Over the past trading week, one thing’s become quite clear: Risk trades are back. A resurgent stock market, for one thing, attests to a definitive shift in investor expectations. Monday’s market action brought the S&P 500 Composite past the breakeven mark for the year after being down more than 33%.
The eight-week rally spilled over into other equity markets, but rising stock prices aren’t the only marker of investors’ sharpening appetite for risk.
Credit spreads have also tightened, indicating a greater willingness on the part of commercial banks to lend. Tuesday, three-month dollar LIBOR (London Interbank Offered Rate) slipped below 1%, shedding 44 basis points (0.44%) since the beginning of the year. At the height of the credit crisis in October, three-month dollar loans were priced as high as 4.82%.
Traders have moved from the relative safe haven of the greenback to higher-yielding resource-linked currencies like the Aussie and Kiwi dollars and the South African rand. Yields on U.S. Treasury securities, as a consequence, have jumped to levels not seen since November.
The Fed Funds traded rate – the actual price at which excess reserves are loaned between banks – has risen toward the top of the Federal Reserve’s 25-basis point target range, after being offered at bottom-scraping rates for weeks.
Commodities – that is, certain commodities, such as crude oil, base metals and the softs – have awakened to turn upward. At the same time, interest in safe-haven gold has been eroding.
The renewed interest in commodities has been reflected in the price trends of broad-based exchange-traded products (ETPs).
Among the half-dozen notes and funds with trading histories of at least 200 days, five have broken to the upside of their 50-day moving averages. None has yet risen above its 200-day mark, the threshold for heralding a primary bull market. The one exchange-traded note (ETN) now trading below its 50-day average is paradoxically the one closest to starting a bullish trend.
So, which commodity exchange-traded fund (ETF) or note is the most sensitive bellwether of a nascent commodity bull market?