Euphoria Shifts From Stocks To Commodities
Silver and Gold remain the major outperformers year-to-date but the rest of commodities - most notably oil is catching up very fast having over taken stocks this week. It appears that the new-found flood of liquidity that we have been so passionately banging the table on for weeks, has found its way into the energy complex as European Sovereigns, European Financials, European Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. And as a hint to anyone who hasn't jumped on this tidal movement yet, one thing to note is that unlike stocks, commodities always have the risk of marginal or weak hands being shaken out via CME...margin hikes.
Year to date performance shows Crude is now outperforming US equities and closing in on Gold's great run. Silver remains the double-levered liquidity trade-d'annee.
But how has the flood of liquidity dooshed sloshed around the world of global assets...
(Click chart for larger version)
It appears there have been five periods to this post LTRO love-fest with nominal values of assets.
1) Post the LTRO and through January (black dotted rectangle), markets generally tracked each other higher in a narrow liquidity and euphoria-driven range with US Stocks having a higher beta than most assets in general (as everything was floated up with the best performers being the worst performers of last year); this bullet-proof rally had just begun to fade as everyone waited for something real to confirm what was before their eyes...
2) As January ended and February began, the most wondrously 'adjusted' NFP print in the US re-engaged the liquidity pump and those most beaten down of last year's assets were grabbed with a vengeance once again as European Stocks, US Stocks, European Sovereigns & Financials, and Brent Crude all levitating rapidly while WTI Crude fell (as the spread rose on Middle-East tensions). European stocks were the major winner in this period as financials flew on the LTRO solution and so the liquidity sloshed into that bucket more broadly.
3) The impressive short-squeezing dash-for-trash 'its real coz the BLS says it is' rally continued until a week into February when European concerns reared their ugly heads with badly weaker macro data in Europe (plus a re-emergence of Greek contagion concerns as Portugal blew) dragging European credit (Sovereign and Financials) considerably weaker and European stocks sideways to modestly down. Maybe the LTRO expectations had finally run out of juice. Liquidity sloshed back into US equities (don't worry we're decoupling) and WTI Crude (decoupling and Iran) - hoorah...
4) This lasted til last week when credit markets really took a turn for the worse and stocks began to follow but the flood of liquidity was not to be stopped and together with some entirely confusing constantly contradictory newsflow from European leaders that all was well in Greece and that China would not suffer a hard landing every risk asset rose in value - spurred on by yet another liquidity flood from a surprise RRR cut by China (which seemed to shake the last weak shorts out as we have drifted since). However, it seems that the need for China to do this (concern that it must be bad for them to do this) along with concerns over the next LTRO and the growing stigma the market is pricing into European banks who used it seemed to slow the liquidity surge into broad equity and credit risk assets and...
5) The energy complex was saturated with liquidity pressures. As Iran tensions rose, the surge in Brent and WTI (and Tapis) crude prices reflects not just the sabre-rattling and supply concerns (which havent changed dramatically in a day or two) but much more simply the only thing that matters - central bank largesse. The last week has seen US and European equity and credit markets slide lower - with Europe underperforming the US (decoupling hopes again and the fact that the US is a hot and open market that will always enable that liquidity to flow more easily).
Meanwhile Gold and Silver have cruised comfortably higher on the growing realization that slowly but surely investors need real value protection not nominal wealth - no matter which liquidity bucket the printing press is spewing into.
The problem now - as John Burbank of Passport Capital so well described is, the oil complex won't stop until the economy's back is broken as there is nowhere for the liquidity to flow given the negative feedback loops all the central banks in the world have created.
With LTRO 2 already priced in, and the Fed having been handed the baton of printing by the rest of the world's central banks this weekend at the G20 meetings, we suspect the liquidity will remain pumping in Oil until the CME steps on its throat or someone disappoints a perilously over-the-top market for stocks (and slightly less so credit now as it has started to awaken from its risk slumber) with a PSI deal fail, disappointing LTRO, new record Oil, or our favorite the unknown unknown consequence.