The markets have an intriguing tendency to do the ‘same thing’ over and over again but usually with a different cast of characters. Over the past few years, for example, the energy sector has been strong through the first half of the year even as the beneficiaries of the positive trend have changed.
At top right we show a chart of oil refiner Valero (VLO) from 2007. The strong energy price trend in 2007 was dominated by a perception that gasoline inventories were too low which led to price appreciation for the refiners. The uranium stocks were also very strong.
At middle right we show Arch Coal (ACI) from 2008. The energy theme focused on the natural gas and coal stocks last year leading to a price peak for ACI in June.
Below right we feature a chart of Petrobras (PBR). The energy theme this year was more a function of a rebound in Chinese and Brazilian growth following peaks for the long end of the U.S. Treasury market and dollar.
The point, however, is that even though the focus of the positive energy trend varied from year to year the relationship with the bond market remained consistent. The peak for 10-year U.S. Treasury yields was made in middle of 2006, 2007, and 2008 marking the end the commodity price push. While we expect energy and metals prices to be lower into the late autumn the ‘stop’ on this view would be a 4% 10-year Treasury yield. If yields were to break to new highs then the pattern will have been broken.
By: Kevin Klombies
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