Stronger for Longer
Trade in Whisky;
I am expecting a massive rotation in stocks. We had one in July and August, and can now expect another. This chart from ByteTrend.io shows market breadth back to 2006 in blue (with the World Index in grey). In 20 years, we have not seen so few stocks outperforming the market, or so many lagging. It is a powerful message, and we should be ready for change.
Global Winners less Losers
I can’t show it with this dataset, but I suspect that the last time this reading was this extreme was in 2000, at the peak of the dotcom boom. Semiconductors have been the driver, and they are now taking a breather. They are rolling over once more, having failed to make new highs. That doesn’t prove it’s the end, but certainly makes it more likely.
Semiconductors
We know why breadth is so weak: rising bond yields. Yet if they can stabilise at these increasingly attractive levels, capital will flow back the other way, and market breadth will improve. The market could rise, or fall, in this environment, but the change in leadership seems inevitable.
In an attempt to calm the bond market, governments are being cautious about spending programmes. Budget deficits are increasingly being taken seriously, even in the UK. An energy shock is part of the problem, and Trump is buying diesel from Putin. The quantity is more symbolic than impactful, but only recently, Trump was penalising India with higher tariffs for purchasing Russian oil.
While the pressure point remains in jet fuel and diesel, crude is not selling off despite the messaging. Moreover, crude oil for delivery late next year is rising again. This is the market’s way of saying that oil will be stronger for longer. The spread (purple) is backwardation, which drives BRNB’s performance well beyond price gains.
Crude Oil Spot and Forward Delivery
Backwardation means today’s oil price is higher than in the future. If you buy oil futures one or two months forward, the price at expiry is higher than the price paid, which creates a positive “roll yield”. Now that longer-term crude is rising, that spread may narrow, but the producers become the new beneficiaries.
The producers are shown by SPOG (red). The Soda Portfolio has made good returns from holding SPOG, but less than spot oil, and much less than BRNB. I think that may start to reverse, and as markets digest a higher oil price environment, producers will have the upper hand.
Oil Trades: Spot, Forward, Stocks, and BRNB
The war in the Middle East is far from over. The attacks on Russian infrastructure continue. There is a bottleneck on tankers. Higher oil prices won’t go away anytime soon.
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