript:

Now what’s not stuck [in this market]? Well clearly, the things that aren’t stuck would be anything that has to do with commodities, currencies and bonds. They are not stuck at all. We have the highest volume selling in the history of volume, let’s say in copper futures. I pointed this out on the last update since we broke the neckline from this big head and shoulders top.

Confirmation is that you have a high volume selloff. Then since it’s a weekly chart, you then need to take out those lows, let’s say the next week or the week after. Well, guess what? New 52-week lows, new multi-year lows actually in copper yesterday. The commodity space, absolutely hammered. Not so much gold in terms of percent. Not so much that. But mostly your industrial-type commodities or oil, unleaded. Just absolutely hammered. Not as bad as the day silver went down 15% in a day, but iron ore, aluminum, nickel, copper, all of everything is breaking down, which is why it’s probably going to be very very important what the ECB and Draghi come out and say [Update: See Bloomberg for a transcript of the press conference] .

If you go back to the update put out on March 4 before all this stuff started breaking down, before all these new lows, before everything had happened— whether we’re in disinflation or deflation is impossible to tell right now. What we can tell is that both of them start out with deleveraging.  And that’s what we have going on. Commodities—well, it’s happening in currencies. They’re absolutely insane, just getting hammered. The kiwi and the Australian dollar—let’s say, your high-beta currencies. So you have all these carry trades that are unwinding, which then affects the commodity space. Granted, why they’re unwinding is because we have terrible economic news, from a hard landing in China to what’s going on in Europe to our own economic news here. Everything is just unwinding.

But if you go back to March 4, you’ll see it does all start with currencies, then goes over to commodities, and lastly you’ll start seeing bonds break out and yields drop. That’s what we’re in right now. You can see right here from new 2013 year highs—and this is the actual futures—but it doesn’t matter if you’re looking at the 30-year or the iShares Barclays 20+ Yr Treas.Bond (NYSE:TLT). Everything is breaking out, which means yields are falling because prices are rising. It’s the opposite of what you would want to see because we’re in a deflationary environment. Commodities are tanking. Currency or carry trades are unwinding. You have interest rates near zero. Bond inflows keep going up and up and up which means yields are dropping. Eventually that all spells trouble for stocks in this environment. Maybe not in prior environments, but in this environment it’s no bueno.

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