This has been a good week for the markets. Economic news has actually been bad overall, but there is some hope that inflation is peaking. It is likely that markets rallied due to lowered expectations of rate hikes.
Markets are shifting their focus rather rapidly. Just recently, it was global slowdown fears. This week, it is peaking inflation hope. Next week, would there be a new focus? Perhaps. Earnings slowdown is a possible candidate. Or maybe slowdown fears will triumph again. Market dynamics are changing more quickly these days, making trading more challenging.
Commodities have continued to fall despite verbal support for stronger Chinese stimulus. A lot has to with weakening economic data. Copper price is at 16-month lows.
Prices have literally fallen off a cliff after being in a trading range for some time It is possible for prices to continue falling, but the probability of at least a short-term bounce has increased. There are still folks believing in the power of future China stimulus.
In my previous update, my preferred short was commodities and long was bonds. Commodities have fallen a lot since, so I would not short it due to increased probability of a bounce. Bond prices have increased slightly, but I am retaining it as my preferred long. It seems likely that the economic slowdown will cap the increase in bond yields going forward.
Iron ore has suddenly become very bearish, going down for 9 consecutive days from 140+ to 110+. Below is the 6-month price chart.
Sentiment seems to have broken down. Prices have gone into fresh 2022 lows. The biggest reason is that the players in the sector were too optimistic on future demand potential. Prices were bid up based on hope, but the hope has been shown to be somewhat misplaced.
There is a decent chance of a bounce at this point, as the drop has been rather drastic. Also, a speech by the Chinese president hinting at stronger stimulus efforts is supportive. A short-covering rally may occur. Thus large short positions are risky now.
US economic data has deteriorated, contributing to the pessimism. Chinese economic data seems to be doing fine, but it is not enough to offset the prevailing negativity.
Stock prices are starting to look more reasonable, but negative drivers of the markets may not have peaked and turned around yet. Inflation expectations are still awful, and major economies are at risk of substantial slowdown.
Commodities have been rising steadily due to being touted as an inflation hedge, but lately have been hit because of economic recession worries. Shorting commodities may be viable if recession worries do not recede. This is my preferred tactical short bet if I am intending to short the markets, as there is still quite a lot of room for commodity stock prices to fall.
On the other hand, recession worries may actually benefit bonds. If economic data continues to deteriorate and/or inflation data goes lower, bonds would benefit significantly. I like this long bet as bond sentiment is extremely low, but I would be cautious about the timing of any bets as there are still several almost confirmed interest rate hikes coming up.
Anyway, hope you folks are doing ok. Do stay safe and sane, and be rational and keep away from impulsive behavior. Good luck!
Iron ore has been rangebound this year, trading between about $120 to $170.
Currently, it is at about $146, roughly in the middle of its 2022 trading range. It has been trending up the last few weeks because of China’s COVID reopening. The reopening and stimulus impulses should support prices for the short-term. Downside risks include Chinese policy response against high commodity prices, and actual commodity demand not meeting expectations.
This is not the optimum setup for shorting. Prices need to go closer to the upper bound of the trading range first, and there should preferably be emerging signs of peaking demand. However, no one can predict the timing of the turnaround in price movement accurately, so we just to constantly monitor news flow and prices. The turnaround can happen anytime, even tomorrow or next year.
Personally, I am hoping for prices to go much higher, as the probability of successful short trades increases the higher prices go. When prices burst above $200 last year, it was a once-in-a-generation type of shorting opportunity. I don’t expect a repeat this year, but if prices can reach at least $180, it would still be an excellent trading opportunity.