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Crude Oil and Natural Gas prices are rising again, What you can do about it

Published 10/08/2023, 11:25 pm

Major stock indices have come under pressure as several key macroeconomic factors converge to cause the first serious threat to risk assets we've seen since the flash banking crisis in March.

The first key factor is undoubtedly higher long-term risk free rates. Yields on many major government bonds, but in particular the US 30-year Treasury Bond, spiked last week following ratings agency Fitch's downgrade of US credit as well as the announcement by US Treasury it would be issuing more bonds in the current quarter than previously expected. The first item here undermines the quality of US paper, while the second increases its supply, and substantially so, to the tune of US$1 trillion over the next few months. The upshot (or downshot as it were) is lower US long-term bond prices, which corresponds to higher long-term bond yields.

Higher bond yields are the bain of stock prices. They increase borrowing costs for companies and take disposable income out of the pockets of consumers. So, businesses are hit on both the cost side and the revenue side. We know that lower profits typically equals lower share prices. Worse still, higher risk free rates increase the rate at which a company's earnings are punitively discounted by professional investors. This makes it harder for these investors to justify higher stock prices.

The second key macro factor is yet another drawdown in the the stock prices of Chinese real estate companies. The key CSI Mainland Real Estate Index and Hang Send Mainland Property Index have each fallen by over 5 per cent across the past few trading sessions. Whilst they remain above their respective July lows (the HSPMI only just), sharp drops such as these remind us of the trouble bubbling just under the surface of the Chinese economy. With Country Garden missing repayments on two of its debt obligations this week, those bubbles could erupt into a boilover of risk-off sentiment at any time.

Finally, whilst substantial progress has been made in recent months in most major economies to bring inflation down, much of the progress is a result of weaker energy prices. As you will see from this week's Live Market Analysis - Macro Edition (video link below), a number of key energy commodities are surgning again. This could put at risk the recent downtrend in inflation and trigger a more hawkish stance at central banks. 

So, we find the macroeconomic picture finely balanced with respect to supporting the fledgling bull market in stocks. Press play on the video for more detailed analysis on macroeconomic factors, including several actionable trading ideas in indices, commodities, fixed interest, and forex.

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