Stocks rallied to new all-time highs last week, with the exception of the Nasdaq. Even so, it continues to consolidate near its highs, which is generally considered to be bullish price action. Last week saw a sector rotation back into value and inflation-sensitive segments of the market from growth and tech. Now that geopolitical risk has grown for the market, the question becomes whether this will induce deflation or inflation.
The dollar rallied to a multi-month high last week before being slammed lower into Friday. A falling dollar is typically inflationary, so if this persists, we could anticipate commodity prices to rise. The last time geopolitical risks were this high was in January 2020. Crude Oil prices peaked then, and commenced a historical decline into negative territory. If such a scenario were to repeat, it would be deflationary, and likely lead to a sustained bid in bonds.
Precious metals had an interesting week too, as they traded down to multi-month lows before snapping back nicely higher into Friday. We note that their performance has generally correlated with the direction of bond prices in recent years--that is, they've risen as interest rates dropped, or in the face of deflationary pressures. The trend since last summer in metals has been lower, but they're working hard to change that now.
Cryptocurrencies staged a nice rally and closed near weekly highs. Ethereum just closed at its third-highest weekly level in history, which is bullish.
A new Mercator Letter was just issued yesterday, where we updated our macroeconomic outlook along with a few stock ideas. Check it out for just $20 here.