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Most attention on Monday was placed squarely and appropriately on European Assets. The DAX has broken to all-time highs and has traded more than 400 points or 3.3% higher. Additionally, German Bund prices on the front end have dropped aggressively sending the yield up 11.9%. The higher yield aligned with EUR/USD pushing higher as EUR/USD weekly open gap was the largest on record per Bloomberg, which brings us to the top chart.
Should the price of Bunds continue to fall, which is predicated on presumed tapering that could be announced by the ECB this Thursday, but most likely, in June we may see the path for a clear move higher in EUR against weaker currencies. In late-April, the weaker currencies have been commodity currencies and the USD. Stronger currencies have been JPY, GBP, & EUR.
The commodity picture could turn the way of Bonds yields, which is to say Bearish. While there remains a lot of managed money net long certain parts of the commodity landscape, most notably, Crude Oil the price is not responding well.
A further breakdown in key commodities like the base metal Iron Ore or Oil could see a flush out of long positions. The level in Crude Oil that a lot of traders are watching to see if the price holds is ~$48/bbl. A look at the Bloomberg Commodity index shows it trading below the Trendline drawn off the 2016 lows. Commodity pricing is a key input to bond yields rising, and a sustained drop in commodities could lead to suppressed yields.
In the topsy-turvy world, we find ourselves in; this environment of potentially lower yields and lower commodity prices seem to be a unique set-up for higher equity prices. In other words, the perma-bears may have another rough summer. Lower commodities and lower yields mean lower input prices and cheaper borrowing, which could continue to support earnings.
Closing Bell’s Top Chart: April 24, 2017, EUR/USD Breaks Higher To 55-WMA, Bund Drop Could Assist
