Global Macro: Central Banks Fail to Create Demand

NEW YORK ( TheStreet) -- The global picture indicates that central banks across the world have yet to create sufficient demand, despite aggressive monetary efforts. Precious and industrial metals, as well as oil, have all tanked, although the U.S. equity indexes have yet to follow. Another round of liquidation in these commodity markets is sure to bring equities lower with it.

As seen in both TIPS and precious metals, investors do not feel the need to hedge themselves against inflation, proving that the near-term odds of rate spikes is less than probable.

The U.S. CPI reading, with a trailing 12-month rise of 1.5%, shows that the economy still has a ways to go in its recovery effort. GDP growth will be the only catalyst for inflation, and considering it has been tepid, provides further evidence for a deflationary environment.

A look at inter-market relationships taking shape makes a strong case for pullbacks across the board in commodities, equities and commodity-linked currencies.

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The first chart compares Utilities Select Sector SPDR ( XLU) over S&P Equal Weight ETF ( RSP). This ratio shows strength when markets turn cautious, and this looks to be the case currently. The long-term downtrend that has recently been broken proves that the rally has had broad participation of small cap, risky assets, but that period seems to have past. As long as utilities continue to outperform, risky assets will not get the allocation of funds they require to push higher.

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The next chart is an illustration of how inflation expectations are losing credibility in world markets. The ratio compares DB Precious Metals Fund ( DFP) to an equal weight DB Commodity Index Tracking Fund ( DBC). This pair has broken lower, with conviction, out of a multiyear sideways pattern. The market was up in the air about whether interest rates would spike higher with aggressive central bank easing, but with a lack of growth, it looks like rates are not going anywhere.

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This week we had an auction for U.S. TIPS that did not receive that much demand. This follows the idea that inflation is not as feared as it has been in the past. The chart above comparing Barclays TIPS Bond Fund ( TIP) over Barclays 20 Year Treasury Bond Fund ( TLT) verifies this argument. This pair usually trades very closely to equity market action, but looks to have diverged in recent months. Bonds usually precede equity action, so do not be surprised if equity takes the hint in the near term and follows this pair lower.

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