Weekly Memorandum 9/28/2020
Equities are up nicely after forming what may have been an important pre-election bottom last week. We are still looking for confirmation via a close above a couple levels of resistance, which were highlighted in yesterday's publication of the Mercator Letter. Recall that before the 2016 presidential elections, stocks put in a meaningful bottom almost a week before the results were known, which subsequently led to a powerful equity rally that lasted over a year.
Another market worth paying close attention to as the election approaches is the bond market. Here too, we saw a meaningful bottom occur prior to the presidential election in 2016. Except in this case, interest rates bottomed in July 2016, and then ripped higher for the next 2 years almost. Interest rates are off their all-time lows that formed during the corona-crash back in March, and a secondary, higher-low may have formed in August.
Our position has been, and continues to be, that a Trump re-election will be bullish for rates (going higher), while a Biden election will be bearish for rates (going lower). The election uncertainty could be a major reason why the Treasury market has basically traded sideways for several weeks now.
The U.S. Dollar also appears to have formed an important bottom in the last few months. The macroeconomic mental mechanics we are trying to work through now concerns whether a potential dollar rally would reignite deflationary pressures in the market, or whether it's simply a function of higher demand for American assets from foreign investors. It's important to remember that all markets are connected-- and the dollar remains the reserve currency of the world, so its fluctuations permeate across all markets.
Gold and silver took it on the chin last week off the back of the dollar rally. Interestingly, precious metals have rallied in conjunction with bond prices, which means they've shown a positive correlation in recent months. But correlations can and do change, and we may be witnessing this now. Crude Oil was down slightly last week too, much like other commodity markets.
The 'Big 3' cryptocurrencies (Bitcoin, Litecoin, Ethereum) were modestly down last week too. A new Mercator Crypto report will be issued Wednesday, where we will update our forecast for these 3 markets.
We will keep readers updated here with market developments, but the Mercator Letter remains the best way to obtain our most detailed and nuanced analysis of markets, in addition to providing actionable trade ideas. Global capital continues to posture itself for the election results, and being caught on the wrong side of a major swing like the one that may be approaching can be detrimental to one's bottom line. Stay tuned!