Weekly Risk Signals

The signals remain the same, but conditions have turned decidedly more risk-off. Gold continues its move higher and lumber prices are still falling, but the more telling shift last week was that we finally saw a big rally in defensive equities. The only asset class that’s still struggling to confirm risk-off conditions is long-term Treasuries. The catalysts igniting the current risk-off regime don’t appear to be short-term in nature.

The signals remain firmly risk-off again this week and the themes driving them appear to be going nowhere any time soon. It’s difficult to see how the Fed can justify cutting rates here given the confluence of inflation, labor & GDP data and I think the market is coming to that realization as well. Treasuries' reaction last week to geopolitical tensions proves that investors do still consider them a safe haven trade under the right set of conditions.

The signals got ahead of last week’s volatility and continue to indicate that risk-off conditions are still holding the upper hand here. Modest losses in the S&P 500 masked how weak equities really were last week. If you take the totality of the financial market picture at the moment, especially in lumber/gold, there’s a strong case to be made that investors should be exercising a lot of caution here.