Which Asset Class Has a Dose of Reality? There May Be Only One – Crude!

On Monday, the FED slammed in a glass floor to protect U.S corporates, with what could become quite a toxic portfolio.

There was certainly innovation but there was also the risk of inflating assets beyond current levels.

Let’s face it, the U.S equity markets at current levels makes little sense. In spite of this, the calls for a correction are few and far between.

There has been so much carnage from the COVID-19 pandemic that even the disgruntled bears are silent.

It’s not all bells and whistles, however, with the FED’s support for Corporate America likely to lead to a further decoupling between crude oil and the U.S major indexes.

We’ve seen it before and we are seeing it again.

The Crystal Ball

For any investor looking into the hazy future, however, it is hard to ignore indicators that have a dose of reality.

OPEC, the IEA, and Central banks are amongst a few that have a vested interest in spelling it out. That doesn’t mean that the likes of the FED aren’t going to crank up the printing machines. It does mean, however, that everything comes with a warning label…

Let’s consider the Dow and the S&P500… At the time of writing, the Dow was down by 8.02% year-to-date, with the S&P500 down by 3.19%. These losses are minor when considering the economic meltdown and an unlikely V-curved recovery.

Then we jump over to WTI and Brent Crude. At the time of writing, Brent was down by 38.35% and WTI was down by 37.8%.

A barometer of global supply and demand is flashing red and not in the way that the alarm bells were ringing last year…

We even saw futures in negative territory. Yet, onwards and upwards we go.

As the U.S and European equity markets tiptoe northwards, the news wires suggest that caution is needed.

Commodities have heeded the warning, with Brent, WTI, and the Bloomberg Commodity Index in the red, at the time of writing.

So, do the commodity markets have it wrong? Unlikely when considering the fact that they aren’t getting the benefits akin to the U.S and global equity markets…

A true barometer?

The Glass Floor

So, when we shift back to the equity markets, there must be a recoupling at some point. This will have to come well before the next earnings season.

Or this continues until the FED pulls the plug…

Almost ironically, we could also see a decoupling of the U.S equity markets and the economic indicators.

As the economic environment improves, the FED is less likely to shoulder the burden of corporate America.

The glass floor prized away would mean a recoupling with the commodities market and, perhaps crude oil in particular.

At some point, the penny will drop. With the S&P500 in the green and the Dow flat, today does not seem to be the day.

FED Chair Powell’s warnings have fallen on deaf ears. The FED’s decision to jump into the secondary corporate bond market should have been a warning. Instead, it was another impetus for the markets to move northwards.

Perhaps it will take nature to deliver the telling blow.

For a look at all of today’s economic events, check out our economic calendar.