From our perspective – and despite the S&P trading only a percentage point off the intraday highs from early March, we believe downside risks over both the near and intermediate-term still far outweigh the potential upside and maintain the view that the parabolic breakdown that began in January should be patiently respected.
As we highlighted in our last note, we are following the previous breakdowns in long-term Treasuries (2016) and the US dollar index (2017) as a potential leading and successive pattern that is now playing out in equities. Should the pattern continue to replicate, stocks would again be rejected below previous highs, eventually manifesting with a breakdown leg below previous support from April and February of this year.
Coming into the Fed meeting next week, gold appears set to again follow the more typical trading pattern of rallying subsequent to the Fed decision, by again challenging the previous cycle highs around 1370.
Moreover, should the recent political convulsions in Italy and Spain continue to disrupt European stability – or if markets see further deterioration in european growth this year – support for the euro from the ECB's telegraphed intentions on winding down it's nearly $3 trillion quantitative easing program later this year would evaporate quickly. That said, with the ECB also convening their June meeting next Thursday, we would expect Draghi to shun any proactive dovish leanings and don a cool placid tie and his best face of confidence in maintaining the ECB's conviction in winding down the bond buying program sooner than later. Over the near-term this should support the euro and pressure the dollar index – creating a tailwind for gold as well.
From a wider perspective we continue to follow Spain's IBEX as our higher beta and leading proxy for Europe. The long-term comparative performance chart that we've highlighted of the IBEX over the past five years has continued to loosely track two of the largest and longest perennial asset unwinds of the previous century.
Should the comparative continue to prove prescient, the downturn in Spain's IBEX – that led the broader reversals in European equities this year, has considerable road to travel on the downside over the next two years. In this respect, we'd speculate it would naturally become progressively more challenging for Draghi and the ECB to find the same relative strength across a diverse European economy and within a disparate political system, then what the Fed encountered in their own tightening cycle over the past few years.
Consequently – and despite what the conventional wisdom is again predicting with a continuation of higher rates, Treasuries continue to look robustly appealing from a near and intermediate-term timeframe – as well as from a fundamental, technical and behavioral point-of-view.