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The New Case For Risk Assets

April 2016

By Bruce Powers, CMT, Chief Market Analyst at MarketsToday.net, and President at WideVision

After experiencing torrid market conditions during the first couple months of the year, investors eventually moved back into equities and commodities. Will the bullish momentum continue?

Investors returned to risk assets last month following the February sell-off. While the US dollar weakened, globally developed and emerging equity markets strengthened, including Brazil, one of the hardest hit markets, along with oil, as well as copper. In the short-term, we can expect some weakening, followed by further strength.

Commodities come back
A weaker dollar looks to have helped commodities last month as the Commodity Research Bureau Index was able to reach a three-month high of $178.68. Further, the rally exceeded the two prior rallies from the past 22 months on a percentage basis. Together, this points to an improving outlook for overall commodities over the coming months. The index had been in a relatively steady decline since its most recent peak in June of 2014, with it falling as much as 50.6% as of the February low. Weakness at this point is likely to be met with more aggressive buying, thereby holding and further lifting prices.

Oil improves
Oil had its strongest performance in a year in March, with both Brent and WTI crude ending at a three-month high. Each started to run out of steam by the end of the month and could see further retracements from the highs before proceeding to advance the uptrends that began off the January bottoms. Whether the March highs (WTI $41.85, Brent $42.52) are exceeded before a break below the January lows occurs remains to be seen. However, there is some reason for optimism. The rallies off the lows have exceeded the two prior rallies that have occurred since the June 2014 peaks on a percentage basis. Brent crude has advanced as much as 57% and WTI was up 60.8% from the bottom. This reflects underlying strength in the rally, and therefore increases the chance for further bullish sentiment.

Interest in high-yield soars
Following the sell-off of risky assets that ended in February, interest in one of the hardest hit assets, high-yield debt, has seen the early stages of at least a temporary recovery. Since hitting a peak of $95.43 in June 2014 the iShares High Yield Corporate Bond ETF (HYG), the most active US listed high yield ETF, has been in a relatively steady decline until two months ago when it found support at $75.09. It has since advanced as much as 10.0% as of last month’s high of $82.61. That’s the biggest rally seen since the June 2014 peak and put HYG at a three-month high. Given that there’s only been one leg up so far, the chance for further strength following a pullback is good. However, the long-term trend remains down. Given the trend towards slower global growth and its impact on corporate profits, an eventual rise in interest rates, and risk in the bond market from energy issuers, the long-term bearish trend will likely again become dominant. For now, watch for short-term weakness, followed by further strength.

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