What will be the impact of rising rates on equities and commodities?
Investors and traders are concerned about the investments they should make on behalf of their portfolios and retirement accounts, especially in light of the Russian-Ukrainian war, market volatility, surging inflation and rising interest rates.
As technical traders, we exclusively look at price action to provide specific clues about the current trend or a potential change in trend. We review our charts for stocks and commodities to see what we can learn from the most recent price action. Before we dive into that, let’s review the different stages of the market; with particular attention paid to expansion versus contraction in a rising interest rate environment, which you can see illustrated below.
Pay attention to your stock portfolio
We keep a particularly close eye on the evolution of the prices of SPDR® S&P 500 (NYSE:) ETFs. The current resistance in SPY is the high of 475 which occurred around January 6th. This high was 212.5% from March 23, 2020, the lowest that was set at the height of the global COVID pandemic.
SPY found support in the 410 area in late February. If you remember (or didn’t know), 410 was the 1.618 Fibonacci, or 161.8%, of the 2020 COVID price drop. Now, after seeing a nice rebound, of just over 50%, we are waiting to see if the rally can continue or if a rotation will occur, sending the price lower.
Commodity markets surged
Commodity markets have rallied tremendously due to rapidly rising inflation, especially energy, metals and food prices.
The iShares S&P GSCI Commodity-Indexed Trust (NYSE:) price action shows that we recently hit 200%, doubling the April 21, 2020 low. Immediately after, as with the SPY, the GSCI Commodity Index Commodities quickly sold off to then find substantial buy support at the 1.618 Fibonacci, or 161.8%, of the uptrend’s starting low. The resistance for the GSG is at 26 and the support at 21.
A strengthening US dollar
The strengthening can be attributed to investors seeking a safe haven in the face of geopolitical events, soaring inflation and the start of the Fed’s rate hike.
The US dollar is still considered the main reserve currency because most of the foreign exchange reserves held by central banks are in dollars. Additionally, most commodities, including and , are also denominated in dollars.
Consider the following statement from the Bank for International Settlements www.bis.org Triennial Central Bank Survey published on September 16, 2019: “The US dollar has retained its status as the dominant currency, being on one side of 88% of all transactions. The report also pointed out: “Trade in the foreign exchange markets reached $6.6 trillion per day in April 2019, compared to $5.1 trillion three years earlier.” This represents a lot of dollars traded globally and confirms that we need to stay on top of the price movement of the dollar.
Multinational companies are especially watching the dollar closely, as any major shift in global money flows will have a serious negative impact on their bottom line and the subsequent value of their shares.
The following chart from www.finviz.com gives us a current snapshot of the relative performance of the US dollar against major global currencies over the past year: