Since breaking out in March after testing the lows from late January, oil has remained in a narrowing range over the past two months, with resistance and support coming in around $61 and $58, respectively.
As described in previous notes throughout the year (most recently - Here), we've followed the SPX:Oil ratio through a comparative prism with the two major exhaustion pivots (86' and 99') that define the asymmetrical structure of the ratio.
All things considered, we still believe the ratio has cyclically pivoted lower, with the current market expressing the closest similarities with the secular low achieved by oil in Q1 1999 and the subsequent rally that coincided as the Fed postured - then shifted towards tighter monetary policy.
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Congruent with the momentum signatures in late June 1999 (Figure 2), oil appears poised to roll momentum in the ratio lower if the market breaks overhead resistance above $61/barrel.
Below is an update of the 1999 10-year yield comparative fitted to the markets respective pivots, which if indexed to the low and first rate hike in June 1999, would point towards a liftoff by the Fed around September of this year.
Although we'd speculate that "liftoff" likely overstates the ultimate reach of yields and the Fed this time around, we still expect long-term resistance in 10-year yields to be challenged later this year ~ 2.65%.
The chart below was normalized to the seasonality of the 1999 yield comparative (Figure 5).
Back then, support was initially broken in May as the Fed unveiled a new push towards greater transparency and announced a bias shift in policy for the first time ever in its communique to the markets.
The net effect was traders heavily sold gold in unison on misplaced fears that real yields were headed materially higher as the Fed shifted towards tighter monetary policy conditions.
That said, one significant difference we noted recently between 1999 and today - and which we suspect would more broadly support commodities and precious metals should it continue, is that the intermarket relationship between yields and the dollar is diametrically different today.
In 1999, yields led the turn tightly correlated with the dollar, as oil followed the pivot higher with a 10 week lag. Over the past year, long-term yields and the dollar have moved inverse to one another, with yields finding a low in late January and the US dollar index setting a high from its relative performance extreme 10 weeks later.