The 2-year/10-year bond yield curve likely bottomed in March. Here's what that means

Ben Griffiths believes that equity markets are doing what they do best, climbing the proverbial wall of worry.
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Global equities experienced volatile trading conditions during the three months to March 2023, as highlighted recently by Ben Griffiths, managing director and senior portfolio manager of Eley Griffiths Group.

“Investors showed exuberance through January, buoyed by an in-line Wall Street reporting season, a growing consensus that interest rate hikes were in the last stanza and a more accommodative stance was imminent sometime this calendar year.,” he said.

"This exuberance unwound during February, when the US Federal Reserve cautioned not to expect rate cuts in 2023 compounded by another strong employment print. Stocks retreated under their own weight with the market implied FOMC terminal rate (the possible rate peak) moving from 4.85% at January end to 5.40% by the close of February. This would further dampen investor sentiment.

"Interesting that US stocks would bottom the day following the announcement of the failure of Silicon Valley Bank (subsequent to the collapse of Silvergate Capital), whilst local shares found support on the announcement of UBS’ merger with Credit Suisse. Both events proving to be the starting point for rallies into quarter close.,” Griffiths said.

But events were “ringfenced” by a combination of:

  • Swift action by the Federal Reserve (introducing the BTFP facility),
  • The Swiss National Bank (playing marriage celebrant) and
  • A quick US$30 billion whip-round from a cabal of US money centre banks (notably, JPM, Citi and WF) to steady the ship at First Republic Bank.

These helped ensure “only modest seismicity registered in bond and credit markets,” Griffiths said.



“The further we move away from the October 2022 key reversal day in the S&P500 the more valid this market low becomes. Market leadership in the US resides with the leading 100 names and the relative outperformance of the OEX (S&P100) versus the Russell 2000 is stark. US small caps continue to consolidate the poor price action of 2022, trapped in the shadow of the OEX,” said Griffith.

“The NASDAQ Composite has performed strongly from the opening days of 2023, defying the gloomy prognostication opined in these pages some months back. This index is essentially back on support projecting out from the March 2020 lows. The NASDAQ 100 looks even more compelling. The latest Commitment of Traders report (COT) points to neutral positioning among investors, a constructive set-up so early in the trend revival,” he said.

He believes the STOXX Europe 600 and Euro STOXX 50 appear set for greater gains.

“The quiet achievers among global equity indices reside in Europe. Do readers realise the French market is at historic highs, the Germans are close and the Italian MIB is poised to break through a downtrend in place since March 2000? The STOXX Europe 600 and Euro STOXX 50 appear set for greater gains” said Griffiths.

“The S&P/ASX All Ordinaries Index briefly retested the uptrend line from March 2020 late in the quarter. The bounce out was notable and the benchmark’s next level of resistance sits at ~ 7900 (7560 at present). The S&P/ASX 300 Metals and Mining Index traded to all-time highs in March, retracing the failed June 2022 move. This index continues to look bullish.

The Midcap 50 benchmark remains constructive and the late March rally from key support on the Small Ordinaries Index is encouraging to see, resource names being an important driver here. The S&P/ASX Emerging Companies index continues to trade sideways and awaits further buy-side conviction before it can regain its impulse.”


Eley Griffiths Group followers will know of their fondness for precious metals, as long term chart set-ups continue to configure bullishly.

“It is increasingly probable that gold will stage a test (for the third time) of the US$2070/oz level. This is gold’s historic high and therefore provides significant magnetic attraction. The AUD gold price is now flirting with $3000/oz and the long-term price chart remains one of the most formidable commodity charts this aged analyst has seen.” said Griffiths.

Source: EGG, Factset April 23

"A textbook uptrend channel has neatly enveloped the US Dollar index (DXY) since 2008. September 2022 saw the unit stall at the upper bound at 114.8 (official resistance sat at 116.4) and now an imminent test of the lower bound (98.76) appears logical. Further weakness from this level will really make things interesting. It appears a growing band of de-dollarisation proponents are ever keen to post Greenback obituaries on social media. Geopolitically inspired and of increasing vehemence, this does offer manna for the unfolding bear drive."

Market savants should take note of the various USD cross-rates unfolding bearishly right now, particularly the Euro.

“DXY market positioning continues to soften (although a long way from being bearish) with traders now long/short 2.2:1, well down from 6:1 at its highs according to the COT."

Brent crude long moribund sprang to life in the first week of April. Crude broke decisively from a downtrend line in place since the March 2022 blow-off high. Significantly the break occurred with a price gap. The old trader’s adage that ‘gaps rarely attend false breaks’ suggests heightened attention to this latest development. Trader positioning in WTI futures is modestly higher (4.2:1 Long) versus December quarter COT data,” said Griffiths.


Well-regarded US economist and commentator David A Rosenberg once said that “Get the US consumer right and everything else will take care of itself”.

“David should be heartened by the most recent University of Michigan survey releases including the Consumer Sentiment Survey, the Current Conditions and the Consumer Expectations Indices which highlighted a revival in each series from very depressed levels dating back to mid-2022,” said Griffiths.

“When combined with the Atlanta Fed Q1 GDP NOW print of around 2.5%, it might be easy to conclude that the US is readying for the mildest of recessions. Intuitively, the script right now feels a little more complicated than simply a restive consumer.”

The US 2yr/10yr treasury yield curve has been inverted since July 2022 and the 3mo/10yr curve has been inverted since November 22, clearly forewarning that a recession is all but banked.

S&P 500 earnings estimates have been revised downwards coincident with these two curve inversions. The upcoming reporting season will be closely scrutinised by professional investors for further deterioration in earnings and outlook commentaries.

“March’s bank failures and the continuing drain on regional bank deposits suggest a contraction in available credit will shortly be upon corporates and households in the US. Its duration is indeterminate at this point,” said Griffiths.

“A recent Bank of America strategy piece estimated that US private investor cash weights had swollen to approximately 14% of AUM, approaching levels immediately prior to COVID. Equity markets are doing what they enjoy most, climbing the proverbial wall of worry."

“Traders seem eager to bet on early rate cuts or a pivot (rather than a pause) after all the Fed never pauses! History has shown that only in the case of a severe recession do stocks fail to rally on a Fed pivot."

“A chart from Deutsche Bank chart below shows that in eight prior economic cycles, the S&P500 rallied for at least 12 months post the 2yr/10yr yield curve trough, which likely happened on March 8. Further, they suggest the yield curve leads the cycle recovery by anywhere between four to eight quarters."

Source: The Daily Shot (WSJ); Deutsche Bank

Source: The Daily Shot (WSJ); Deutsche Bank

“It does feel like investors might unwittingly already be on the next market upswing, a move whose origins can be traced back to the aforementioned key reversal day on October 13 last year.”

This wire is an extract from the March edition of the Eley Griffiths Group's quarterly newsletter, The Encyclical.

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