Bad News For A Commodities Breakout

After more than two years and a half of downtrend, many analysts and pundits were calling the end to the cyclical commodities down wave this year. Since many of its components, in particular gold and agricultural, were already breaking out to the upside, I tended to agree with that analysis.

Though, this week FOMC meeting shifted my view on what to expect in the next few months for commodities and inflation. Why?

• Wednesday press conference shifted the narrative.
• Emphasis changed from near-zero interest rate to eventual hikes.
• The Federal Reserve revealed a post meeting hawkish bias.
• Bellwether price action deteriorated.
• US economic strength has been re-emphasized. 

From a macro perspective this change in tone is what George Soros refer to as "playing changes in the rules of the game" because that is the kind of event that changes market participants perception of the market place and creates orderflow that speculators can profit from.

In her press conference on Wednesday, Fed Chair Yellen accidentally caused the market to focus, laser-like, on the seemingly casual phrase “six months.” Prior to the presser, the narrative was focused on near-zero interest rates and their positive effects. “The US economy is recovering nicely,” the line of thinking seemed to go, “and we will have super-low rates for quite a while yet.” To hear SIX MONTHS was the needle scratching across the record.

This event is even more damaging for commodities as it happened right at the moment when the market seemed to wonder if it was more concern about inflation or deflation. See below chart of the ratio between bonds and gold, one of the best inflation/deflation indicator:

Just when the ratio was trying to break out to the upside, this week FOMC decision seemed to kill any hope for commodities bull as it created a bearish engulfing candlestick pattern right at the downtrend resistance line.

Some commentators inclined to shut their eyes tight and wish a dovish Fed back into existence, next-day comments from Fed members Fisher and Bullard are a blast of cold water. Consider these wire headlines (Zero Hedge):

*BULLARD SAYS YELLEN'S '6-MONTHS' COMMENT IN LINE WITH SURVEYS 

*BULLARD SAYS FED WATCHFUL FOR 'ANY KIND OF REPLAY' OF BUBBLES 

*FISHER SAYS FED HAS EXHAUSTED EFFICACY OF U.S. QE POLICY

*FISHER SAYS ASSET-BUYING TO END BY OCTOBER AT CURRENT PACE *FISHER SAYS SOME MORE VOLATILITY IN MARKET WOULD BE HEALTHY 

Here is another great comment from Joe Kalash, Chief Global Macro Strategist at NDR,  “Although Fed Chair Yellen cautioned against reading too much into the so called “dot plot,” we can’t get it out of our head that the median year-end values rose compared to three months ago.  The median year-end fed funds rate target of FOMC participants for 2015 is now 1.00%, up from 0.75%, while the year-end target for 2016 is 2.25%, up from 1.75%. This suggests the FOMC will begin hiking rates sooner and/or more aggressively than previously expected.”

Now the picture should be abundantly clear. Wednesday’s press conference, plus follow-on information, has revealed that the men and women of the US Federal Reserve are significantly less dovish than many anticipated (including me). Combine this cold-water dose of narrative sea-change with a slow growth global economy, and commodities are in danger.