November 7, 2017, 4:00pm EST

All eyes continue to be on U.S. stocks. But the bigger opportunities are elsewhere.

Japanese stocks were up another 1.3% today. The Nikkei is up 20% since September 8th. Oil is up 26% over just about the same period.

We’ve talked about the case for oil to continue its run. And with oil at 2 1/2 year highs and closing in on $60 a barrel, I’ve said we should expect the inflation chatter to start picking up. For those that have been looking for a catalyst to get bonds finally moving (and continuing) lower, this could be it. The Fed will find it very hard to ignore the impact of higher oil prices.

Here’s a look at that oil/ rates relationship we looked at a few weeks ago. At 2.30% on the 10 year yield, we sit 100 basis points off of the all-time lows (of last year). And coincidentally, we have 100 basis points of post-QE tightening in the market. With the strength in oil of the past two weeks, the divergence should be narrowing. But it has widened.

But we have another 25 basis points of tightening coming next month. This, along with this chart above, would argue we should be on the way up to 2.65ish in the 10-year yield (i.e. rates higher, bond prices lower).

With the oil story in mind, here’s another interesting chart: natural gas.

Natural gas is closing on this big four-year trendline. This momentum needs to continue, to close the sector performance gap in stocks (in the graphic below).

The energy sector has made up about three percentage points of ground since we looked at this chart last month.

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