What will be the impact of rising rates on equities and commodities?

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Investors and traders are concerned about the investments they should make in the name of their portfolios and retirement accounts. At TheTechnicalTraders.com, we continue to watch equities and commodities closely due to the Russian-Ukrainian war, market volatility, soaring inflation and rising interest rates. Several of our subscribers have asked if changes in monitor policy could lead to a recession, as higher rates further eat away at corporate profits.

As technical traders, we exclusively look at price action to provide specific clues about the current trend or a potential change in trend. We review our charts for stocks and commodities to see what we can learn from the most recent price action. Before we dive into that, let’s review the different stages of the market; with particular attention paid to expansion versus contraction in a rising interest rate environment which you can see illustrated below.

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Pay attention to your stock portfolio

We are keeping a particularly close eye on the price development of the SPY ETF. Current resistance in SPY is the high of 475 which occurred around January 6, 2022. This high was 212.5% ​​from March 23, 2020, the lowest that was set at the peak of the global covid pandemic.

The SPY found support in the 410 area in late February. If you remember (or didn’t know), 410 was the 1.618 Fibonacci or 161.8% of the Covid 2020 price drop. Now after seeing a nice rally of just over 50% , we are waiting to see if the rally can continue or if a rotation will occur, sending the price lower.

RISE IN RATES ON EQUITIES AND COMMODITIES

Commodity markets surged

Commodity markets have rallied tremendously due to rapidly rising inflation, especially energy, metals and food prices.

The price action of the GSG ETF shows that we recently hit 200%, doubling the April 21, 2020 low. Immediately after, as with the SPY, the GSCI Commodity Index sold off quickly to then find substantial buy support at the Fibonacci 1.618 or 161.8% of the uptrend’s starting low. The resistance for the GSG is at 26 and the support at 21.

Rising rates on equities and commodities

A strengthening US dollar

The strengthening US dollar can be attributed to investors seeking refuge from geopolitical events, soaring inflation and the start of the Fed’s rate hike.

The US dollar is still considered the main reserve currency because most of the foreign exchange reserves held by central banks are in dollars. Additionally, most commodities, including gold and crude oil, are also denominated in dollars.

Consider the following statement from the Bank for International Settlements www.bis.org “Triennial Central Bank Survey” published on September 16, 2019: “The US dollar has retained its status as the dominant currency, being on one side of 88% of all transactions.” The report also pointed out that “trade in the foreign exchange markets reached $6.6 trillion per day in April 2019, compared to $5.1 trillion three years earlier.” That’s a lot of dollars being traded globally and it confirms that we need to stay on top of dollar price developments.

Multinational companies are especially watching the dollar closely, as any major shift in global money flows will have a serious negative impact on their bottom line and the subsequent value of their shares.

The following chart from www.finviz.com gives us a current snapshot of the relative performance of the US dollar against major global currencies over the past year:

RISE IN RATES ON EQUITIES AND COMMODITIES

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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