Investment Idea

The party continues- but keep an eye on the interest rates!

22 Feb 2021 | 4 min read

We got a lot of reactions to last week’s weekly letter about bitcoin and SPAC, which is always fun. Most of the comments, however, were based on a headline that we foresee Armageddon. This is a completely correct headline as today’s huge support policy will end one day.

We got a lot of reactions to last week’s weekly letter about bitcoin and SPAC, which is always fun. Most of the comments, however, were based on a headline that we foresee Armageddon. This is a completely correct headline as today’s huge support policy will end one day.

But before the economic support ends, all support will benefit investments. Before the depression in the 1930s, there was a long period known as the Roaring Twenties. We may be in a similar period now. It is better to enjoy a rising trend than to worry about tomorrow’s crash. This crash will surely happen because the support policy can not last forever, but as said – enjoy while the party is going on.

The problem for the central banks is that they have won the markets with constant support. Once they start talking about reducing support, the market trends is likely to decline.

Right now, there is a newly awakened focus on the fixed income market.

Above is the weekly graph for the ten-year government bond yield in the US, which is rising faster and faster. It is said that 1.5 percent is a psychological barrier in the fixed income market that can trigger a negative chain reaction. Right now, the US ten-year interest rate is trading at 1.345 percent (divide the numbers in the graph by 10 and it will be right). At the current rate, it is quite likely that interest rates in the US will reach 1.5 percent, so this is the focus right now. Note that falling MA100 serves as a resistance.

But is it only negative if interest rates rise? No. Above are interest rates (US 10 yr yield, blue) relative to the stock market (S&P 500, red). Interest rates should typically follow the stock exchanges (or equivalent). Rising interest rates mean that the fixed income market is pricing in a better economy, just like the stock markets. The problem is that with today’s rigged market, rising interest rates mean that many investors who have borrowed cheaply must begin to reduce their asset exposure, which means that a headwind is created for the stock exchanges.

Above you can see how real interest rates suddenly rise. Note that we continue to live in a strange period with negative real interest rates. This mean that the nominal interest rate minus the inflation rate is negative.

In the long term, interest rates have fallen dramatically from levels around 14-15 percent to now close to zero. Fundamental to this is that inflation was shaken out of the market and that the world was flooded with cheap Chinese production. All the ups and downs against this declining trend are creating concern on the stock markets. Many, many times, all the world’s macroeconomists have been out and warned that the interest rate party is over. So far, they have been wrong since the central banks have been buying bonds for support. As we wrote in previous weekly letters, we see no end to the support purchases, on the contrary. But a rapid rise in interest rates can surprise central banks, so one must be aware that this can occur.

Rates are also rising in Europe. The EUR/USD is consolidating trying to find a direction:

The graph above shows the relationship between interest rates and VIX. VIX shows the options market’s pricing of volatility over the next 30 days. In periods when interest rates are moving fast, VIX also rises rapidly as investors capital costs rise. A rising VIX gives a falling stock market.

HYG, which shows the mood in the market for high-risk bonds, shows a slight weakness again. This created a weak sell signal in the MACD. If you are going to keep track of a graph right now, this is it. If it breaks down, it is likely to pull the stock market with it. But if it shows resilience, so will the stock markets.

The S&P500 index continues to rise along an almost straight line. The S&P500 index is traded on EMA9 in the daily chart, which is the first line of defense. Some spring turbulence always happens. It may well be interest rates that cause this, unless the central banks are quick and purchase the bonds that come out of the market. Note that MACD is close to generate a weak sell signal.

In the 2-hour graph, the S&P500 index is traded steadily in a bearish rising wedge.


Nasdaq is also showing sign of weakness as MACD has generated a weak sell signal:

Apple stock continues to look weak. Below is the weekly graph and as can be seen, the rising trend is under pressure. The Bill Gates Trust has been a big seller in Apple recently, which may be one reason why this stock is going against the flow.

In the daily graph, MACD has generated a sell signal. MA100 right below the 125 USD-level serves as the next level on the downside:

The copper price continues its triumphant march on the prospects of major investments after all the shutdowns. According to the International Copper Study Group, there is a shortage of copper. Adjustment to more electricity in society also increases demand. A petrol or diesel car contains about 15 kilos of copper, while an electric car contains 60 kilos. Is the copper price looking at the previous tops from year 2011?

Swedish Boliden share has been gaining from the rising copper price. Will we see the share to reach levels from year 2000?

The OMXS30 index continues to trade above EMA9 and MA20. Also note that the negative trend for MACD has been broken. In case of further upwards movement, it is important for the trend that a new high is set.

The German DAX index is consolidating as EMA9 as well as MA20 is flattening out. Also note that MACD is falling and has generated a weak sell signal:

Gold is traded on a support level but MACD is falling as well as EMA9 and MA20. In case of a break to the downside, the next level can be found around 1 700 USD per troy ounce

The price of oil (brent) has been dragged into the same rush as copper. However, it is much easier to open the taps for oil compared to opening new copper mines. Also, the oil price fell 2 percent on Friday as the situation begins to stabilize in Texas and Saudi Arabia will increase its production again. A rising EMA9 and MA20 still serve as support levels: