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“It’s always darkest before it becomes totally black.”

― Mao Zedong

Commentary & Analysis

Credit induced bounce or something more?

Commodities prices have staged a nice bounce. We have been long in our Key Market Strategies service and captured some decent gains.

Our target for oil (WTI) has been 50.88 on oil for some time; we are getting close and seeing some waning in momentum as oil tests its first swing high level at 48.28; next swing comes in at 50.92 [just 4 cents above our 50.00 target achieved as Wave A=C]. Lots of bullish sentiment growing here…hmmm…

Gold has made a nice move and many expect gold to continue to rally if stocks come off. We are skeptical. We expect gold to play its usual role and fall along with commodities on a major risk off event. The chart below compares gold and the US dollar index. We are expecting a yield-driven risk off rally in the dollar and gold to correct, or consolidate, recent gains.

Iron ore; turning over?

The question is: Is the move in commodities just a bounce? We think so. Why? For the same reason we think we got the bounce: China.

China’s massive stimulus this year is yet another page out of the old playbook of the capital investment model; at the expense of delaying the economy’s transition to a more consumer-based model and adding to the towering debt load, which will ultimately further depress cash flows and corporate profits. We think there will be blow-back and it will take a major bite out of the run up in commodities we have seen. It will likely be especially bad news for the emerging market economies in Asia.