Last week we suggested that the “long dark shadow” of deflation was starting to fade, and given the impressive rally off the February low through the end of the month, we would suggest that sentiment was overly negative going into the 2016 equity market lows, as the global swoon was mostly about disappointing forward momentum and not some major, difficult-to-solve obstacle.
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Is the Long, Dark Shadow of Deflation Starting to Fade?
Perhaps the moderation is the result of many markets having already priced-in anemic growth, oversupply and little threat to supply.
Current Sentiment in Favor of the Bear Camp
We continue to think that the current crisis lacks a pedigree, and industry leader Jamie Dimon (CEO of JP Morgan) would seem to concur, given that in the wake of stock declines he purchased shares of his company.
Fundamental Track in Favor of the Bear Camp
Just when it appeared that sentiment had reached a trough, the crude oil market dragged commodities down even further.
Classic Physical Commodities Under Spillover Pressure
The markets have seemingly become comfortable with a “one and done” rate hike from the Fed in December or sometime in early 2016.
Impressive Stock Market Rally Has Continued in the Face of Mixed US Economic Data
An impressive stock market rally has continued in the face of mixed US economic data, China continues to show signs of weakness, and the Euro zone isn’t sure if it needs more central bank assistance.
Fed Not Confident in Pace of US Growth
With the Fed taking a pass on hiking rates in September, a reduction in their 2016 and 2017 growth forecasts, and only minimal dissension within their ranks against a steady policy stance, it appears that they are not confident enough in the pace of US growth to make a move at this time.
Commodity Sentiment Was Overdone
We won’t suggest that the recent lows in many commodities are solid, but value-hunt buying of copper assets by Carl Icahn, a $4.00 single-day rise in crude oil prices, and a 1,000-point, 2-day bounce in the Dow suggest that sentiment was overdone on a number of fronts.
Prospect of a Global Currency War is On the Rise
On one hand the Chinese currency debacle has tripped up sentiment, but on the other hand the markets have not shown progressive anxiety, and the shelf-life of the crisis appears fairly short.
Strong Dollar, Burdensome Commodity Supplies
The challenges for physical commodities are slack global demand, the Dollar remains strong and commodity supplies are generally burdensome.