Asset Prices Are Now All About Central Bank Activity At This Point

Tactically speaking, we do not see much to be done in today’s shortened pre-holiday session. We continue to hold our tactical biases, and have greatly tightened the stop on the Treasury futures short, now working just above the last two weeks’ highs. We continue to pursue these short-term entries in Treasuries, not for their own sake, but for the potential they have to mark a significant higher-timeframe turning point in rates. Note that we continue to see deterioration in the SPY/EAFE spread, but will not make any adjustments to this bias in pre-holiday trading. Last, we initiated a tactical long bias in Corn futures on yesterday’s close. (See chart.) 

Tactical Conviction Notes:

S&P 500: We hold a tactical long conviction in the S&P 500 futures.

SPY/EAFE: We also hold a long conviction in the SPY/EAFE spread.

Treasury Futures (10 or 30 years): We hold a tactical short conviction.

Copper: We hold a short in Copper futures.

Natural Gas: We hold a tactical long bias in Natural Gas futures. 

Sugar: We hold a tactical short bias in Sugar futures.

Corn: We hold a tactical long bias in Corn futures (see text and chart on page 3).

Waverly Corn

Photo: Waverly Advisors

We have initiated a short-term tactical long bias in Corn futures, the equivalent of a short-term trade recommendation. This trade is supported by a long sideways range (on the continuous contract) and would have been entered on or around the close yesterday. We would advise a stop well into the range, perhaps 576-590, basis September futures. Note that this trade could have directional implications for the entire grain complex, but, at present, is simply a tactical trade entry.           

Macro: In case you have not noticed, there have been very few discussions of organic growth drivers in recent macro narratives. All things appear to hinge, for the near and intermediate-term, on the intervention of central banks. Thursday will bring the ECB and BOE announcements. Both appear to have room to manoeuvre as inflation remains a very distant concern and activity measures are sluggish. May PPI for the Eurozone released this morning was flat for the month with a 0.5% M/M contraction (+2.3% Y/Y) weaker than forecast but almost entirely driven by weakening Brent prices for the period (core was unchanged). In Australia, the RBA announcement of no change in rates was largely anticipated as Glenn Stevens (the world’s most proactive central banker) balances low inflation expectations with still softening growth drivers in Asia. Meanwhile markets continue to calibrate the likelihood of further easing by the PBOC (we view this as likely) and the Federal Reserve (we view this as unlikely) for the very near-term. As we begin a truncated trading day in the US, to be followed by a holiday that will see many traders out of action through the weekend, we mull over a tautology of the markets: central bank intervention in the absence of organic growth inflates financial assets, but this rise is fleeting unless growth drivers catch up with markets in short order. Our macro perspective is therefore largely aligned with our tactical, as in this environment we view price action as a far better barometer of near-term risk than the best-intentions of policy makers and the wishful thinking of politicians. 

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