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Weekend Daily: What Will Drive the Commodities Market?

Commodities across the board rallied after the Russian invasion of Ukraine and have since declined significantly.

Before the War though, commodities were already enjoying a rally due to results of the pandemic such as supply chain, low production, rising demand, high government debt and labor shortages.

The other significant factor influencing commodity prices is the value of the U.S. dollar. A stronger greenback makes dollar-denominated commodities more expensive for foreign buyers, which pushes prices lower.

Right now, the dollar seems to have found a peak. With FOMC on tap, that could change. Assuming a peak has been established, we can also make that a reason for a bigger move in commodities.

So while a short-term correction ensues, commodities could still have massive room to run in the longer term. The Invesco DB Commodity Index Fund is currently near the 50 day moving average suggesting commodity prices have found support and will continue higher.

Next week, there will be lots more earnings on tap plus, we have the FOMC meeting. With expectations of a raise by 75 bps, there has been hints of perhaps .50 bps instead.

Moreover, Powell suggested that this raise at the next meeting could be the end of aggresssive rate hikes in general.

If one follows the logical path we can assume a few things:

Yields remaining around 3% will not impact a 9.1% inflation rateA weaker dollar will not help reduce inflationWith nary a recession (strong labor, ok housing market) nor economic growth (earnings mixed, reduction in corporate spending) in the near future, stagflation-a word rarely used, is the economic themeThe war in Russia-Ukraine is not endingOil supply remains lowChina, still somewhat asleep, has yet to emerge hungry for raw materials.

What we did see this past week was a potential bottom in gold and in bitcoin.

Whether we see more rally in the equtities remains to be seen, yet, the rally to resistance certainly supports a stagflation-trading range scenario.

This coming week, watch a few key indicators.

First, watch the yields and the high grade plus high yield bonds.

Secondly, watch the consumer discretionary sectors. We need to see the consumers stay in the game.

Watch the dollar and the gold market-if gold continues to hold the major multiyear support, then we see a big gold rally coming.

Finally, watch the oil and energy market. Should crude oil join natural gas in a new bull run-commodities will soar while equities will suffer. 

Investing in commodities can be a speculative bet on future price movements or a way to hedge against other investments in one’s portfolio. Energy commodities, for example, may be used as a hedge against inflation.

Adding commodities to a larger balanced portfolio can also help reduce risks as commodity prices tend to have low correlation to other assets such as stocks and bonds.

Commodities provide valuable diversification and enhanced risk-adjusted returns to a portfolio, but active management is needed, due to volatile price swings.

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Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

In this appearance on BNN Bloomberg, Mish explains why commodities could have a second run higher, and what we can expect from the equities market.

Mish discusses the term “stagflation” in her latest appearance on Neil Cavuto’s Coast to Coast on Fox Business.

Mish talks about the current rally and how retail is key to its continuation or failure on Making Money with Charles Payne.

Read Mish’s latest article for CMC Markets, “What Does EV Adoption Mean for Traders?“.

Mish discusses “Taking Profits on Good Profits” in Business First AM.

Hear Mish explain how the market is in a range, but could break down from here on Money Life with Chuck Jaffe.

See Mish’s most recent appearances on Neil Cavuto’s Coast to Coast on Fox Business!

ETF Summary

S&P 500 (SPY): 403 big resistance, 390 support.Russell 2000 (IWM): 176.50 support to hold and now must take out 182.50.Dow (DIA): 322-323 resistance, 316 support.Nasdaq (QQQ): 308 big resistance, 293 support.KRE (Regional Banks): 60 key support.SMH (Semiconductors): 221 support, 230 resistance.IYT (Transportation): On Friday, I noted the pause here in XRT and IWM; the decision was sell. Now 221 support.IBB (Biotechnology): Given the bearish type day, still in best shape with support 120.XRT (Retail): 62.90 support on the 50-DMA.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

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