- Financial conditions have climbed to their strongest level in the Bloomberg Financial Conditions Index data shown by Bruce Campbell, providing a supportive backdrop for markets.
- Rising earnings expectations could provide further support for equities despite ongoing concerns about market valuations.
- Gold and copper mining shares are showing improving relative momentum as commodity fundamentals and seasonal trends come into focus.
Markets may be trading at elevated valuations, but the underlying picture continues to offer reasons for investors to pay attention.
In the latest episode of Markets in Motion, Bruce Campbell of StoneCastle Investment Management examines financial conditions, corporate earnings, copper and gold before turning to what relative rotation is signalling for Canadian mining and financial stocks.
Financial conditions are one of the more striking signals. Campbell points to the Bloomberg Financial Conditions Index, which has reached its highest level across the period shown, stretching back to 1997. Historically, sharp deterioration in financial conditions has accompanied periods of significant market stress. For now, however, conditions remain highly supportive.
This article is being disseminated on behalf of StoneCastle Investment Management a third-party issuer and is intended for informational purposes only.
Earnings provide another important piece of the picture. While equity valuations have attracted scrutiny, Campbell notes that forward earnings and earnings expectations continue to rise. Historically, markets have tended to broadly track the direction of earnings, suggesting that continued profit growth could help support equities even at elevated valuations.
Copper and gold attract attention
The commodity picture is also becoming increasingly interesting.
Copper has moved into backwardation, meaning near-term prices are higher than prices further out on the futures curve. Campbell links the move to strong copper consumption and tight stockpiles, adding another supply-demand signal for investors watching the metal.
Gold, meanwhile, continues to benefit from central bank purchases and flows into exchange-traded funds. That comes as the metal enters what has historically been a stronger seasonal period following weakness earlier in the year.
Those trends are beginning to appear in mining equities. Campbell highlights improving relative rotation across the TSX mining and gold sectors, alongside gold and copper shares more broadly. The groups are either in, or moving into, the improving quadrant and heading toward leading territory.
That could make the fall particularly important for Canadian resource investors if improving relative strength is reinforced by commodity fundamentals and seasonal trends.
Canadian financials are another area to watch as TSX reporting season gets underway. The sector remains strong relative to the wider market, although Campbell notes some early indications that momentum could be beginning to soften. U.S. financials are displaying a similar pattern.
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