In yesterday’s issue we included a few charts that appeared to argue in favor of higher natural gas futures prices. This is enough of a perspective change for us to warrant some kind of backing and filling.

Just below is a comparison between 10-year U.S. Treasury yields and the sum of the Canadian and Australian dollar futures.

The argument is that these two markets should trend together. The reality is that they haven’t been since late May. Weakness in the U.S. dollar has helped support and encourage a return to stronger commodity prices and the kind of Asian growth theme that tends to go with rising commodity-oriented currencies. On the other hand long-term U.S. yields tell a completely different story as falling rates depict an economy heading towards the kind of double-dip slowdown that virtually ensures weaker commodity prices.

Below is a comparison between the Canadian dollar futures and the Amex Natural Gas Index . The XNG is an index of the equities of 15 natural gas producers including Apache, Devon, and Chesapeake.

The chart suggests that the trends for the XNG and Cdn dollar are virtually identical. A stronger Cdn dollar argues for a bullish perspective on the growth prospects for natural gas producers... and vice versa.

One of our points yesterday was that continued strength in the Cdn dollar and XNG argues for an eventual rebound in natural gas futures prices as the ratio between the XNG and front month gas prices remains in the stratosphere. Typically peaks for gas prices occur when the XNG/gas ratio falls back to around 30:1 although the ratio only declined to 50:1 in mid-2008. Given that the ratio remains north of 120:1... the equity markets and, by extension, the forex markets continue to argue that in due course gas prices may move substantially higher.

The problem with this argument is that it rests in part on the forex markets being ‘right’. The chart at top right shows enough of a divergence between Treasury yields and the commodity currencies to at least call into question some of the assumptions that the forex markets are making with respect to the trends for the commodity currencies. Even so... the argument in favor of natural gas is based on the idea that Asian growth is improving as the cyclical trend remains positive through this year’s final two quarters.

Equity/Bond Markets

We are once again going to pull two of the charts that we have been running daily in the back pages forward. At top right is a comparison between the S&P 500 Index and 30-year U.S. T-Bond futures PRICES from 1987.

Below we show the SPX and 30-year T-Bond YIELDS from 2010.

The argument is and has been that when 30-year YIELDS bottomed this year at the end of June it marked a pivot point upwards for the equity markets similar to the pivot that took place in May of 1987.

As long as YIELDS remain above the end of June lows then the SPX was expected to trend higher. So far this has worked perfectly as the SPX has tacked on 100 or so points from the recent lows.

If we take the comparison literally then yields rising or falling on a daily basis isn’t really the issue. Bond PRICES in 1987 circled back and tested the lows a couple of months later at the end of July while the equity markets continued to push higher into August. The stock market only broke once prices fell to new lows.

The point? In a perfect world equities continue to resolve higher through at least the end of this quarter although we have previously argued that the cyclical trend should remain positive for a few months beyond that.

Further below is a comparison between Japanese 10-year bond futures and the spread between 30-year and 5-year U.S. Treasury yields.

The first thing that stands out on this chart is the move to new highs by the spread between 30-year and 5-year yields. Something obviously has to give one of these days with mid-term yields rising or 30-year yields falling.

The second detail of interest is the Japanese bond futures. Similar to 2002- 2003 the trend is relentlessly higher. The good news is that the JGBs peaked in 2003 about a quarter before the equity markets bottomed and turned sustainably higher.