deflation

ECB keeps rates and communication unchanged, discussion of rate cuts premature

European Central Bank President Christine Lagarde stressed during the press conference that any discussion on rate cuts was still premature.

 

At today’s meeting, the European Central Bank kept everything unchanged: both policy rates and communication. The press release with the policy announcements is almost a verbatim copy of the December statement. The ECB only dropped two phrases that could be interpreted as opening the door to rate cuts very softly: the December comments on domestic price pressure being elevated, and the temporary pick-up in inflation. The fact that these two phrases were dropped, however, could also simply be linked to the fact that there are no new forecasts. And during the press conference, ECB President Lagarde mentioned that observers shouldn’t pay too much attention to subtle changes in the text. Admittedly, we don’t know what to do with this comment, bearing in mind

Decarbonizing Hard-to-Abate Sectors: Key Challenges and Pathways Forward

Is That the S&P 500 And Gold Correction Finally?

Monica Kingsley Monica Kingsley 17.02.2021 16:21
The stock bears finally showed they aren‘t an extinct species – merely a seriously endangered one. Yesterday‘s close though gives them a chance to try again today, but they should be tame in expectations. While there is some chart deterioration, it‘s not nearly enough to help fuel a full on bearish onslaught in the S&P 500. There is no serious correction starting now, nothing to really take down stocks seriously for the time being.The Fed remains active, and monetary policy hasn‘t lost its charm (effect) just yet. Commodities and asset price inflation has been in high gear for quite some time, yet it‘s not a raging problem for the Main Street as evidenced by the CPI. Food price inflation, substitution and hedonistic adjustments in its calculation, are a different cup of tea, but CPI isn‘t biting yet.Meanwhile, the real economy recovery goes on (just check yesterday‘s Empire State Manufacturing figures for proof), even without the $1.9T stimulus and infrastructure plans. Once we see signs of strain in the job market (higher participation rate, hourly earnings and hours worked), then the real, palpable inflation story can unfold. But we‘re talking 2022, or even 2023 to get there – and the Fed will just let it overshoot to compensate for the current and prior era.Meanwhile, the wave of new money creation (we‘re almost at double the early 2020 Fed‘s balance sheet value - $4T give or take then vs. almost $7.5T now – and that‘s before the multiplier in commercial banks loan creation kicks in) keeps hitting the markets, going into the real economy, predictably lifting many boats. It‘s my view that we have to (and will) experience a stock market bubble accompanied by the precious metals and commodities one – to a degree, simultaneously, for the stock market is likely to get under pressure first. Again, I am talking the big picture here – not the coming weeks.Meanwhile, the intense talk of S&P 500 correction any-day-week-now is on, just as outrageous gold, silver and miners‘ drop projections. Let‘s examine the bear market is gold – some say that the late 2015 marked bottom, I‘m of the view that the 2016 steep rally was a first proof of turning tide. But the Fed got serious about tightening (raising rates, shrinking its balance sheet), and gold reached the final bottom in Aug 2018. Seeing through the hawks vs. dove fights at the Fed in the latter half of 2018 (December was a notable moment when Powell refused to the markets‘ bidding, remained hawkish in the face of heavy, indiscriminate selling across the board – before relenting).Since then, gold was slowly but surely gathering steam, and speculation in stocks was on. The repo crisis of autumn 2019 didn‘t have a dampening effect either – the Fed was solidly back to accomodative back then. These have all happened well before corona hit – and it wasn‘t able to push gold down really much. The recovery from the forced selling, this deflationary episode (which I had notably declared back in summer 2020 to be a one-off, not to be repeated event), was swift. Commodities have clearly joined, and the picture of various asset classes taking the baton as inflation is cascading through the system, is very clear.Quoting from my yesterday‘s analysis:(…) The dollar keeps topping out, which I called it to do a week ago – and its losses have been mounting since. Long-dated Treasury yields are rising in tandem, which is a great environment for financials (XLF ETF) and emerging markets (EEM ETF). The former benefit from the widening yield curve, the latter from plain devaluation.Gold performance is still short-term disappointing, and silver and platinum are leading. But it‘s the miners and the moves between various mining indices, that work to soothe the bulls‘ impatience. Understandable as we are in 5+ months of downside correction whose target I called on Aug 07 in the article S&P 500 Bulls Meet Non-Farm Payrolls, witnessing record pace of new money creation.The ongoing economic recovery will get new stimulus support, and that will work to broaden the precious metals advance. Again quoting my Friday‘s words:(…) in our print-and-spend-happy world, where the give or take $1.9T stimulus will sooner or later come in one way or another, we better prepare on repricing downside risk in the precious metals, and also better not to fixate on the premature bubble pop talk too closely. I have been stating repeatedly that things have to get really ridiculous first, and this just doesn‘t qualify yet in my view. All those serious correction calls have to wait – in tech and elsewhere, for we‘re going higher overall – like it or not.Let‘s get right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookFinally, there is a whiff of bearish activity. Will it last or turn out a one day event as thus far in Feb? The chances for a sideways correction to last at least a little longer, are still on, however the short- and medium-term outlook remains bullish.Credit Markets and TreasuriesHigh yield corporate bonds (HYG ETF) wavered yesterday, trading in a sideways pattern during recent days. Encouragingly, yesterday‘s session attracted increasing volume, which I read as willingness to buy the dip. One dip and done?Long-term Treasuries (TLT ETF) are the key chart on my radar screen right now. The rise in yields is accelerating, and if progressing unmitigated, would throw a spanner into many an asset‘s works. Even though it‘s not apparent right now, there is a chance that we‘ll see a slowdown, even a temporary stabilization, over the coming sessions. The larger trend in rates is higher though, and in the dollar to the downside.Gold, Silver and CommoditiesThe heat gold is taking from rising Treasury yields, has gotten weaker recently, with the decoupling from rising nominal (real) yields being a good omen for precious metals universally. The dynamics of commodity price inflation, dollar hardly balancing under the weight of unprecedented economic policy and twin deficits, attests to the gold upleg arriving sooner rather than later.Let‘s step back, and compare the performance of gold, silver, copper and oil. The weekly chart captures the key turns in monetary policy, the plunge into the corona deflationary bottom, and crucially the timing and pace of each asset‘s recovery. Gold and silver were the first to sensitively respond to activist policies, followed by copper, and finally oil. Is their current breather really such a surprise and reversal of fortunes? Absolutely not.SummaryThe bearish push in stocks has a good chance of finally materializing today. How strong will its internals be, will it entice the bulls to step in – or not yet? The stock bull run is firmly on, and there are no signals thus far pointing to an onset of a deeper correction with today‘s price action.The gold bulls continue lagging behind their silver counterparts, predictably, with both under continued pressure. The yields are rising a bit too fast, taking the metals along – temporarily, until they decouple to a greater degree. Combined with the miners‘ signals, and unprecendented monetary and fiscal stimulus, unfolding real economy recovery, inflation making its way through the system, and the dollar struggling to keep its head above water, the new PMs upleg is a question of time.
Boosting Stimulus: A Look at Recent Developments and Market Impact

S&P 500 Correction – No Need to Hold Onto Your Hat

Monica Kingsley Monica Kingsley 18.02.2021 16:09
Yesterday‘s bearish price action in stocks was the kind of shallow, largely sideways correction I was looking for. Not too enthusiastic follow through – just rocking the boat while the S&P 500 bull run goes on. Stocks are likely to run quite higher before meeting a serious correction. As I argued in yesterday‘s detailed analysis of the Fed policies, their current stance won‘t bring stocks down. But it‘s taking down long-term Treasuries, exerting pressure on the dollar (top in the making called previous Monday), and fuelling commodities – albeit at very differnt pace. The divergencies I have described yesterday, center on weak gold performance – not gaining traction through the monetary inflation, instead trading way closer in sympathy with Treasury prices. Gold has frontrunned the other commodities through the corona deflationary shock, and appears waiting for more signs of inflation. It didn‘t make a final top in Aug 2020, and a new bear market didn‘t start. It‘s my opinion that thanks to the jittery Treasury markets, we‘re seeing these dislocations, and that once the Fed focuses on the long end of the curve in earnest, that would remove the albatross from gold‘s back.I can‘t understate how important the rising yields are to the economy (and to the largest borrower, the government). Since 1981, we‘ve been in one long bond bull market, and are now approaching the stage of it getting questioned before too long. The rates are rising without the real economy growing really strongly, far from its potential output, and characterized by a weak labor market. Not exactly signs of overheating, but we‘ll get there later this year still probably.It‘s like with generating inflation – the Fed policies for all their intent, can‘t command it into happening. The Treasury market is throwing a fit, knowing how much spending (debt monetization) is coming its way, and the Fed‘s focus is surely shifting to yields at the long end. Bringing it under control would work to dampen the rampant speculation in stocks, and also lift gold while not hurting commodities or real economy recovery much. Sounds like a reasonable move (yield curve control), and I believe they‘re considering it as strongly as I am talking about it.Let‘s quote yesterday‘s special report on gold, inflation, and commodities:(…) the wave of new money creation (we‘re almost at double the early 2020 Fed‘s balance sheet value - $4T give or take then vs. almost $7.5T now – and that‘s before the multiplier in commercial banks loan creation kicks in) keeps hitting the markets, going into the real economy, predictably lifting many boats. It‘s my view that we have to (and will) experience a stock market bubble accompanied by the precious metals and commodities one – to a degree, simultaneously, for the stock market is likely to get under pressure first. Again, I am talking the big picture here – not the coming weeks.Let‘s examine the bear market is gold – some say that the late 2015 marked bottom, I‘m of the view that the 2016 steep rally was a first proof of turning tide. But the Fed got serious about tightening (raising rates, shrinking its balance sheet), and gold reached the final bottom in Aug 2018. Seeing through the hawks vs. dove fights at the Fed in the latter half of 2018 (December was a notable moment when Powell refused to the markets‘ bidding, remained hawkish in the face of heavy, indiscriminate selling across the board – before relenting).Since then, gold was slowly but surely gathering steam, and speculation in stocks was on. The repo crisis of autumn 2019 didn‘t have a dampening effect either – the Fed was solidly back to accomodative back then. These have all happened well before corona hit – and it wasn‘t able to push gold down really much. The recovery from the forced selling, this deflationary episode (which I had notably declared back in summer 2020 to be a one-off, not to be repeated event), was swift. Commodities have clearly joined, and the picture of various asset classes taking the baton as inflation is cascading through the system, is very clear.Let‘s get right into the charts (all courtesy of www.stockcharts.com).S&P 500 Outlook and Its InternalsFinally, a daily downswing – not meaningful, but it‘s as good as it gets. The slightly lower volume though shows that there is not a raging conviction yet that this sideways move is over.The market breadth indicators aren‘t at their strongest. Both the advance-decline line and advance-decline volume dipped negative, which isn‘t worrying unless you look at new highs new lows as well. While still positive, $NYHL is showing a divergence by moving below the mid-Feb lows. Seeing its decline to carve a rounded bottom a la end Jan would be a welcome sight to the stock bulls. Before then, nothing stands in the way of muddling through in a shallow, corrective fashion.Credit Markets and TreasuriesThe divergence in both leading credit market ratios – high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) – show the bond market strains. HYG:SHY clearly supports the S&P 500 rally, while LQD:IEI isn‘t declining in tandem with long-term Treasuries. Instead, it‘s carving out a bullish divergence as it‘s trading well above the Sep and Oct lows – unlike the TLT.Speaking of which, such were my words yesterday, calling for a Treasury reprieve to happen soon:(…) Long-term Treasuries (TLT ETF) are the key chart on my radar screen right now. The rise in yields is accelerating, and if progressing unmitigated, would throw a spanner into many an asset‘s works. Even though it‘s not apparent right now, there is a chance that we‘ll see a slowdown, even a temporary stabilization, over the coming sessions. The larger trend in rates is higher though, and in the dollar to the downside.The dollar is still topping out, and a new daily upswing doesn‘t change that – I look for it to be reversed, and for the new downleg reasserting itself.Gold, Silver and CommoditiesThe encouraging, budding short-term resilience of gold to rising Treasury yields, got a harsh reality check yesterday. While the latter ticked higher, gold declined regardless. Closing at the late Nov lows, it‘s still relatively higher given the steep rise in long-term Treasury yields since. A bullish divergence, but a more clear sign of (directional) decoupling (negating this week‘s poor performance) is needed.Let‘s look again at gold, silver, and commodities in the medium run. Silver decoupled from gold since the late Nov bottom in both, while commodities haven‘t really looked back since early Nov. Till the end of 2020, gold wasn‘t as markedly weak as it has become since, and actually tracked the silver recovery from the late Nov bottom. And the reason it stopped, are the long-term Treasury yields, which quickened their rise in 2021. It looks like an orderly decline in TLT is what gold would appreciate – not a rush to the Treasury exit door.SummaryThe bearish push in stocks has a good chance of finally materializing also today. How strong will its internals be, will it entice the bulls to step in again? Signs are for this correction to run a bit longer in time – but the stock bull run is firmly on, and there are no signals thus far pointing to an onset of a deeper correction right away.The gold bulls recovered a little of the lost ground, but that doesn‘t flip the short-term picture their way in the least. While the yellow metal is leading silver today, its overall performance in the short run remains disappointing, and the silver-gold spread trade I introduced you to a week ago, a much stronger proposition. Still, given the miners‘ signals, unprecendented monetary and fiscal stimulus, unfolding real economy recovery, inflation making its way through the system, and the dollar struggling to keep its head above water, the new PMs upleg is a question of time.
Decarbonizing Hard-to-Abate Sectors: Key Challenges and Pathways Forward

Why the Sky Is Not Falling in Precious Metals

Monica Kingsley Monica Kingsley 19.02.2021 16:03
Stocks are predictably staging a continued recovery from the mostly sideways correction – a shallow one not strong enough to break the bulls‘ back. Credit markets are largely behaving – with the exception of long-term Treasuries, which I see as highly likely to draw the Fed‘s attention – just as I discussed in detail yesterday. The S&P 500 keeps doing fine, and so does my open position there – in the black again. On one hand, volatility remains low regardless of intraday attempts to rise, on the other hand, the put/call ratio has risen quite high yesterday – it‘s as if the traders are expecting a shoe to drop, similarly to the end of Jan. Will it, is there any on the horizon?Treasuries at the long-end are falling like a stone, and those on the short end (3-months) are seeing higher prices in 2021. The bond market is clearly under pressure, and exerting influence primarily upon precious metals (and commodities such as oil, which are experiencing a down day today, after quite a string of foreseeable gains). The bearish sentiment in gold and miners is running rampant, and it‘s been only yesterday when I answered a question on ominous head and shoulders patterns in the making, at my own site. This clearly illustrates the razor edge we‘re at in precious metals:(…) This is more often than not the case with H&S patterns – they are not the most reliable ones, highly judgemental at times, and their targets are more often than not far away, which makes them a not fully reliable trading proposition when a long enough time (trade) series is taken. I rather look at what is driving individual moves – which asset classes influence it the most at a given time? Where to look for so as to get most precise information? With gold and gold miners (they still trade quite tightly together), it's the Treasury yields on the long end.As I wrote in today's (Feb 18) precious metals report, despite the new 2021 lows in TLT, gold isn't amplifying the pressure – it's trading well above the $1,770 level, and enjoys a stronger session today than silver. Look at the gold – TLT evolving relationship, as that's the key determinant right now. The post-Nov dynamic speaks in gold's favor – under the surface. Don't underestimate the Fed either.Plenty to talk and cover in the precious metals really – just as usual at such crossroads. Let‘s briefly recap all the ducks lining up in stocks first.Let‘s get right into the charts (all courtesy of www.stockcharts.com).S&P 500 and VolatilityRepeated lower knots mark a refusal to decline as the daily dips keep being bought. Given the constructive developments in high yield corporate bonds and its key ratio (HYG and HYG:SHY), I fully expect the uptrend to keep reasserting itself once again. The talk about a top, imminent correction or stretched valuations, is still premature.The best known volatility measure is still refusing to rise on a lasting basis, indicating that the environment remains favorable to higher stock prices.Dollar and TreasuriesThe world reserve currency is on the doorstep of another powerful decline, and not initiating a bull market run. The caption says it all – this is the time for antidollar plays to thrive in our era of ample credit, unprecedented money creation that‘s triggering a Roaring Twenties style of speculative environment, not a Kondratieff winter with a deflationary shock as you might hear some argue.Look around, check food, energy, or housing prices, and you‘ll see how connected to reality are the calls of those writing that inflation isn‘t a problem (monetary inflation lifting many asset classes). Check that against Fed President Daly stating that the inflationary pressures now point downwards… and make your own conclusions about the new money wave hitting the real economy.Gold, Silver and MinersJust as gold is challenging (resting on) the late Nov lows, so is the miners to gold ratio. That‘s a key one – I mentioned at the very end of Jan that I would like to see it start to lead higher. Seeing the latest two-day losing streak, it‘s not happening, and the late Jan breakdown which might have turned out to be false, may not materialize in the short run. Let‘s get a proper perspective by displaying this chart in weekly format.Is this the dreadful breakdown threating doom and gloom in the precious metals? Zooming out definitely provides a very different take – a more objective one than letting (fear) emotions run high and tickitis to take over.We‘re still consolidating, and not making lower lows – regardless of this week‘s increased gold sensitivity to rising yields as seen in the plunging TLT values. Inflation is making its way through the system as surely as Titanic‘s watertight compartments were filled with water. I‘ve discussed on Wednesday at length inflation, past Fed action and asset appreciation, and yesterday explained why the central bank will be tied into a war on two fronts as it gets to seek control over the yield curve at the long end too.Another short-term worrying chart as silver miners are caught in last days‘ selling whirlwind. Even the juniors lost their short-term edge over the seniors, making me think that a potential washout event before a more universal sectoral rebound, might be at hand.Pretty worrying for those who are all in gold – unless they took me up on last Friday‘s repeated idea that silver is going to outperform gold in the next precious metals upleg, which I formulated that day into a spread (arbitrage) trade long silver, short gold. Check out the following chart how that would have worked out for you.The dynamics favoring silver are unquestionable – starting from varied and growing industrial applications, strengthening manufacturing and economy recovery, poor outlook in silver above ground stockpile and recycling, to the white metal being also a monetary metal. Silver is bound to score better gains than gold, marred by the Bitcoin allure, would. SummaryThe bearish push in stocks didn‘t indeed take the sellers far – just as I wrote yesterday, there was no reason to hold on to your hat. The stock bull run is firmly entrenched, and there are no signals thus far pointing to an onset of a deeper correction right away as all we‘re going through, is a shallow correction (in time especially).Bearish dollar, $1.9T or similar stimulus not priced in, and yet gold isn‘t taking a dive. Amid very positive fundamentals, it‘s the technicals that are short-term challenging for gold – we‘re in truly unchartered territory given the economic policies pursued. I stand by my call to watch the TLT chart very closely – it looks like an orderly TLT decline is what gold needs, not a selling stampede. Despite the current disclocation with gold being the weakest of the weak (I am looking at commodities for cues), I still stand by the call that a new PMs upleg is only a question of time – a shortening one, at that.
Boosting Stimulus: A Look at Recent Developments and Market Impact

No More Rocking the Boat in Stocks But Gold?

Monica Kingsley Monica Kingsley 08.03.2021 15:23
Stocks sharply reversed intraday, and closed just where they opened the prior Friday. That indicates quite some pressures, quite some searching for direction in this correction that isn‘t over just yet. Stocks have had a great run over the past 4 months, getting a bit ahead of themselves in some aspects such as valuations. Then, grappling with the rising long-term rates did strike.So did inflation fears, especially when looking at commodities. Inflation expectations are rising, but not galloping yet. What to make of the rising rates then? They‘re up for all the good reasons – the economy is growing strongly after the Q4 corona restrictions (I actually expect not the conservative 5% Q1 GDP growth, but over 8% at least) while inflation expectations are lagging behind. In other words, the reflation (of economic growth) is working and hasn‘t turned into inflation (rising or roughly stable inflation expectations while the economy‘s growth is slowing down). We‘re more than a few quarters from that – I fully expect really biting inflation (supported by overheating in the job market) to be an 2022-3 affair. As regards S&P 500 sectors, would you really expect financials and energy do as greatly as they do if the prospects were darkening?So, I am looking for stocks to do rather well as they are absorbing the rising nominal rates. It‘s also about the pace of such move, which has been extraordinary, and left long-term Treasuries trading historically very extended compared to their 50-day moving averages. Thus, they‘re prone to a quick snapback rally over the next 1-2 weeks, which would help the S&P 500 regain even stronger footing. And even plain temporary stabilization of theirs would do the trick.This is taking me directly to gold. We have good odds of long-term rates not pressuring the yellow metal as much as recently, and inflation expectations are also rising (not as well anchored to 2% as the Fed thinks / says). As I‘ll show you in the charts, the signs of decoupling have been already visible for some time, and now became more apparent. And that‘s far from the only suggestion of an upcoming gold upswing that I‘ll bring you today.Just as I was calling out gold as overheated in Aug 2020 and prone to a real soft patch, some signs of internal strength in the precious metals sector were present this Feb already. And now as we have been testing for quite a few days the first support in my game plan, we‘re getting once again close to a bullish formation that I called precisely to a day, and had been banging the bearish gold drum for the following two days, anticipating the downside that followed. Now, that‘s what I call welcome flexibility, extending to accentuated, numerous portfolio calls.And the permabears keep (losing capital through many bullish years in a row in some cases) calling for hundreds bucks more downside after a respite now, not even entertaining the thought that gold bottom might very well not be quarters ahead. It‘s easier to try falsely project own perma stickers onto others. Beware of wolves in ill-fitting sheep clothing. Look at full, proven track records, compare varying perspectives of yesteryear too, and wave off cheap halo effects.It‘s the above dynamic between nominal rates taking a breather, dollar getting back under pressure, commodities continuing their rise and stocks gradually resuming theirs – see the ebbing and flowing that I‘m laying down in the daily analyses on the revamped homepage, and you‘ll get a knack for my timings of local tops or bottoms just the way I did in the early Sep buying climax or in the corona crash.True mastery is in integrating and arguing opposing views with experience and adaptability daily. People are thankfully able to recognize these characteristics on their own – and they have memory too. Who needs to be told what to read and consider by those embracing expertise only to turn against it when the fruits were no longer theirs? Sour grapes. Narrow thinking is one of the dangers of our era replete with empty and shallow shortcuts. Curiosity, ingenuity and diligence are a gift to power mankind – and what you get from financial analysts – forward in a virtuous circle.If gold prices rise from here, they have bounced off support. Simple as that, especially given the accompanying signs presented. There is time to run with the herd, and against the herd – in both bull and bear trends, constantly reevaluating the rationale for a position, unafraid to turn on a dime when justified.Whatever else bullish or bearish I see technically and fundamentally in rates, inflation and dollar among much else, I‘ll be duly reporting and commenting on as always. It‘s the markets‘ discounting mechanism of the future that counts – just as gold cleared the deflationary corona crash in psring 2020, just as it disregarded the tough Fed tone of 2H 2018, just as it sprang vigorously higher in early 2016 stunning bears in all three cases with sharp losses over many months, or just as stocks stopped declining well before economic news got better in April 2020 or March 2009. Make no mistake, the markets consider transitioning to a higher inflation environment already now (the Fed timidly says that reopening will spike it, well, temporarily they say), when inflation expectations are still relatively low, yet peeking higher based on the Fed‘s own data. Such were my Friday‘s words:(…) Let‘s keep the big picture – gold is in a secular bull market that started in 2018 (if not in late 2015), and what we‘re seeing since the Aug 2020 top, is the soft patch I called. The name of the game now, is where the downside stops – I am not capitulating to (hundreds dollars) lower numbers below $1,650 on a sustainable basis. The new precious metals upleg is a question of time even though the waiting is getting longer than comfortable for many, including myself. Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 Outlook and Its InternalsStrong rebound after more downside was rejected, creating a tweezers bottom formation, with long lower knots. This is suggestive of most of the downside being already in. The Feb 25 upswing had a bearish flavor to it, while the Mar 1 one looked more constructive – and Friday‘s one is from the latter category. That doesn‘t mean though this correction won‘t be in the 5% range. The 3,900 zone is critical for the bulls to pass so as to clear the current precarious almost no man‘s land.The market breadth indicators are actually quite resilient given how far this correction has reached. New highs new lows are holding up still very well, yet they too indicate that this correction has further to go in time. While the bullish percent index still remains in the bullish territory, it indicates how far the correction has progressed technically, and that we can‘t declare the bullish spirits as having returned just yet.Credit MarketsHigh yield corporate bonds (HYG ETF) ilustrate this fragility for they haven‘t rebounded as strongly as stocks. This correction doesn‘t appear to be as really over just yet, also given the sectoral picture that I am showing you next.S&P 500 Sectoral LookTech reversed, but higher volume would be welcome to lend the move more credibility. This sector is still the weakest link in the whole S&P 500 rebound, and not until I see the $NYFANG carve out a sustainable bottom (this needn‘t happen at the 200-day moving average really), I can declare this correction as getting close to over. The bullish take on the volume is that the value sector has undergone strong accumulation, as can be readily seen in the equal weight S&P 500 index (RSP ETF). The above chart shows that cyclicals are performing strongly – with industrials (XLI ETF) and energy (XLE ETF) leading the charge as the tech and defensives are trying to stabilize, and the same is true about consumer discretionaries (XLY ETF).Gold‘s Big Picture ViewGold‘s weekly chart shows two different stages in the reaction to rising long-term rates. The first half was characterized by the two tracking each other rather closely, yet since late Dec, the nominal rates pressure has been abating in strength within the mutual relationship. While TLT plunged, gold didn‘t move down as strongly. Real rates are negative, nominal rates rose fast, and inflation expectations have been trending higher painfully slowly, not reflecting the jump in commodities or the key inflation precursor (food price inflation) just yet – these are the factors pressuring gold as the Fed‘s brinkmanship on inflation goes on. Once the Fed moves to bring long-term rates under control through intervention – hello yield curve control or at least twist – then real rates would would be pressured to drop, which would be a lifeline for gold – the real questions now are how far gold is willing to drop before that, and when that Fed move would happen. Needless to add as a side note regarding the still very good economic growth (the expansion is still young), staglation is what gold would really love.Copper and Silver Big Picture ViewThe red metal keeps rising without end in sight, reflecting both the economic recovery and monetary intervention. This is a very bullish chart with strong implications for other commodities and silver too. That‘s the essence of my favorite play in the precious metals – long silver short gold spread, clearly spelled out as more promising than waiting for gold upswing to arrive while the yellow metals‘ bullish signs have been appearing through Feb only to disappear, reappear, and so on.As you can see, silver performance approximates commodity performance better than gold one. And as the economic recovery goes on, it‘s indeed safer to be a silver bull than a gold bull – another of my early Feb utterances.Miners to Gold Big Picture ViewThis gold sectoral ratio made an encouraging rebound last week, but isn‘t internally as strong as it might appear, because the juniors (GDXJ ETF) aren‘t yet outperforming the seniors (GDX ETF), which had been the case in early 2021 and late in Feb as well – right till I sounded the alarm bells on Feb 23-24. This is precisely why I was not bullish in tone at all in the past week, as gold hadn‘t been acting as strongly now as it had been right before the Feb 22 upswing that I called. And I am missing this ingredient at the moment still.SummaryStock bulls stepped in and repaired much of Thursday‘s damage, flipping the balance of power as more even at the moment. While the medium-term factors favor the bulls, this correction is slated to go on still for longer, as all eyes are on tech (big names) as the deciding sector.Gold still remains acting weak around the lower border of its support zone, silver is refusing to decline more, and signs overall favoring a rebound, are appearing. It‘s still a mixed bag though, with especially gold being far from out of the woods yet.
New York Climate Week: A Call for Urgent and Collective Climate Action

How to Join the Mining Party… Before it Ends

Finance Press Release Finance Press Release 08.03.2021 18:39
Forget gold and silver for a moment. Do you hear the music? Yes, it’s coming from the mining ETFs club. But how long will the party last?And more importantly, why miners, you may ask? Because miners tend to outperform in the early days of a major rally.After closing only $0.10 below my initial downside target of $31 on Mar. 1 , the GDX ETF could be ripe for an upward revision. Able to ignore much of last week’s chaos, the GDX ETF’s outperformance of gold and silver signals that the tide has likely turned.Please see below:Figure 1To that point, I warned on Mar. 1 that help was on the way:The GDX ETF has garnered historical support at roughly $29.52. The level also coincides with the early-March high, the mid-April low and the 61.8% Fibonacci retracement level. As a result, a corrective upswing to ~$33/$34 could be the miners’ next move.Furthermore, after alerting subscribers on Mar. 4 – writing that when gold moves to $1,692, we’ll automatically open long positions in the miners – the GDX ETF ended Friday’s (Mar. 5) session up by 3.2% from my initial entry of ~$30.80 - $31. Thus, from here, the GDX ETF has roughly 3.8% to 7.0% upside (as of Friday’s close) before the $33/$34 levels signals that the momentum has run its course.For now, though, positioning for more upside offers a solid risk-reward proposition . Prior to the initial decline, miners were weak relative to gold . However, after outperforming on Mar. 5, their steady hand was a sign of short-term strength. If you analyze the chart below, you can see that the size and shape of the current price action actually mirrors what we witnessed back in April.Please see below:Figure 2 - VanEck Vectors Gold Miners ETF (GDX), GDX and Slow Stochastic Oscillator Chart Comparison – 2020For context, I wrote on Mar. 5:Miners stopped their decline practically right in my target area, which I based on the 50% Fibonacci retracement and the 2020 highs and lows. Moreover, the proximity of the $31 level corresponds to the 2019 high and the 2016 high. Since so many support levels coincide at the same price (approximately), the latter is likely to be a very strong support. Moreover, the RSI was just close to 30, which corresponded to short-term buying opportunities quite a few times in the past.In addition, a short-term upswing could provide a potential pathway to $35 – as this level also corresponds with the GDX ETF’s late-February high, its monthly declining resistance line and its 50-day moving average. The abundance of resistance levels – combined with the fact that an upswing would further verify the GDX ETF’s breakdown below the neckline of its potential head and shoulders pattern – should keep the upward momentum in check.Over the medium-term, the potential head and shoulders pattern – marked by the shaded green boxes above – also deserves plenty of attention.For context, I wrote previously:Ever since the mid-September breakdown below the 50-day moving average , the GDX ETF was unable to trigger a substantial and lasting move above this MA. The times when the GDX was able to move above it were also the times when the biggest short-term declines started.(…)The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder (figure 2 - both marked with green) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.Due to the uncanny similarity between the two green rectangles, I decided to check what happens if this mirror-similarity continues. I used purple, dashed lines for that. There were two important short-term price swings in April 2020 – one shows the size of the correction and one is a near-vertical move higher.Copying these price moves (purple lines) to the current situation, we get a scenario in which GDX (mining stocks) moves to about $31 and then comes back up to about $34. This would be in perfect tune with what I wrote previously. After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, stocks’ day of reckoning is coming . And it might be very, very close.As I explained previously, based on the similarities to the 1929 and 2008 declines, it could be the case that the precious metals sector declines for about 3 months after the general stock market tops. And it seems that we won’t have to wait long for the latter. In fact, the next big move lower in stocks might already be underway, as the mid-Feb. 2021 top could have been the final medium-term top.In conclusion, the gold miners should continue to glisten as oversold conditions buoy them back to the $33-$35 range. Due to the GDX ETF’s recent strength, combined with gold rallying off of the lows on Mar. 5, the PMs could enjoy a profitable one-week (or so) party. However, with the celebration likely to be short-lived, it’s important to keep things in perspective. While this week’s performance may elicit superficial confidence, medium-term clouds have already formed. As a result, positioning for an extended rally offers more risk than reward.(We normally include the "Letters to the Editor" section in the full version of Gold & Silver Trading Alerts only, but today I decided to include it also in this free version of the full (about 10x bigger than what you just read) analysis, so that you get the idea of how this part of the analysis looks like. It might be quite informative too. Enjoy:)Letters to the EditorQ: Could you update your thoughts regarding physical [gold and silver] for those looking to acquire additional positions - specifically, what do you think premiums and availability are going to look like when/if spot goes a $100 or $200 down from here? By way of example, I bought some U.S. gold buffaloes at $1854 spot at $1954. Those same coins at $1710 spot are still around $1930, if there are any to be found.A: It’s a tough call, because the premium values don’t follow the technical patterns. Still, based on the analogy to situations that seem similar to what we saw recently, it seems that we can indeed say something about the likely physical values close to the likely $1,450 bottom.Figure 43 - Source: didthesystemcollapse.orgThe above chart shows the eBay premium for 1 oz Gold American Eagle coins over the spot gold price.In April 2020, the premium spiked at about 14%. It was likely even higher in March (we don’t have the direct data), but the volatility back then was bigger than it is right now, so it seems that the current premium and the April 2020 premium values are a better proxy for the future bottoming premiums than the March 2020 bottom premium would be. If the volatility increases, one could see the premium at about 15% or so.With gold at about $1,450, the above-mentioned information means Gold American Eagle coins can cost about $1,670.Still, since gold futures prices seem more predictable than the prices of bullion coins, I’d focus on the former even while timing the purchase of the latter.Moreover, please note that I’m planning to focus on buying mining stocks close to the bottom and move to metals only later. The reason is that miners tend to outperform in the early days of a major rally (just like they did in the first quarter of 2016). The fact that the premium is likely to be high when gold bottoms in a volatile manner is yet another reason for the above. When switching from mining stocks to physical holdings several weeks or months later, one might be buying at a smaller premium over the spot, and also after having gained more on miners than on the metals. Of course, the above is just my opinion, and you can purchase whatever you want – after all, it’s your capital and your investment decisions.Q: Please note that I am glad to see gold moving downwards but I am a little confused – the trading report I just received recommends selling at 1690ish but the mailing previously said 1450ish - please see attached.Could you please investigate and advise.A: If anything in the Gold & Silver Trading Alerts seems confusing, please refer to the “Summary”, the trading/investment positions, and the “Overview of the Upcoming Part of the Decline” sections for clarification. In this case, we exited the remaining short positions when gold hit $1,693 and almost immediately entered long ones (when gold hit $1,692). We now have long positions in the mining stocks with the plan to exit them in a week or so, and re-enter short positions then, because the next big move is likely to be to the downside (perhaps as low as $1,450 or so). Also, the above is just my opinion, not a recommendation or investment advice.Q: Hi P.R., thanks for the advice on this trend, it’s been an amazing trade.As I’m trading on XAUUSD, are you also able to advise the targets for a gold long entry,or should I wait for the final bottom before opening any longs?A: I’m very happy that you’re making profits thanks to my analyses. While I think that the very short-term (for the next 5 trading days or so) outlook for gold, silver and mining stocks is bullish, I think the targets are more predictable for mining stocks than they are for gold and – especially – silver. Still, this time, the short-term upside target for gold is also relatively clear – at about $1,770. That’s why I put the $1,758 in the “For-your-information target” for gold in the “Summary” section below.Q: Are we looking for the short-term upside move to be 1-5 weeks before the final decline into the 1350-1500 zone? I'm a little unsure of the timing you're laying out.A: I’m looking for the short-term upswing to take place between 1 and 3 weeks – that’s the part of the “Overview of the Upcoming Part of the Decline” section about it:It seems to me that the initial bottom has either just formed or is about to form with gold falling to roughly $1,670 - $1,680, likely this week.I expect the rebound to take place during the next 1-3 weeks.After the rebound (perhaps to $33 - $34 in the GDX), I plan to get back in with the short position in the mining stocks.In my opinion it’s most likely that this counter-trend rally will take about 1 – 1.5 weeks. Then, I think that the decline to about $1,450 in gold will start.Q: Thank you for sending out the Alert # 2 with the new changes in the Gold and Silver trades today. This is necessary, so please send out the alert once you enter back to the short positions, please.A: I’m happy that you enjoyed this intraday Alert. I will indeed send you – my subscribers – an intraday confirmation that the long positions were closed and when we enter new short positions. Still, please note that we already have binding profit-take exit prices in place, which means that when prices move to the target levels (e.g., GDX to $33.92), the long positions should be automatically closed, and profits should be taken off the table – even without an additional confirmation from me (it takes time for me to write and send the message and then some time usually passes before one is able to act on my message).Q: You have informed us to make the move when the Gold price “REACHES” $1693.00. My question is; Does the word “Reach” mean when the price touches that point, if only for a moment, or does “Reach” mean when it closes the day at or below $1693.00?Thank you for your response to this question.A: “Reaching” a price means the same thing as “touching” the price or “moving to” the price. This means moving to this price level on an intraday basis – even for just one tick . If I mean closing prices, I will specifically describe them as such.For instance, I currently have binding exit positions for the current long position in the mining stocks – and these are exactly the price levels that I have put in my brokerage account as a limit sell order.Q: Please comment on the Hindenburg Omen for stocks:Figure 44 - Source: RefinitivA: Thanks. The Hindenburg omen is not one of the most reliable indicators - even on the above chart, it’s clear that most of the signals were not followed by declines. Please note how many fake initial signals there were before stocks finally declined in 2019 or 2020. There are many other reasons to think that stocks are going to move much lower, though. In the very short-term they could still move higher, but this move could be fake and could turn out to be the right shoulder of the head-and-shoulders top formation.Q: 1) for shorter-term trades such as the potential 10% pop in the GDX, is NUGT better?2) the plan after we re-enter a short trade when the GDX gets to $33/$34 might mean a longer haul before we hit rock bottom . You have mentioned time-scales up to 20 weeks (ish). Due to a longer holding period , would the CFD route be a cheaper route when compared to NUGT? I’m asking in general terms because each provider imposes different fees and I don’t expect you to comment on the fees charged by IG, which is the service I use.I also recognize that NUGT only offers 2 X leverage, whereas CFD’s offer up to five times leverage.Finally, the manner in which you detail the rich tapestry of the economic forces that impact PMs is revealing and educational. I find this all fascinating.I have my own views which can be summed up like this: How many inflationary false-dawns and panics has the bond market had? Ever since 2008, when the FED launched QE, there have been numerous bouts and hissy fits of inflationary expectations that have subsequently sunk like a dodgy soufflé. I think this time is no different and it’s entirely possible the 30-year bond could drop to ZERO. I am in the deflationary camp.How might the 10 year at zero or possibly sub-zero and longer, out on the duration curve to (TLT ETF) dropping to 0.5%, affect the price of gold?Your thoughts as ever, are much appreciatedA: 1) That depends on whether one seeks leverage or not, and how much thereof. Please note that some short-term trades could sometimes become medium-term trades if the market decides to consolidate or move in the other direction before continuing the predicted trend. In this case, non-leveraged instruments are at an advantage over the leveraged ones, because they don’t suffer from the back-and-forth trading as much as the leveraged ones do.If one’s desired exposure to the GDX ETF wouldn’t exceed the cash that one dedicated to trading, then in order to have the same exposure one would simply have half of the capital employed in NUGT (which is 2x leveraged). This way, the exposure would be identical, but the NUGT would imply additional risk of losing more capital if the trade takes much longer than planned and/or if the price moves adversely first.Please note that there is also an additional way to gain leverage (it’s not available for everyone, though) and that is through the use of margin on one’s brokerage account. I’d prefer to use margin for the GDX before aiming to gain leverage through NUGT.In other words, I’d first use more cash for GDX before I’d go into NUGT. If I wanted to have even bigger exposure than the one achieved by employing more capital to GDX, I would then consider using margin, and then I would consider using NUGT if I still wanted to get more leverage.There might be some traders who would seek to combine both for even bigger leverage (buying NUGT on margin), but this is definitely not something that I’d recommend to most people. In fact, it seems that in many cases, sticking to the GDX would be a good way to go.2) I think I already replied to the first part of your question (NUGT vs. CFD) above. Also, for other people reading this reply – please note that CFDs (contracts for difference) are not available in many areas, including the USA and Canada.I’m glad to read that you enjoy reading my explanations of the current situation in the markets (precisely, my opinions on it).Real interest rates are one of the most important drivers for gold (along with the USD Index), so a drop in the 10-year rates to zero or sub-zero levels would likely be very beneficial for the gold prices.Figure 45Also, based on the pace at which the rates have rallied recently, they might be topping here, but… There was no decline in the previous 40 years that was as big as what we saw between 2018 and 2020. Consequently, the corrective upswing might be bigger as well. Also, the above chart is not necessarily the scale that is big enough to make very long-term conclusions.Figure 46Over the past centuries, whenever the rates fell very low, they then rallied back up with vengeance. After WW2, it theoretically would have been a “good idea” to keep stimulating the economy with low rates – and yet, they soared. Right now, the monetary authorities strive to be very dovish and keep pumping liquidity into the system, and yet the rates are rallying anyway.So, while the analogy to the previous years – or the past few decades – suggests that the rally in the rates might be over or close to being over, the very long-term chart suggests otherwise.To make the situation even more complicated, if the stock market has already topped in February, and we have already entered the Kondratiev winter cycle, it means that we can theoretically expect the rates to fall, then rise in a credit crunch, and then fall much lower.All in all, the outlook for the interest rates is anything but simple and clear. Perhaps what we see right now already IS the credit crunch and the 10-year rates are on their way to above 2% - after all, they used to return above their 200-day moving average after the previous medium-term declines. It seems to me that the move above 2% in the 10-year rates could correspond with gold’s decline below $1,500.Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.Przemyslaw Radomski, CFA Founder, Editor-in-chiefSunshine Profits: Effective Investment through Diligence & Care* * * * *All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Stocks Shaking Off Weak Tech As Gold Bottoms?

Stocks Shaking Off Weak Tech As Gold Bottoms?

Monica Kingsley Monica Kingsley 09.03.2021 15:28
Stocks spiked higher, but not before going sideways to down prior on the day. And the close to the session hasn‘t been convincing either – does it count as a reversal? In my view, we haven‘t seen one yesterday really, regardless of this correction not being over just yet. There are still some cracks I tweeted yesterday about in need closing first, such as the worrying corporate bonds performance, manifest in the HYG:SHY ratio, or the tech searching for the bottom (it‘s $NYFANG precisely). Quoting from yesterday‘s extensive analysis spanning beyond stocks, metals and the Fed:(…) Stocks have had a great run over the past 4 months, getting a bit ahead of themselves in some aspects such as valuations. Then, grappling with the rising long-term rates did strike.So did inflation fears, especially when looking at commodities. Inflation expectations are rising, but not galloping yet. What to make of the rising rates then? They‘re up for all the good reasons – the economy is growing strongly after the Q4 corona restrictions (I actually expect not the conservative 5% Q1 GDP growth, but over 8% at least) while inflation expectations are lagging behind. In other words, the reflation (of economic growth) is working and hasn‘t turned into inflation (rising or roughly stable inflation expectations while the economy‘s growth is slowing down). We‘re more than a few quarters from that – I fully expect really biting inflation (supported by overheating in the job market) to be an 2022-3 affair. As regards S&P 500 sectors, would you really expect financials and energy do as greatly as they do if the prospects were darkening?Stocks are well positioned to keep absorbing the rising nominal rates. What has been the issue, was the extraordinarily steep pace of such move, leaving long-term Treasuries trading historically very extended compared to their 50-day moving averages. While they can snap back over the next 1-2 weeks, the 10y Treasury bond yield again breaking 1.50% is a testament to the Fed not willing to do anything at the moment. Little does the central bank care about commodities moves, when it didn‘t consider any market moves thus far as unruly.Gold market offered proof of being finally ready for a rebound, and it‘s visible in the closing prices of the yellow metal and its miners. Being more than a one day occurence, supported by yesterday presented big picture signals, the market confirmed my yesterday‘s suggestion of an upcoming gold. It appears we‘ll get more than a few days to assess the legs this rally is made of, facilitating nimble charting of the waters ahead my usual way:(…) Just as I was calling out gold as overheated in Aug 2020 and prone to a real soft patch, some signs of internal strength in the precious metals sector were present this Feb already. And now as we have been testing for quite a few days the first support in my game plan, we‘re getting once again close to a bullish formation that I called precisely to a day, and had been banging the bearish gold drum for the following two days, anticipating the downside that followed. Flexibility and broad horizons result in accentuated, numerous other portfolio calls – such as long Bitcoin at $32,275 or long oil at $58 practically since the great return with my very own site. We‘re now on the doorstep of visible, positive price outperformance in the gold miners (GDX ETF) as gold prices didn‘t break the higher bullish trend by declining through both the Mar 4 presented supports of my game plan. As I wrote yesterday, if prices move higher from here, they have simply bounced off support, especially given the accompanying signs presented, not the least of which is the dollar getting back under pressure. Make no mistake, the greenback isn‘t in a bull market – it‘s merely consolidation before plunging to new 2021 lows. I have not been presenting any USDX declining resistance lines and breakout arguments, because prices can be both above such a line, and lower than at the moment of „breakout“ at the same time – ultimately, rising and declining supports and resistances are a play on the speed of the move, where pure inertia / deceleration / reprieve doesn‘t break the prior, higher trend. And as I called in summer 2020 the dollar to roll over and keep plunging, that‘s still what‘s unfolding.How does it tie in to commodities and stocks? We‘re not at extreme moves in either, and I see copper, iron, oil, agrifoods as benefiting from the reflationary efforts greatly. Similarly and in spite of the $NYFANG travails, it would be ill-advised to search for stock market tops now (have you seen how well the Dow Industrials is doing?) – no, we‘re not approaching a top that I would need to call the way I did in the early Sep buying climax. This is still the time to be running with the herd, and not against it – you can ignore the noise to the contrary for both the S&P 500 and commodities have a good year ahead. As for precious metals, we might have seen the bottom already – and in any case by the current shape of things, I don‘t see it occuring quarters ahead and hundreds buck lower.Bringing up the constant reevaluation of position‘s rationale, market reactions and narratives:(…) It‘s the markets‘ discounting mechanism of the future that counts – just as gold cleared the deflationary corona crash in psring 2020, just as it disregarded the tough Fed tone of 2H 2018, just as it sprang vigorously higher in early 2016 stunning bears in all three cases with sharp losses over many months, or just as stocks stopped declining well before economic news got better in April 2020 or March 2009. Make no mistake, the markets consider transitioning to a higher inflation environment already now (the Fed timidly says that reopening will spike it, well, temporarily they say), when inflation expectations are still relatively low, yet peeking higher based on the Fed‘s own data. Gold is in a secular bull market that started in 2018 (if not in late 2015), and what we‘re seeing since the Aug 2020 top, is the soft patch I called. The name of the game now, is where the downside stops – and it‘s one of the scenarios that it has just happened, especially if gold convincingly closed back above $1,720 without undue delay.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookWe have seen two intraday reversals to the downside yesterday, yet I think the effects would prove a temporary obstacle to the bulls only. Such candlestick patterns usually slow down the advance, but don‘t end it – and that‘s consistent with my yesterday‘s words of most of the downside being already in. Once the 3,900 zone is confidently passed, the bears would have missed the chance to reach below Thursday‘s lows.Credit MarketsHigh yield corporate bonds (HYG ETF) still ilustrate ongoing fragility for they have plunged below their Feb lows. This correction doesn‘t appear to be as totally over just yet, also given the sectoral picture that I am showing you next.Put/Call Ratio and VolatilityOption players clearly aren‘t concerned by yesterday‘s S&P 500 price action, and the VIX is painting a similarly neutral picture – just as the sentiment overall. Very good, we‘re primed to go higher next, from a starting position far away from the extreme greed levels.Technology and ValueThe sectoral divergence continues, and tech is still the weakest link in the whole S&P 500 rebound. The big $NYFANG names, the Teslas of this world, are the biggest drag, and not until these carve out a sustainable bottom (this needn‘t happen at the 200-day moving average really), I can declare this correction as getting close to over. It‘s the cyclicals, it‘s value stocks that is pulling the 500-strong index ahead, with financials (XLF ETF), industrials (XLI ETF) and energy (XLE ETF) leading the charge.Treasuries and DollarNominal, long-term Treasury rates have at least slowed their quickening Feb pace, even in the face of no action plan on the table by the Fed – the dollar moved higher on the realization next, and it‘s my view that once new Fed intervention is raised, it would have tremendous implications for the dollar, and last but not least – the precious metals.Gold and SilverFinally, this is the much awaited sign, enabling me to sound some bullish tone in gold again – the miners are outperforming the yellow metal with more than a daily credibility, which I view as key given the lackluster gold price action before yesterday (absence of intraday rebounds coupled with more downside attempts). It would turn stronger once the gold juniors start outperforming the seniors, which is not the case yet.Coupled with the 4-chart big picture view from yesterday, it‘s my view that the gold market is laying the groundwork for its turning:(…) Real rates are negative, nominal rates rose fast, and inflation expectations have been trending higher painfully slowly, not reflecting the jump in commodities or the key inflation precursor (food price inflation) just yet – these are the factors pressuring gold as the Fed‘s brinkmanship on inflation goes on. Once the Fed moves to bring long-term rates under control through intervention – hello yield curve control or at least twist – then real rates would would be pressured to drop, which would be a lifeline for gold – the real questions now are how far gold is willing to drop before that, and when that Fed move would happen. Needless to add as a side note regarding the still very good economic growth (the expansion is still young), stagflation is what gold would really love.Silver is carving out a bottom while both copper and platinum are turning higher already – these are That‘s the essence of one of my many profitable plays presented thus far – long silver short gold spread – clearly spelled out as more promising than waiting for gold upswing to arrive while the yellow metals‘ bullish signs have been appearing through Feb only to disappear, reappear, and so on.SummaryStocks haven‘t seen a real reversal yesterday, but more backing and filling till the tech finds bottom, appears due. The medium-term factors favor the bulls, but this correction isn‘t over yet, definitely not in time.Now, gold can show some strength – and silver naturally even more. The signs overall favoring a rebound, are appearing with increasing clarity for the short term, and the nearest weeks will show whether we have made a sustainable bottom already, or whether the $1,670 zone will get tested thoroughly. The bulls have the upper hand now.
GBP: ECB's Dovish Stance Keeps BoE Expectations in Check

Stocks Bulls Can Take a Rest – But Gold Ones Can‘t

Monica Kingsley Monica Kingsley 11.03.2021 15:40
The daily banging on the 3,900 threshold shows in yesterday‘s upper knot, and this milestone has very good chances of being conquered today. More important than the exact timing though, are the internals marking the setup – we‘ve indeed progressed very far into this correction. While not historically among the longest ones, it‘s still getting long in the tooth – just as I was writing throughout the week.And it is getting stale, even if I look at the star non-cofirnation, the high yield corporate bonds. Relatively modest daily upswing, outshined by investment grade corporate bonds. Yes, the credit markets are calming down, and the tiny daily long-term Treasuries upswing doesn‘t reflect that fully just yet. Besides giving breathing room to defensives such as utilities and consumer staples, it‘s also very conducive to the precious metals sector.Copper, oil or agrifoods aren‘t flashing warning signs either – this is a healthy consolidation of steep prior gains as the dollar is getting again under pressure on retreating yields. Just as stocks are undergoing the larger rotation in favor of high beta value plays (financials and manufacturing ones are doing great, airlines jumped), the leaders out of the corona deflationary crash are leading no longer (technology). The picture of the unfolding reflationary recovery is a healthy one as rates are rising on account of improving economic environment, and inflation doesn‘t really bite yet.Ideal environment for the stock market to do well (hello my profitable open position), and for commodities to do really well. While the Fed is prepping the markets for (temporary, they say) higher inflation readings, gold didn‘t react too bullishly to yesterday‘s mildly positive CPI data – just wait for PPI data which would reflect the surging commodity prices more adequately. At the moment, evaluating the strength and internals of precious metals rebound, is the way to go as we might very well have seen the gold bottom, with the timid $1,670 zone test being all the bears could muster. Time and my dutiful reporting will tell.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 Outlook and Its InternalsVolume isn‘t sharply contracting, and coupled with the price action, the rebound above 3,900 has good chance of succeeding. The path most ahead to entertain your imagination as well, looks as a little congested series of daily candles followed by a longer white one. We‘re in a stock bull market after all, and still not in danger of a significant (10%+) correction as I have been writing throughout 2021.Market breadth indicators have turned the corner really, underscoring accumulation within a returning bull market advance – just as the bullish percent index shows. A brief sideways to higher consolidation of this week‘s advance would only help to solidify it before the next run higher.Credit MarketsHigh yield corporate bonds to short-dated Treasuries (HYG:SHY) ratio‘s degree of non-confirmation has decreased, at least if you take direction into view. Finally, high yield corporate bonds are turning higher, and once they catch breath even more, the all time highs already in sight would be conquered as smoothly as the 3,900 zone I delineated earlier.Gold Sector ExaminedVery mild upswing in both the gold miners and gold – along the lines of a daily consolidation with bullish undertones. This early in the precious metals upswing, miners are in the pool position, and their relative and gradually increasing strength has been visible since the early Mar days. So far so good here.Silver, Platinum and the RestSilver isn‘t yet outshining the rest of the crowd, and that‘s good, for it often tends to do so in the later stages of the precious metals sector advance. Within the coming precious metals advance, I continue to view silver outperformance as expected. Part monetary metal, part commodity, it‘s uniquely position to benefit. Its yesterday‘s setback is nothing to be concerned about as the gold, gold miners and platinum rebound keeps doing largely well.Comparing the gold miners to gold ($HUI:$GOLD) ratio to the silver miners to silver (SIL:$SILVER) ratio is returning a bullish snapshot of the current advance too. The beaten down gold sector is leading the charge, and the silver one will play catch-up in time.SummaryHaving reached the 3,900 zone, the S&P 500 is likely to consolidate the gains next. Due to the improving key markets (corporate bonds and tech), I am not looking for any this week‘s potential setback to turn the tide in this aging correction really.The gold upswing is proceeding, helped by the weakening dollar and ever so slightly retreating Treasury yields. After clearing the volume profile defined support at $1,720 and stretching a little below, the bulls next objective is the roughly $1,775 figure marking the Feb lows. Should that one be conquered, the odds of having seen gold bottom this Monday, would have dramatically increased.
US Industry Shows Strength as Inflation Expectations Decline

Dangerous Game of Chicken

Monica Kingsley Monica Kingsley 23.03.2021 15:32
Monday‘s higher stock prices don‘t mean that the sky is the limit now – there were quite a few signs of weakness in related markets as well. The put/call ratio moved lower agains, and so did VIX. But it‘s the market internals that are the giveaway sign – technology has been the predictable upswing driver, reflecting my yesterday‘s thoughts on the rising yields pressure:(…) One daily move doesn‘t make a trend change likely though, especially since the Mar pace of TLT decline is on par with Feb‘s and higher than in Jan. While Treasuries paused in early Mar, they‘re now once again as extended vs. their 50-day moving average as before.And that poses a challenge for interest rate sensitive stocks and to some degree also for tech - while I expect value to continue to lead over growth, technology would recover some of the lost ground on rates stabilization. And it‘s true that the $UST10Y move has been a very sharp one, more than tripling from the Aug 2020 lows.We got that reprieve yesterday, and tech jumped on board enthusiastically, while other usual beneficiaries didn‘t – utilities didn‘t move, but at least consumer staples swung higher. Coupled with the value stocks mostly treading water yesterday, it makes for a weak daily market breadth. The key events of today and tomorrow are the Congress testimonies – while Powell is set to downplay inflation, inflation expectations and still overall elevated / rising long-dated Treasury yields, it‘s my view that the market is again squaring the bets, best seen in the commodities lately (think Thursday and today) – but I look for the Fed to project the same messaging it did on Wednesday, and perhaps double down on it.I don‘t view the market as in danger of a deflationary collapse, not when the stimulus avalanche is hitting and the Fed is reluctant to change course. I am not looking for them to telegraphs such a turn today or in the weeks to come, and that would mean recovery in the commodity prices.Gold is an island of relative, temporary peace, but the miners are concerningly weakening – both gold and silver ones. Darkening clouds here regardless of the support the copper to 10-year Treasury yields can offer. Still, the yellow metal has decoupled from rising nominal yields to a remarkable degree lately.Let‘s quote yesterday‘s observations:(…) As gold is arguably the first asset to move in advance of a key policy move, it might be sensing the Fed being forced (i.e. the markets betting against the Fed) to moderate its accomodative policy. Twist, taper – there are many ways short of raising the Fed funds rate that would help put pressure off the sliding long-dated Treasuries, not that these wouldn‘t be susceptible to move higher from oversold levels. And just like the yellow metal frontrunned the Fed before the repo crisis of autumn 2019, we might be seeing the same dynamic today as well.For the cynical and clairvoyant ones, we might sit here in 3-6 months over my notes on „the decoupling that wasn‘t“ - all because rates might snap back from the current almost 1.8% on the 10-year bond.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookBoth the volume and upper knot are short-term suspect on yesterday‘s S&P 500 upswing – I wouldn‘t be surprised by continued consolidation unless the testimonies today and tomorrow, bring a game changer.Credit MarketsHigh yield corporate bonds (HYG ETF), and the volume comparison to preceding day looks here better than in stocks. Still, it can‘t be said the move either in HYG or in investment grade corporate bonds (LQD) was a bullish rush. These two markets merely joined in the long-dated Treasuries recovery, not signalling return of animal spirits.Technology, Financials and UtilitiesSuch a sectoral view of rising tech (XLK ETF), for a few sessions weakening financials (XLF ETF) and unconvinced utilities (XLU ETF) isn‘t a bullish constellation to drive the 500-strong index reliably ahead at breakneck speed really.Gold in the SpotlightSimilarly to Mar 12, the precious metals upswing is being challenged – miners (GDX ETF) are underperforming. Today‘s session will tell whether we‘re witnessing consolidation, or a renewed rollover to the downside, the chances of which have risen yesterday.The weekly view remains positive – the pace of gold‘s decline became less sensitive to nominal yields move, turning higher before these did, and currently not making much headway. Still, that‘s arguably the clearest sign of the turning tide in the gold market.Silver, Silver Miners and CopperSilver is getting under pressure on rising volume, and its miners are declining too, highlighting increasing risks to the white metal. Disregarding today‘s premarket action, that alone makes it worthwhile to dial back (take profits off the table) in the long silver short gold spread I introduced you to on Feb 12. It‘s that the degree of momentary commodities underperformance looks like taking a meaningful toll on the white metal (and that concerns oil as well, which would turn short-term bearish with a breakdown below $57 to $57.50 on a closing basis and on high volume without a prominent lower knot.SummaryS&P 500 upswing isn‘t as strong as it might seem, and today‘s deceptively small downswing has the potential to turn ugly on Fed missteps. Seeing these happen, I don‘t view as a leading scenario for today or tomorrow, however.Gold and for that matter silver bulls too, have to prove shortly that the upswing isn‘t taking more than a pause – that is, that it isn‘t rolling over. The signals from the commodities space aren‘t encouraging, and platinum trading isn‘t helping to clarify the outlook for today‘s session either.
Why It‘s Reasonable to Be Bullish Stocks and Gold

Why It‘s Reasonable to Be Bullish Stocks and Gold

Monica Kingsley Monica Kingsley 26.03.2021 15:02
Another day, another reversal – and a positive one for stocks. Universal sectoral weakness gave way to a unison rebound amid constructive outside markets. After weeks of on and off fits over rising Treasury yields, S&P 500 ran into headwinds on their retreat, and recaptured its luster yesterday as long-dated Treasuries (TLT ETF) rolled over to the downside. I guess nothing boosts confidence as much a troubled 7-year Treasury auction.While it‘s far from full steam ahead, it‘s a welcome sight that the reflation trade dynamic has returned, and that technology isn‘t standing in the way. I think we‘re on the doorstep of another upswing establishing itself, which would be apparent latest Monday. Credit markets support such a conclusion, and so does the premarket turn higher in commodities – yes, I am referring also to yesterday‘s renewed uptick in inflation expectation.Neither running out of control, nor declaring the inflation scare (as some might term it but not me, for I view the markets as transitioning to a higher inflation environment) as over, inflation isn‘t yet strong enough to break the bull run, where both stocks and commodities benefit. It isn‘t yet forcing the Fed‘s hand enough, but look for it to change – we got a slight preview in the recent emergency support withdrawal and taper entertainment talking points, however distant from today‘s situation.Now, look for the fresh money avalanche, activist fiscal and moterary policy to hit the markets as a tidal wave. Modern monetary theorists‘ dream come true. Unlike during the Great Recession, the newly minted money isn‘t going to go towards repairing banks‘ balance sheets – it‘s going into the financial markets, lifting up asset prices, and over to the real economy. So far, it‘s only PPI that‘s showing signs of inflation in the pipeline – soon to be manifest according to the CPI methodology as well.Any deflation scare in such an environment stands low prospects of success. That concerns precious metals – neither rising, nor falling, regardless of the miners‘ message. After the upswing off the Mar 08 lows faltered, the bears had quite a few chances to ambush this week, yet made no progress. And the longer such inaction draws on, the more it is indicative of the opposite outcome.Yes, that‘s true regardless of the dollar continuing down for almost a month since my early Feb call before turning higher. When I was asked recently over Twitter my opionion on the greenback, I replied that its short-term outlook is bullish now – while I think the world reserve currency would get on the defensive and reach new lows this year still, it could take more than a few weeks for it to form a local top. Once AUD/USD turns higher, that could be among its first signs.Regarding gold, yesterday‘s words are true also today:(…) Gold is again a few bucks above its volume profile $1,720 support zone, and miners aren‘t painting a bullish picture. Resilient when faced with the commodities selloff, but weak when it comes to retreating nominal yields. The king of metals looks mixed, but the risks to the downside seem greater than those of catching a solid bid.That doesn‘t mean a steep selloff in a short amount of time just ahead – rather continuation of choppy trading with bursts of selling here and there. What could change my mind? Decoupling from rising TLT yields returning – in the form of gold convincingly rising when yields move down. Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookYesterday‘s reversal was overall credible – more so in its internals than as regards the daily volume. On a positive and contrarian note, the put to call ratio reached higher highs yesterday, leaving ample room to power a swift upswing should it come to that. And it could as quite many investors are positioned for a downswing in stocks.Credit MarketsThe high yield corporate bonds to short-dated Treasuries (HYG:SHY) ratio gave up all of yesterday‘s gains, but isn‘t leaving stocks as extended here. Much depends upon whether squaring the risk-on bets would continue, or not. Both stocks and the ratio appear consolidating here, and not rolling over to the downside.Value and TechnologyValue stocks (VTV ETF) finally showed clear leadership yesterday, the volume didn‘t disappoint, and technology (XLK ETF) recovered from prior downside on top. Closing about unchanged, it‘s key to the S&P 500 upswing continuation with force as opposed to muddling through.Gold in the SpotlightThe troubled miners got a little less problematic yesterday. The GDX ETF recovered from intraday losses while gold didn‘t exactly plunge. Its opening strength was a pleasant sight as more often than not, miners‘ weakness while gold goes nowhere, is a signal for going short the metal. But as this sign didn‘t result in a gold slide, my viewpoint is turning bullish again because we might be seeing fake miners weakness that would be resolved over the coming week with an upswing. Now that the Wall and Main Street expectation for the coming week aren‘t probably as bullish as for the week almost over, an upswing would be easier to pull off (should it come to that).Big picture view remains (positively) mixed – the selling pressure is retreating but gold isn‘t yet reacting to declining yields. Once it clearly does, the waiting for a precious metals upswing would be over.Silver and MinersSilver staged an intraday reversal, which copper couldn‘t pull off. Not that it attempted to, but still the commodities selloff appears a bit overdone, given that nothing has fundamentally changed. Both gold and silver miners stabilized on the day, meaning that the sector is in a wait and see mode, unwilling to turn bearish just yet.SummaryThe odds of an S&P 500 upswing have gone up, and volatility made a powerful retreat below 20 once again. Value stocks have turned upwards, and the stock bulls appear readying another run.Miners closed at least undecided yesterday, but gold and silver miners showing outperformance again is missing. Both metals still remain vulnerable to short-term downside. Once gold strengthens on declining yields, that would be another missing ingredient in the precious metals bull market.
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

What Could Slay the Stock & Gold Bulls

Monica Kingsley Monica Kingsley 29.03.2021 15:31
Put/call ratio didn‘t lie, and the anticipated S&P 500 upswing came on Friday – fireworks till the closing bell. Starting on Thursday, with the rising yields dynamic sending value stocks higher – and this time technology didn‘t stand in the way. What an understatement given the strong Friday sectoral showing, acocmpanied by the defensives swinging higher as well. And that‘s the characterization of the stock market rise – it‘s led by the defensive sectors with value stocks coming in close second now.Still last week, the market confirmed my early Friday‘s take:(…) While it‘s far from full steam ahead, it‘s a welcome sight that the reflation trade dynamic has returned, and that technology isn‘t standing in the way. I think we‘re on the doorstep of another upswing establishing itself, which would be apparent latest Monday. Credit markets support such a conclusion, and so does the premarket turn higher in commodities – yes, I am referring also to yesterday‘s renewed uptick in inflation expectation.Neither running out of control, nor declaring the inflation scare (as some might term it but not me, for I view the markets as transitioning to a higher inflation environment) as over, inflation isn‘t yet strong enough to break the bull run, where both stocks and commodities benefit. It isn‘t yet forcing the Fed‘s hand enough, but look for it to change – we got a slight preview in the recent emergency support withdrawal and taper entertainment talking points, however distant from today‘s situation.Commodities have indeed turned again higher on Friday, as seen in both copper and oil – and so did inflation expectations. While some central banks (hello, Canada) might be ahead in attempting to roll back the emergency support, the Fed isn‘t yet forced by the bond market to act – which I however view as likely to change over the coming months.With 10-year Treasury yields at 1.67%, last week‘s decline didn‘t reach far before turning higher. Remembering stock market woes the first breach of 1.50% caused, stocks have coped well with the subsequent run up – while in the old days of retirees actually being able to live off interest rate income, a level of 4% would bring about trouble for S&P 500, now the level is probably just above 2%. Yes, that‘s how far our financialized economy has progressed – and I look for volatility to rise, and stocks to waver and likely enter a correction at such a bond market juncture. As always, I‘ll be keeping a close eye on the signs, emerging or not, as we approach that yield level.Again quoting my Friday‘s words, what else to expect as the bond markets takes notice:(…) Now, look for the fresh money avalanche, activist fiscal and moterary policy to hit the markets as a tidal wave. Modern monetary theorists‘ dream come true. Unlike during the Great Recession, the newly minted money isn‘t going to go towards repairing banks‘ balance sheets – it‘s going into the financial markets, lifting up asset prices, and over to the real economy. So far, it‘s only PPI that‘s showing signs of inflation in the pipeline – soon to be manifest according to the CPI methodology as well.Any deflation scare in such an environment stands low prospects of success. For deflation to succeed, a stock market crash followed by a depression has to come first. And as inflation is firing on just one cylinder now (asset price inflation not accompanied by labor market pressures), it isn‘t yet strong enough to derail the stock bull run. The true inflation is a 2022-3 story, which is when we would be likely in a full blown financial repression and bond yields capped well above 2% while inflation rate could run at double that figure. Then, the Fed wouldn‘t be engaged in a twist operation, but in yield curve control, which the precious metals would love, for they love low nominal and negative real rates.Gold might be already sensing that upcoming pressure on the Fed to act – remember their run for so many months before the repo crisis of autumn 2019 broke out:(…) After the upswing off the Mar 08 lows faltered, the bears had quite a few chances to ambush this week, yet made no progress. And the longer such inaction draws on, the more it is indicative of the opposite outcome.Not only that gold miners outperformed the yellow metal on Friday, with their position relative to silver, the king of metals is sending a signal that it would be the one to take leadership in the approaching precious metals upswing. And the dollar wouldn‘t be standing in the way – let‘s continue with my Friday‘s thoughts:(…) When I was asked recently over Twitter my opionion on the greenback, I replied that its short-term outlook is bullish now – while I think the world reserve currency would get on the defensive and reach new lows this year still, it could take more than a few weeks for it to form a local top. Once AUD/USD turns higher, that could be among its first signs.Once higher rates challenge the stock market bull, the dollar would do well in whiff of deflationary environment (remember the corona runup of spring 2020), but it would be the devaluation that would break it – and it‘s my view that devaluation would not happen against other fiat currencies, but against gold (and by extension silver). With devaluation (it‘s still far away in the future), a true inflation would arrive and stay, which forms a more drastic scenario to the more orderly one I discussed earlier in today‘s article.Another challenge for the stock market bull comes from taxes, as the current and upcoming infrastructure stimuli (wait, there is the $2T one to move the U.S. to a carbon-neutral future on top) would result in higher tax rates next year, which would further hamper productive capital allocation as people and institutions would seek to negate their effect. Needless to say, gold, miners and real assets would do very well in such an environment.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookStrong S&P 500 upswing on Friday, on a not too shabby volume. The key question is whether the bulls can keep the momentum on Monday, and ideally extend the gains at least a little. Signs are they would be able to achieve that.Credit MarketsHigh yield corporate bonds (HYG ETF) reached the mid-Mar highs, and need to confirm Friday‘s upswing – odds are they would continue higher on Monday as well, because the volume comparison is positive and daily indicators don‘t appear yet ready to turn down.Inflation ExpectationsInflation expectation as measured by Treasury inflation protected securities to long-dated Treasuries (TIP:TLT) ratio, keep making higher highs and higher lows – the market is recalibrating towards a higher inflation environment, but not yet running ahead of the Fed as the 10-year Treasury yield (black line) shows. It‘s so far still orderly.Smallcaps and Emerging MarketsThe Russell 2000 (IWM ETF, upper black line) is underperforming the S&P 500, and so are the emerging markets (EEM ETF) – both signals of the defensive nature of the stock market upswing. The animal spirits aren‘t there to the full extent (don‘t be fooled by the strong VTV showing), but have been making a return since Thursday.Gold, Silver and MinersA new turn is taking shape within the Tuesday-challenged precious metals upswing – the miners appear yet again assuming leadership. The call I made on Thursday, hinting at a change, appears materializing to the bulls‘ benefit.Comparing gold and silver at the moment, results in the conclusion of the yellow metal leading higher after all – and the positive turn in copper (which is also reflected in the copper to 10-year Treasury yield ratio) confirms that.Crude OilBlack gold keeps defending the 50-day moving average, showing the reflation trade in both commodities and stocks isn‘t over yet. The oil index ($XOI) is once again pointing higher, and so is the energy ETF (XLE). While Friday‘s volume was relatively modest, oil has good prospects to keep recovering this week.SummaryThe odds of an S&P 500 upswing were confirmed by the Friday‘s upswing, in line with the put/call ratio indications. Credit markets concur, and while the sectoral constellation isn‘t totally bullish, it can still carry the index to new highs.Miners made an important turn higher relative to gold, and the sector can enter today‘s trading on a stronger footing than was the case on Friday. The green shoots in the precious metals sector appear likely to take a turn for the better this week and next. As always, keeping a close eye on the gold‘s relationship to nominal yields, is essential – be it decoupling from rising ones, or a strong upswing on retreating ones.
Liquidity Boost for Stocks and Gold?

Liquidity Boost for Stocks and Gold?

Monica Kingsley Monica Kingsley 30.03.2021 15:53
Friday‘s great run gave way to yesterday‘s consolidation, and stock bulls appear in need of more before taking out the psychological 4,000 mark. The Archegos crash isn‘t causing contagion fears the way GameStop in late Jan did. The current volatility and put/call ratio simply doesn‘t reflect that.The theme is still one of reflation – while inflation expectations are rising, and so are the inflation data for those who care to examine them closely enough, true inflation isn‘t yet here with us. Markets are merely transitioning to a higher inflation environment already, not buying the Fed‘s transitory explanation. Commodities are basing at the conquered levels before another run higher.Make no mistake though, the current S&P 500 upswing is heavily reliant on the defensive sectors – technology isn‘t standing in the way, utilities and consumer staples are doing great, and so are several areas within the real estate sector such the residential one, or REIT ETFs that can be expected to keep doing well. Couple that with value stocks not really retreating, and you get the current view of S&P 500 advance structurally.Credit markets though are a little lagging behind – thanks to the return of rising yields, working its predictable magic on investment grade corporate bonds as well. Such were my points from yesterday‘s extensive analysis, diving into the big picture across the markets and the economy:(…) With 10-year Treasury yields at 1.67%, last week‘s decline didn‘t reach far before turning higher. Remembering stock market woes the first breach of 1.50% caused, stocks have coped well with the subsequent run up – while in the old days of retirees actually being able to live off interest rate income, a level of 4% would bring about trouble for S&P 500, now the level is probably just above 2%. Yes, that‘s how far our financialized economy has progressed – and I look for volatility to rise, and stocks to waver and likely enter a correction at such a bond market juncture. As always, I‘ll be keeping a close eye on the signs, emerging or not, as we approach that yield level.The bond market isn‘t merely anticipating an economic recovery that has good chances of overheating still this year, it‘s also reacting to:(…) the fresh money avalanche, activist fiscal and moterary policy to hit the markets as a tidal wave. Modern monetary theorists‘ dream come true. Unlike during the Great Recession, the newly minted money isn‘t going to go towards repairing banks‘ balance sheets – it‘s going into the financial markets, lifting up asset prices, and over to the real economy. So far, it‘s only PPI that‘s showing signs of inflation in the pipeline – soon to be manifest according to the CPI methodology as well.Any deflation scare in such an environment stands low prospects of success. Continuing:(…) For deflation to succeed, a stock market crash followed by a depression has to come first. And as inflation is firing on just one cylinder now (asset price inflation not accompanied by labor market pressures), it isn‘t yet strong enough to derail the stock bull run. The true inflation is a 2022-3 story, which is when we would be likely in a full blown financial repression and bond yields capped well above 2% while inflation rate could run at double that figure. Then, the Fed wouldn‘t be engaged in a twist operation, but in yield curve control, which the precious metals would love, for they love low nominal and negative real rates.As I wrote on Twitter, it‘s a question of time when gold starts anticipating the policy turn, snifffing it out just like the Fed having to abandon hawkish positions of late 2018, or the runup to the repo crisis of autumn 2019. We got quite a few decoupling signs, some on prolonged basis, but gold isn‘t yet leading commodities the way it did both before and after the corona deflationary shock. Let‘s not forget about the currencies and arbitrage opportunities there – the yen carry trade is still very much alive, making it a no brainer to borrow in declining currency while parking the proceeds elsewhere – and the one-way trading in $USDJPY in 2021 is a fitting testament thereof. A powerful argument against deflation on our doorstep, by the way.Quite to the (deflationary shock) contrary at the moment – both commodities and precious metals are under pressure in today‘s premarket session. Another undoing of the miners‘ outperformance?Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookDaily consolidation on average volume – no hinting at serious troubles down the road. Buy the dip mentality still rules the day.Credit MarketsHigh yield corporate bonds (HYG ETF) chart looks a bit tired to the upside – the bulls had to defend against a serious downswing yesterday first. Contracting volume precedes rising volume, and the best the bulls can hope for, is sideways trading coupled with downswing rejection followed by another move higher.Technology and ValueTechnology (XLK ETF) repelled an intraday downswing while value stocks (VTV ETF) merely couldn‘t keep up all the gained ground during the day. So far so good in the run up or base building on the path to new all time highs.Gold in the SpotlightThe daily resilience in the miners would come under heavy pressure today, and GDX can be expected to close lower. Would they still show outperformance vs. the yellow metal? I wouldn‘t bet the farm on it – it appears the Mar 04 game plan will be tested soon instead.Miners to gold (black line) still keeps painting a bullish picture on the weekly chart, as it refuses to follow the yellow metal to the downside. Where would it be should the $1,670 support zone get tested again – would that level be sufficient enough to power a rebound?Silver, Miners and CopperSilver clearly illustrates the sectoral weakness – the selling waves get harder to repel, and upswing attempts are happening on lower volume. While copper goes sideways, the white metal is breaking lower, and its miners aren‘t showing any strength at all.SummaryS&P 500 keeps consolidating Friday‘s gains without signs of upcoming, groundbreaking weakness. With volatility at around 20, the path of least resistance remains overall higher – until tech says no more. Again, no hint at that today still.Gold is again approaching the $1,670 support, and miners‘ performance will send as valuable clues just as before the Mar 08 bottom. Given today‘s downswing, that will be an even more important indication, bearing medium-term consequences as well.
GBP: ECB's Dovish Stance Keeps BoE Expectations in Check

Stocks, Gold and the Troubling Yields

Monica Kingsley Monica Kingsley 31.03.2021 16:03
Yesterday‘s consolidation in stocks was a bullish one, and the S&P 500 upswing has good prospects of proceeding unimpeded. Strange but true if you consider that also a plan to considerably raise taxes would be announced today, so as to help pay for the stimulus wave. The bond markets are calmly overlooking that so far, enabling the run to the 4,000 mark.And it still appears a question of time. Inflation isn‘t yet biting (forget about the German CPI data for now), fresh money keeps hitting the markets, and Archegos is about to become a distant memory. Stocks seem immune to the rising yields spell at the moment, meaning that value trades can remain at elevated levels while technology is stuck in no man‘s land and defensives are consolidating recent sharp gains (consolidating until the rising yields come back with vengeance).And there is little reason given the Fed‘s stance why they shouldn‘t. Much of the marketplace is buying into the transitory inflation story, and inflation expectations aren‘t yet running too hot. As the economic growth is stronger than current or future inflation, we‘re still at a good stage in the inflation cycle – everyone benefits and no one pays.When such reflation starts to give way to decreasing or stagnant growth rates accompanied by rising inflation metrics, the stock market performance stops being as positive as it had been since the Mar 2020 bottom. At such a time, the current transitioning to a higher inflation environment would be at a very different (commodity prices) stage, and so would the bond yields (no longer well below 2% on 10-year Treasuries).Points made in my Monday‘s extensive analysis, ring true also today:(…) With 10-year Treasury yields at 1.67%, last week‘s decline didn‘t reach far before turning higher. Remembering stock market woes the first breach of 1.50% caused, stocks have coped well with the subsequent run up – while in the old days of retirees actually being able to live off interest rate income, a level of 4% would bring about trouble for S&P 500, now the level is probably just above 2%. Yes, that‘s how far our financialized economy has progressed – and I look for volatility to rise, and stocks to waver and likely enter a correction at such a bond market juncture. As always, I‘ll be keeping a close eye on the signs, emerging or not, as we approach that yield level.Gold isn‘t yet sensing the coming Fed intervention – similar to Europe or Australia, the central bank would have to take aim at the long end of the curve in earnest – yield curve control I raised mid-Feb already, as twist wouldn‘t be enough at that stage. Look for a full fledged financial repression and deflation standing no chance then – boon to all real assets, a time when gold would truly shine.For now though, Fed‘s credibility isn‘t being questioned and challenged in the markets. Bond yields are rising in an orderly fashion – if you can consider the 2021 run as orderly. I can‘t but I am not calling the shots at the Fed either so as to highlight the record 2021 TLT price extension below its longer-term moving averages. The unchallenged USD/JPY exchange rate shows that the yesterday mentioned yen carry trade is running hot:(…) making it a no brainer to borrow in declining currency while parking the proceeds elsewhere – powerful argument against deflation on our doorstep, by the way.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookStocks consolidated in a bullish fashion, and the stage is set for an upswing next. I see it as merely a question of time, and the early reaction to non-farm employment change, is neutral – look for the key Friday figure though.Credit MarketsHigh yield corporate bonds (HYG ETF) underperformed yesterday as both the investment grade corporate bonds and long-dated Treasuries rose. The HYG daily volume shows that this upswing isn‘t a done deal yet.Russell 2000 and Emerging MarketsWhile the 500-strong index is basing, both smallcaps (IWM ETF) and emerging markets (EEM ETF) attempt a turn higher. See how elevated $SPX remained vs. the two – it‘s clear the current upswing is a defensive one.Gold in the SpotlightGold miners weren‘t able to repeat their Monday‘s feat exactly, but aren‘t plunging faster than gold either. Sending inconclusive signals, is the takeaway – unless you step back and look at exactly the same weekly chart, which reveals miners comfortably outperforming the yellow metal. Be still ready for a coming test of my Mar 04 game plan, though.Gold with the overlaid copper to 10-year Treasury yield ratio (black line) shows that in the current (consolidation) phase of the commodities bull run, gold has lost its luster with yesterday‘s upswing. Again, how fast and from what level would it regain its footing, is the key question - $1,670 or not.Silver, Platinum and CopperSilver selling pressure unfortunately still dominates as the volume shows. White metal is in the straits much more than copper or platinum, which are merely going sideways (just as oil is).SummaryS&P 500 keeps consolidating Friday‘s gains without signs of upcoming, groundbreaking weakness. With volatility moving down again, the path of least resistance is still up – and tech isn‘t saying no.Gold is again in the proximity of the $1,670 support, and miners‘ performance will send as valuable clues just as before the Mar 08 bottom. Nothing convincing to draw conclusions either way at the moment.
Boosting Stimulus: A Look at Recent Developments and Market Impact

The Tax Plan to Slay the Stock Bull?

Monica Kingsley Monica Kingsley 23.04.2021 16:11
A day like almost any other – S&P 500 about to take again on the ATHs until the capital gains tax hike proposal came, shaving off 50 points in stocks within an hour. The 4,415 support held though, both before and after the closing bell. Are we ready to shake off the cold water and resume running higher again?Depends on where you look – stocks have quite some recovering still to do, and it‘s the precious metals and commodities that are performing best today. Both as an index and sectoral collection, the S&P 500 sustained broad damage, concentrated in the tech heavyweights. The volatility spike has been partially repelled but option traders seem expecting another shoe to drop, which attests to us better dampening expectations of a fast return above 4,170.Look still though how little has changed, as if the tax raising plans haven‘t been around since the infrastructure bill or implicitly even before. It‘s still April, and markets are pricing in not only this select reality, but broader tax increases coming. Yes, they have woken up, and the reflation paradigm is getting an unwelcome companion. This hit won‘t bring down the bull, but will slow it down – and the implications for broader economy will only hasten the pronounced advent of the commodities supercycle (well underway since the corona deflationary crash last year). As the Chinese say, may you live in interesting times, and I am glad to have caught the April 2020 turnaround reasonably well. I‘m bringing this up just to say that this isn‘t the time to turn bearish on stocks yet – not in the least. The initial panic is over, real economy keeps recovering (amazing how fast were the reasonably good unemployment claims of yesterday forgotten, right?), inflation expectations aren‘t running progressively hotter, and Treasury yields continue retreating.Another argument for why this is a storm in a tea cup (I‘m talking merely stock market perspective now, not the very real consequences about to hit the economy like a trainwreck in slow motion), is the Russell 2000 and emerging markets performance yesterday – reasonably bullish given the setback most keenly felt in the S&P 500 and Bitcoin. Unless the latter recaptures $52,500 promptly and convincingly, it‘s going to remain in hot water as yet another tax cash cow on the horizon, which aligns nicely with the Yellen weekend cryptos announcement. A bit over 24hrs ago in response to a question from my great West Coast subscriber, I highlighted Bitcoin vulnerability as it has been unable to revert back above the 50-day moving average, drawing the $52,500 line in the „bulls still have a chance“ sand. Now, I would have to be convinced by the upswing‘s strength recapturing said level, which I‘m not expecting even though the asset trades quite extended relative to the lower border of its daily chart Bollinger Bands.Thus far, precious metals, copper, oil and other commodities are holding up best – little surprising given the risk-off nature of yesterday‘s move and potentially misplaced hopes that the 28% collectibles tax on the metals would survive. These things tend to creep.Gold or miners held up reasonably well yesterday, and I look for them to be fastest in recapturing the lost ground, followed by silver. The precious metals upleg has started, we‘re in a real assets super bull market, and this little hiccup won‘t derail it. The sad implication would actually drive it as capital formation would be hampered, unproductive behaviors encouraged, and potential output lowered. Pretty serious consequences – add to which inflation as that‘s what the Fed ultimately wants, and the recipe for more people falling into higher tax brackets through illusory gains, is set. Then, as inflation starts firing on all cylinders – a 2022-3 story when the job market starts overheating – the pain would be felt more keenly. And this is supposed to be the environment where the dollar would be in a bull run, now and ever? Wake up:(…) we‘re in the decade of precious metals and commodities super bull runs – and these are well underway. The debasement of fiat currencies against real assets is set to continue, and will accelerate given the unprecedented fiscal and monetary support already and ahead – sorry dollar bulls, the greenback declines are resuming – just look at the yen and yields nodding to the metals upswing.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookThe intraday reversal is thus far lacking volume and follow through. That means it would be premature to jump to conclusions as to the shallow correction extending deeper.Credit MarketsThe high yield corporate bonds to short-term Treasuries (HYG:SHY) ratio isn‘t panicking either. So far, the move has been hesitant and orderly.Technology and ValueValue keeps being most resilient, and the tech sector stands in the middle, dragged lower by the heavyweights. I would like these to stop leading to the downside so as to declare the correction as approaching its end in terms of prices.Inflation ExpectationsThe inflation expectations are in a momentary limbo, but seem as likely to rise again shortly. That would be one more piece of the puzzle bringing real rates down, making the yellow metal‘s fundamental outlook more positive (as if it hadn‘t been already).Gold and SilverThe decline across the gold sector has been orderly yesterday, and the retreating yields (helped by the stock market turmoil) are putting a nice floor below the king of metals. I look for miners to keep leading higher shortly again.The key message is the one by the copper to 10-year Treasuries yield – a little hesitation yesterday, hinting at a little more time being necessary to overcome the $1,800 barrier next.SummaryThe S&P 500 is at a crossroads determining how low would the shock-facilitated consolidation stretch. Thus far, signs are modestly leaning in favor of the worst being in, and a gradual repair coming next.Gold and miners took a daily dive in sympathy with stocks yesterday, but I look for the precious metals sector to recover fastest, and overcome the next resistance convincingly.
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

No Upsetting the Apple Cart in Stocks or Gold

Monica Kingsley Monica Kingsley 26.04.2021 15:35
The tax hike proposal shock is over, and S&P 500 took again on the ATHs on Friday. Buying pressure throughout the day lasted almost till the closing bell, and is likely to continue this week as well. And why shouldn‘t it – has anything changed? The artificial selling any capital gains tax hike would generate, is likely to come before year end – not now:(…) Look still though how little has changed, as if the tax raising plans haven‘t been around since the infrastructure bill or implicitly even before. It‘s still April, and markets are pricing in not only this select reality, but broader tax increases coming. Yes, they have woken up, and the reflation paradigm is getting an unwelcome companion. This hit won‘t bring down the bull, but will slow it down – and the implications for broader economy will only hasten the pronounced advent of the commodities supercycle (well underway since the corona deflationary crash last year). The move towards risk-on was clearly there, overpowering the USD bulls yet again as the dollar bear market has reasserted itself. It‘s not just about EUR/USD on the way to its late Feb highs, but about the USD/JPY too – the yen carry trade is facing headwinds these days, acting as a supportive factor for gold prices. While these went through a daily correction, commodities pretty much didn‘t – lumber is powering to new highs, agrifoods didn‘t have a down day in April, copper and oil scored respectable gains. The market is in a higher inflation environment already, and it will become increasingly apparent that commodity-led inflation is here to stay.Back to stocks and bonds, the S&P 500 took well to a daily rise in Treasury yields – and that‘s the key factor overall. The turnaround was most clearly seen in tech heavyweights but defensive sectors such as consumer staples or utilities didn‘t do well (they‘re interest rate sensitive, after all), and Dow Jones Industrial Average traded closer to the optimistic side of the spectrum. The second piece of the puzzle came from value stocks and financials, which are working to put an end to their own shallow correction – just as you would expect when rates take a turn higher.So, another volatility spike has been banished, but option traders aren‘t yet satisfied, and keep piling into protective instruments. I view this as a fuel of the upcoming rally continuation, unless the tech‘s earnings batch doesn‘t disappoint as Netflix subscriber base growth did.One more argument in favor of the S&P 500 upswing, comes from the smallcaps – the time of their outperformance, is approaching. Likewise emerging markets are starting to do better, and the dollar effect is part of the explanation.Gold took sensitively to the rise in yields, and retreating dollar didn‘t lift it up really. The yellow metal disregarded proportional increase in inflation expectations, and so did the miners – indicating that a brief soft patch in the precious metals sector can‘t be excluded. This doesn‘t change my Friday‘s thoughts that:(…) The precious metals upleg has started, we‘re in a real assets super bull market, and this little hiccup won‘t derail it. The sad implication would actually drive it as capital formation would be hampered, unproductive behaviors encouraged, and potential output lowered. Pretty serious consequences – add to which inflation as that‘s what the Fed ultimately wants, and the recipe for more people falling into higher tax brackets through illusory gains, is set. Then, as inflation starts firing on all cylinders – a 2022-3 story when the job market starts overheating – the pain would be felt more keenly. Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookIt‘s not an issue that the two latest upswings happened on decreasing volume as I view the preceding modest volume spike as a sign of weak selling turning into accumulation. There is plenty of doubt to drive further S&P 500 gains.Credit MarketsBoth high yield corporate bonds to short-term Treasuries (HYG ETF) and investment grade ones (LQD ETF) have risen on Friday, and the divergence to long-dated Treasuries is another key factor driving the risk-on return conclusion.Technology and FinancialsThe $NYFANG strength was the key deciding factor in the S&P 500 upswing, and value stocks didn‘t stand in the way much either. Financials joined in the upswing by tech are a sign of the shallow correction drawing to its end.Gold & Miners WeeklyCompare this chart to the one that I published on Thursday – the red candle smacking of reversal is actually just an initial rejection in my view. It‘ll take a while to return back above the 50-day moving average, but that‘s a question of time merely. Gold miners are still outperforming, and the upside momentum in the gold sector merely paused. We may see a brief pullback as the bears try their luck, but it will be only a temporary setback – there is no telling weakness in any of the markets I am looking at that would indicate otherwise.Gold, Silver and Key RatioThe copper to 10-year Treasury yield ratio shows that the markets aren‘t buying the transitory inflation story – the rush into commodities goes on, and justifiably so. Just look how much silver has been resilient, and the white metal is uniquely positioned to benefit both from the economic recovery, forced shift into green economy, and building monetary pressures.Seniors vs. JuniorsThroughout the 10+month long correction, juniors had been the more resilient ones, but it was the seniors that I called to lead gold out of the bottom. And they did, meaning that juniors had underperformed over the coming month clearly. Once animal spirits return even more to the precious metals sector, their outperformance is likely to return as the market appetite for ounces in the ground grows. We aren‘t there yet, but the new upleg is well underway.SummaryThe S&P 500 turned around convincingly, and new highs are a question of a rather short amount of time – be prepared though for headline risks should we get an (unlikely) earnings disappointment.Gold and miners are in consolidation mode as they failed to take advantage of plunging dollar and rising commodity prices, but the precious metals sector is likely to play a catch up relative to commodities as its sluggish post Aug performance would get inevitably forgotten.
US Industry Shows Strength as Inflation Expectations Decline

Gold Sings a “Hot N Cold” Song

Finance Press Release Finance Press Release 30.04.2021 18:18
Although spring has begun, we can still find ourselves in winter, or even summer. Gold may benefit from such a seasonal aberration.Oh, how wonderful, spring has finally started, hasn’t it? We have April, after all. Well, in calendar terms, it’s indeed spring, but economically it can be summer already or still the beginning of winter. How so? I refer here to Kondratiev cycles (also known as Kondratieff cycles or Kondratyev cycles).As a reminder, Nikolai Kondratiev was a Russian economist who noted in the 1920s that capitalist economies experience long super-cycles, lasting 40-60 years (yup, it’s not a very precise concept). His idea was that capitalism was not on an inevitable path to destruction, but that it was rather sustainable and cyclical in nature. Stalin didn’t like this conclusion and ordered a prison sentence and, later, an execution for Kondratiev. And you thought that being an economist is a boring and safe profession!The Kondratiev cycles, also called waves, are composed of a few phases, similar to the seasons of the year. In 2018, I defined them as follows:Spring : economic upswing, technological innovation which drives productivity, low inflation , bull market in stocks, low level of confidence (winter’s legacy).Summer : economic slowdowns combined with high inflation and bear market in stocks, this phase often ends in conflicts.Autumn : the plateau phase characterized by speculative fever, economic growth fueled by debt, disinflation and high level of confidence.Winter : a phase when the excess capacity is reduced by deflation and economic depression, debt is repaid or repudiated. There is a stock market crash and high unemployment rate , social conflicts arise.However, other economists define these phases in a slightly different manner. For them, spring is an inflationary growth phase, summer is a period of stagflation (inflationary recession ), autumn a deflationary growth period, while winter is a time of deflationary depression.So, which phase are we in? That’s a very good question. After all, the whole concept of Kondratiev cycles is somewhat vague, so it’s not easy to be precise. But some experts believe that we are likely in the very early part of the winter after a very long autumn . Indeed, there are some important arguments supporting such a view.First, we have been experiencing a long period of disinflation (and later just low inflation), a decline in the bond yields , and economic growth fueled by debt. I refer here to the time from the end of the Great Recession until the Covid-19 pandemic , but one can argue that autumn lasted since the early 1980s, when both interest rates and inflation peaked, as the chart below shows.Second, winter is believed to be a depression phase with stock and debt markets collapsing, but with commodity prices increasing. And this is exactly what we are observing right now. I refer here to the rally in several commodity prices. This is at least partially caused by the disruption in the supply chains amid the epidemic in the U.S. and worldwide pandemic, but if the bull market in commodities sets in for good, this could be a negative harbinger for the stock market. After all, more expensive raw materials eat into corporate profits.Third, winter is thought of as a period that tears the social fabric of society and deepens the inequalities. The data is limited, but the coronavirus crisis has been one of the most unequal in modern U.S. history, as its costs have been borne disproportionately by the poorer parts of society that have been unable to work online.So, “winter is coming” may be a belated warning, as winter could have already begun. Later during this period, we could see bankruptcies of firms and financial institutions, and even some governments, as a delayed consequences of the coronavirus crisis. This is bad news for the whole of Westeros and its economy, but good for gold. Investors who don’t like the cold should grab a golden blanket to hedge them from the winter.However, in 2018, I expressed the opinion that summer may come in the 2020s, as the debts are rising and the inflationary pressure is growing:As the global economy recovered and now expands, inflation is low, while stocks still rally, we enjoy spring. This is why gold has remained in a broad sideways trend in the last few years. However, as we are on the edge of the next technological revolution, confidence is finally rising and there are worries about higher prices, and we could enter the summer phase in the not-so-distant future.And I still believe that my opinion makes sense. Indeed, after the global financial crisis of 2007-9, we have seen several spring features: low inflation, a bull market in stocks, and a low level of confidence (after all, there was “the most hated rally in the stock market”), which was a legacy of winter, i.e., the collapse of Lehman Brothers and the following economic crisis .And summer is generally a period of stagflation, which is exactly what I’m expecting. You see, after a strong economic recovery in the nearest quarters, the U.S. economy is likely to return to a mediocre pace of economic growth, but with much higher inflation. After all, there is strong monetary and fiscal stimulation ongoing right now, another feature of summer. Meanwhile, winter is generally a deflationary period, so the specter of inflation rather suggests that summer may be coming and investors should hedge themselves against waves of gold.Luckily, gold offers its protection not only against winters, but also against summers . Indeed, gold performs the worst during autumns, when there is disinflation, like in the 1980s and the 1990s, and the best during winters (due to the economic crisis – remember the 2000s?) and the summers (due to high inflation – remember the 1970s?).Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter . Once you sign up, you’ll also get a 7-day no-obligation trial for all of our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!Arkadiusz Sieron, PhD Sunshine Profits: Effective Investment through Diligence & Care.
Asia Morning Bites: Trade Data from Australia, Taiwan Inflation, and US Fed Minutes Highlighted

Taper Smoke and Mirrors

Monica Kingsley Monica Kingsley 03.05.2021 15:03
Once in a while, stocks closed in red – is that a reversal or the most the bears could hope for these days? Thursday‘s hanging man got its follow through, yet the bulls staged a rebound into the close. Perhaps that‘s as good as the selling pressure gets, for I think the path of least resistance is still higher in S&P 500.If you look at the VIX or the put/call ratio, Friday‘s setback is readily apparent, and stocks seem ripe for an upswing now. Fed‘s Kaplan did its job s with the taper talk, yet I think he played the bad cop part – the Fed will really act ostrich in the face of not so transitory inflation, for as long as the Treasuries market doesn‘t throw a tantrum.And the 10-year yield has been quite well behaved lately, closing at 1.65% only on Friday. The April calm seems to be over, and I‘m looking for the instrument to trade at 1.80% at least at the onset of summer. Then, let‘s see how the September price increases telegraphed by Procter & Gamble influence the offtake – will the price leader be followed by its competitors? That‘s one of the key pieces of the inflation stickiness puzzle – and I think others will follow, and P&G sales and profitability won‘t suffer. The company is on par with Coca Cola when it comes to dividends really.Once there, we would progress further in the reflation cycle when inflation is no longer benign and anchored. We‘re though still quite a way from when the Fed tries to sell rising rates as proof of strengthening economic recovery – once the bond market would get to doubt this story though, it would be game over for its recent tame behavior.Friday‘s retreating Treasuries though didn‘t lift gold, and neither helped miners – it‘s not that inflation expectations would be sending a conflicting signal, as these slightly receded too. Inflation at the moment is probably still too low for the complacent market lulled to sleep by the transitory story, but look for that to change.Once the reality of modern monetary theory driven spending in eternity does result in higher inflation biting into real rates even more, the below quote would need to be updated:(…) It‘s as if the market place didn‘t deem inflation at the moment too high, i.e. as if real rates were actually rising (those believing so are in for a surprise). Personally, I find it odd that the transitory inflation story is still getting some ear, and wonder when last have the lumber, oil, copper, iron, nickel, zinc, corn, soybean (and soon also coffee) prices been checked.The taper story being revealed for a trial baloon that it is, would quickly reverse Friday‘s sharp USDX gains, where particularly the USDJPY segment is worth watching. In the end, the debasement of fiat currencies against real assets would continue, and accelerate as the dollar goes fully onto strategic defensive in 2H 2021 again.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookStocks declined, volume remained elevated – so is this the start of a downswing, or rather its closing stage? In spite of weak smallcaps and emerging markets, it‘s the latter – thanks to the credit markets, including emerging market ones.Credit MarketsIt‘s the high yield corporate bonds intraday recovery that appears key here, for the junk bonds joined the investment grade ones and long-dated Treasuries. The dip is being bought in the credit markets.Technology and FinancialsTechnology recovered from steep intraday losses, and so did $NYFANG. To complete the picture, value stocks were out of the daily favor too.S&P 500 Market BreadthIt‘s not just the advance-decline line or advance-decline volume to pay attention to right now, but the new highs new lows too. All three indicate that we are nearing a local bottom.Gold and Miners Short-TermGold is quite holding up, yet not totally convincingly, especially when miners are examined. This setup screams danger as the retreating nominal yields were ignored on Friday. But...Gold and Miners Long-TermThe copper to 10-year Treasury yield isn‘t breaking lower, and neither is gold. The stage is set for the yellow metal (and silver naturally too) to catch up and start outperforming the commodities, especially in the 2H of 2021. The miners to gold ratio‘s posture is curious to say the least. Is it a fake breakdown along the late Mar lines, or it it attempting to lead lower in earnest? The 2018 and 2019 gyrations are more applicable than the uniquely deflationary corona crash in my view – but the miners need to turn higher and lead relatively shortly to confirm.Crude OilCrude oil quite steeply declined on Friday, but the daily downswing doesn‘t have the characteristics of a reversal. The post-correction pattern of higher highs and higher lows remains intact, and black gold is like to return to scoring gains shortly.BitcoinSuch was the Bitcoin chart on Sunday when I tweeted about this go long opportunity. Since then, prices have risen to almost $59,000 as we speak. The uptrend is reasserting itself, but might take a while longer before the Bollinger Bands‘ upper border is reached.SummaryThe S&P 500 is probably almost done meeting headwinds, and the risk-on trades are likely to return before too long – the top of this bull market is still far away.Gold and miners need to prove themselves – especially the miners. With gold holding $1,760 and miners rebounding, the benefit of the doubt given to the precious metals upswing, would be justified – this precious metals upleg is quite well established already.
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

SPX Correction Arriving or Not?

Monica Kingsley Monica Kingsley 04.05.2021 16:26
One more day of upside rejection in S&P 500, in what is now quite a long stretch of prices going mostly sideways. As unsteady as VIX seems at the moment, it doesn‘t flash danger of spiking in this data-light week, and neither does the put/call ratio. As I wrote yesterday about the selling pressure, these tight range days accompanied by 30-ish point corrections is as good as it gets when the Fed still has its foot on the accelerate pedal. Yes, you can ignore the Kaplan trial baloon (have you checked when he gets to vote on the FOMC?) that spiked the dollar on Friday but didn‘t put all that a solid floor before long-dated Treasuries as seen in their intraday reversal. Highlighting the key Treasury, inflation and reflation thoughts of yesterday, as these are still here to power stocks higher:(…) the 10-year yield has been quite well behaved lately, closing at 1.65% only on Friday. The April calm seems to be over, and I‘m looking for the instrument to trade at 1.80% at least at the onset of summer. Then, let‘s see how the September price increases telegraphed by Procter & Gamble influence the offtake – will the price leader be followed by its competitors? That‘s one of the key pieces of the inflation stickiness puzzle – and I think others will follow, and P&G sales and profitability won‘t suffer. The company is on par with Coca Cola when it comes to dividends really.Once there, we would progress further in the reflation cycle when inflation is no longer benign and anchored. We‘re though still quite a way from when the Fed tries to sell rising rates as proof of strengthening economic recovery – once the bond market would get to doubt this story though, it would be game over for its recent tame behavior.Gold market enjoyed its fireworks, aided mightily by the silver squeeze run. The inflation theme is getting rightfully increasing attention, and commodities are on the run across the board. Just check yesterday‘s oil analysis or the bullish copper calls of mine. I could just as easily say that copper is the new gold – it has been certainly acting as one over the past many months, yet the yellow metal‘s time in the limelight is about here now. And don‘t forget about silver bring you the best of two worlds – the monetary and industrial applications ones.When it comes to USD/JPY support for the unfolding precious metals upswing, we indeed got the reversal of Friday‘s USD upside:(…) The taper story being revealed for a trial baloon that it is, would quickly reverse Friday‘s sharp USDX gains, where particularly the USDJPY segment is worth watching. Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookThe declining volume tells a story of not enough conviction to go higher or lower – the market remains vulnerable to brief spikes either way such as those seen and covered in both today‘s intraday Stock Trading Signals.Credit MarketsAs inconclusive intraday the corporate credit markets may seem, the pressure to go up is there, regardless of the high yield corporate bonds reversal. Long-dated Treasuries aren‘t standing in the way but it must be noted that these have given up their intraday upswing completely, and opened with no bullish gap.Technology and FinancialsTechnology lost the advantage of higher open, and wasn‘t helped by the poor daily $NYFANG performance. At the same time, value stocks continued higher but gave away a portion of intraday gains. The markets are on edge, and a bigger move this or more likely next week, shouldn‘t come as a surprise.Smallcaps and Emerging MarketsThe Russell 2000 turned higher on Monday, and emerging markets seem waiting for more signs of dollar weakness. Overall, the U.S. indices still continue outperforming the international markets.Gold and Miners Short-TermVolume returned into the gold market, and so did miners‘ outperformance. While these didn‘t close anywhere near their mid-Apr highs unlike gold, they had extremely undeperformed on Friday – what happens over the next few sessions would provide clue as to whether strength genuinely returned yesterday.Gold and Miners Long-TermThe copper to 10-year Treasury yield is edging higher again, and the miners to gold ratio strongly rebounded, proving my yesterday‘s point that the real parallels are the 2018 and 2019 gyrations, not the uniquely deflationary corona crash.SummaryThe S&P 500 remains vulnerable to short-term spikes in both directions, but the medium-term picture remains positive – the strong gains since late Mar are being worked off here before another upswingGold and miners proved themselves yesterday, and scored strong gains in a universally supportive array of signals across commodities, Treasuries, and also the USD/JPY daily move. Well worth not retiring the benefit of the doubt given to the precious metals bulls – more gains are in sight.
Boosting Stimulus: A Look at Recent Developments and Market Impact

Stocks and Gold – Hot and Hotter

Monica Kingsley Monica Kingsley 06.05.2021 15:50
The rebound off Tuesday‘s lows continued semisuccessfully yesterday – further upside was rejected in spite of signs of strength both within the S&P 500 and outside markets. Technically, the bulls are still on a dicey, vulnerable ground – but increasingly less so. It‘s that VIX is calming down, and the put/call ratio has sharply moved into its complacent spectrum. And not only that – new highs new lows are rising in spite of the advance-decline line being little moved.These are all budding signs of the upcoming break higher, and no change in the reflationary positive dynamics for stocks, let alone the red hot commodities. These (copper, agrifoods, base metals, lumber, oil) continue appreciating in spite of nominal yields pulling back a little these days. Make no mistake though, deflation isn‘t about to break out. Lower yields no longer work in support of all the defensive sectors – technology has passed the leadership baton long ago to value stocks (think Mar), but appears to be bottoming here in spite of the reversal late yesterday. That‘s positive as any S&P 500 advance has to count on both value and tech pulling ahead more or less simultaneously. A welcome sign of returning animal spirits in the 500-strong index would be the Russell 2000 juices flowing again. Thus far, even the emerging markets are hesitating.Not that they should be – the USD Index looks very vulnerable to me here, and its anticipated downside move (the smoke and mirror games I talked about on Monday and Wednesday are nothing but a distraction) would help lift international markets, and is also part of the explanation behind the strong commodity performance these days. This CRB Index move is key, and shows how far have real assets progressed in shaking off the dollar link – if you compare the dollar‘s value in early Feb and now, you are looking at very meaningfully higher commodity prices over that same time period.Gold and silver are about to shake off the dollar shackles as they catch up to commodities that have left them in the dust since Aug or Nov. The key metrics such as nominal or real yields support the precious metals rebound increasingly more – don‘t be fooled, gold would break above the $1,800 resistance, whether you look at it as a purely psychological one, or as a neckline of an inverse head and shoulders on the daily chart. The advance across the real assets, the precious metals and commodities super bull, would be more well rounded then. As I wrote yesterday:(…) I‘m known for incessantly beating the copper bullish drum, and also the oil one, and here we are with further gains added since my latest oil analysis. Silver might pull back a little here, but look for it to mirror the insatiable appetite for base metals and other commodities. Beyond the Green New Deal mandates, the monetary demand is set to help power the white metal higher.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookShort-term vulnerability and drying up volume as we‘re waiting for the daily indicators to turn brighter. Some more sideways trading would do that trick.Credit MarketsThe corporate credit markets keep signalling higher stock prices next, though. Notably, both HYG and LQD rose in spite of long-dated Treasuries turning up as well.Technology and ValueDid it bottom, did it not? For much of yesterday‘s session, the tweezer bottom approximating formation was in place. Both semiconductors (XSD ETF) and heavyweights ($NYFANG) gave up the encouraging intraday gains, and value (VTV ETF) wasn‘t strong enough to save the day. The question of a tech bottom remains of crucial importance, and looking at the distance between both XLK and $NYFANG price swings relative to the 50-day moving average, the odds are good for higher tech prices right next.Inflation ExpectationsInflation expectations have moderated their run, and are currently consolidating. The key sign here is that Treasury yields are no longer frontrunning them, but have come modestly down lately. Coupled with the USD/JPY below 109.20 making a rounding top, that‘s one less headwind for gold.Gold, Silver and MinersMiners aren‘t underperforming, and the tentative signs of strength beyond the intraday flavor returning, are there.Silver didn‘t outperform yesterday, which means that the precious metals sector isn‘t approaching short-term overheating. At the same time, the copper to 10-year Treasuriy yields is increasingly supportive of the coming gold upleg.SummaryS&P 500 is short-term consolidating only, and getting ready for a new upswing whenever the technology behemoths turn. These are the decisive factor of sustainable and noticeable stock market gains. Gold and miners have bullishly consolidated yesterday, and are amply supported by related markets to score strong gains next.
Decarbonizing Hard-to-Abate Sectors: Key Challenges and Pathways Forward

Ready for More Hot Gold and Stocks Profits

Monica Kingsley Monica Kingsley 07.05.2021 16:22
One final attempt to go down before reversing to strong gains all the way to the closing bell – the S&P 500 returned to trading back at the upper border of its prolonged consolidation range. Again at 4,200, new ATHs are back in sight – that‘s at least what the impression from declining VIX says, and the option traders might disagree here all they want, they‘re likely to be the next cannon fodder in the bullish advance.Needless to say that my reasonably and justifiably aggressive long positions in both S&P 500 and gold, are innundated with rising profits. Initiated in the vicinity of Tuesday‘s lows, I look for more gains in stocks (we‘ll get to the metals shortly) in spite of smallcaps still lagging behind (don‘t worry, they‘ll catch up over time, and I will cover that), and precisely because emerging markets are rejoicing over further dollar woes. Yes, the glitzy and fake tightening show is officially over since I first vocally called for it in Monday‘s analysis.Keep an eye on the big picture presented yesterday:(…) no change in the reflationary positive dynamics for stocks, let alone the red hot commodities. These (copper, agrifoods, base metals, lumber, oil) continue appreciating in spite of nominal yields pulling back a little these days. Make no mistake though, deflation isn‘t about to break out. Lower yields finally coincided with (supported) the defensive sectors the way it ideally should – technology bottom searching is over, Dow Jones Industrial Average is spurting higher, utilities recovered, and consumer staples continued upwards as if nothing happened at all. Maybe is this heavy on P&G sector placing faith in the market leader‘s pricing power to result in a success once September arrives with the rest of crowd following? That‘s the part of the cost-push inflation I discussed on Monday. I truly hope that people are paying attention, and don‘t put all their eggs into e.g. the dollar basket when it comes to commodities:(…) the USD Index … anticipated downside move ... would help lift international markets, and is also part of the explanation behind the strong commodity performance these days. This CRB Index move is key, and shows how far have real assets progressed in shaking off the dollar link – if you compare the dollar‘s value in early Feb and now, you are looking at very meaningfully higher commodity prices over that same time period.Gold and silver fireworks arrived, and more is to come! What a better proof than a broad based advance across the sector, starting with both metals, and extending to gold and silver miners left and right. Not to mention the copper fires burning brightly – if you were listening to my incessant red metal bullish calls, you‘re very happy now. And just as in the precious metals, there is more to come here too. So happy for all you who had the patience to wait out a couple of adverse sessions, because:(…) The key metrics such as nominal or real yields support the precious metals rebound increasingly more – don‘t be fooled, gold would break above the $1,800 resistance, whether you look at it as a purely psychological one, or as a neckline of an inverse head and shoulders on the daily chart. The advance across the real assets, the precious metals and commodities super bull, would be more well rounded then. As for Bitcoin, such was my yesterday‘s (still valid) assessment in a series of updates of the leading, but currently lagging crypto when compared to Ethereum or Dogecoin, the latter being a true middle finger to the financial system. GameStop, silver squeeze, Doge...Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookYesterday‘s rebound happened on rising volume, lending it credibility for the sessions to come. The bears weren‘t obviously convinced enough to sell as yesterday‘s volume lagged behind Tuesday‘s one.Credit MarketsThe corporate credit markets kept yesterday and still keep today signalling higher stock prices next. Notably, both HYG and LQD rose again in spite of long-dated Treasuries turning up as well.Technology and ValueTechnology did indeed bottom, and the heavyweights contributed reasonably enough to its advance. Semiconductors could have fared a little better, but that‘s not a major issue. At the same time, value stocks continued their steep ascent, as reliably as ever.S&P 500 Market BreadthThe S&P 500 advance wasn‘t accompanied by either new highs new lows or the advance-decline line turning up noticeably. Might be disappointing at first sight, but the overall impression is still of a healthy and quite broad advance.Gold and Miners Short-TermMiners and gold are in tune with each other, jointly pulling the cart of the precious metals advance. No further words are necessary here, I believe.Gold, Silver and Miners Long-TermJust as strongly when I doubted the miners to gold plunge on Monday, the ratio swiftly recovered starting Tuesday and extending gains yesterday. Please note silver springing to leadership position again – gradually first, more obviously throughout this week on the silver squeeze heels, which would be a volatile ride, but once again, silver is the best of both worlds – the monetary and industrial applications ones.Crude OilCrude oil pulled back a little yesterday, but the series of higher highs and higher lows since April hasn‘t been violated. The table remains set for further gains, and the only question is how fast these come – I‘m standing by my calls for at least $80 West Texas Intermediate before 2022 is over. Seasonality is still good for black gold, so enjoy the ride!SummaryS&P 500 is readying another reach for the highs, finally supported (a ka not being hampered by) technology. Risk on is returning and high beta stock markets pockets are expected to keep doing well. Gold, silver and miners have firmly positioned themselves to extend yesterday‘s much awaited and well deserved gains. The upleg is just getting started, now that the few weeks‘ consolidation is over.
GBP: ECB's Dovish Stance Keeps BoE Expectations in Check

Bulls Getting Caught in the Whirlwind

Monica Kingsley Monica Kingsley 11.05.2021 15:49
Seemingly uneventful and tight range day in S&P 500 gave way to extraordinary selling once the 4,220 intraday support broke – extraordinary by recent standards. The bulls obviously have quite some damage to repair before thinking about taking on new highs. Prices have moved back into the prolonged consolidation, in what isn‘t a true breakdown though yet. Neither the smallcaps, nor the emerging markets, let alone S&P 500 fell on sharply rising volume, which speaks in favor of a bad day, chiefly driven by tech (yes, I‘m looking at you, $NYFANG) and weak credit markets. Look at market breadth – new highs new lows stunningly rose yesterday in spite of the 500-strong index losing quite a few dozen points.Classic risk off positioning, if only the defensives as a group did a lot better – but it could have been worse had commodities joined in the melee. They didn‘t, and they are thus the dog that didn‘t bark, detracting credibility from yesterday‘s stock market plunge (unless they catch up next, that is).Both copper and lumber reversed, but won‘t this turn out as another buying opportunity, especially in copper? Little has changed in the reflationary and reopening trades – financials managed to shake off the rising yields easily yesterday. True, VIX and put/call ratio aren‘t painting a picture of calmness, but especially the option traders are positioned a bit too bearishly at the moment. Again, it‘s a question of how long before the tech bottom hunters step in. Make no mistake though, growth is going to keep lagging behind value.Gold, silver and miners are in a vulnerable position even though neither the technical nor fundamental reasons behind their rally changed. The rising yields are a testament of rotation out of stocks into bonds not having worked yesterday, and should commodities such as copper get hurt again, precious metals would land in hot water likely. Thus far though, no sign thereof – the momentum remains with the bulls overall, and higher time frames confirm that.Miners are not flashing outrageous underperformance, merely a modest daily one – the short-term fate of the precious metals upleg will be determined by long-dated Treasuries, copper and should the dollar (or USD/JPY) move, then through the contribution of fiat currencies. Even a brief comparison of the USD Index and the dollar-yen pair reveals though that risk-on is the prevailing move of 2021.Crude oil was less hurt by all the selling yesterday, but should it break below $64 on a closing basis, $62 could very easily come next. The daily indicators have weakened, and the bulls don‘t appear ready to break above $66 next.Cryptos are also in a wait and see mode, yet with noticeably less bearish undertones than black gold. Bitcoin remains choppy around its flat 50-day moving average, and should better return trading above it – no prodding by Ethereum though helps. The bulls are still taking a short-term break.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookS&P 500 suffered a sizable daily setback, and the recent consolidation‘s lows are likely to have to be defended next. Deceleration of the daily declines accompanied by a lower knot ideally would be the first sign that I would be looking for – alongside a positive turn in the credit markets.Credit MarketsCorporate bonds showed no strength relative to long-dated Treasuries, and that doesn‘t bode well for today‘s session. High yield corporate bonds have though still been performing better in April than the two instruments represented by black lines on the above chart, which attests to risk-on being still the environment we‘re in.Technology and ValueTechnology gave up all the gains since Thursday, and $NYFANG broke below its rising blue support line, and the deterioration among the heavyweights continues. Besides tech, $TSLA illustrates that eloquently just like $ARKK. The rotation out of the behemoths is weighing down the index – this is the area where bleeding needs to stop.VolatilityThe VIX open within the body of Friday‘s candle (harami position) didn‘t bode well, and volatility having closed significantly above Friday‘s open, attests to the strength of yesterday‘s move. This spike doesn‘t appear as over yet.Gold, Silver and MinersGold and miners are in a vulnerable position, and consolidation of recent sharp gains would be healthy and desired. The volume in both gold and silver shows the sellers don‘t have enough conviction, and pullbacks remain buying opportunities regardless of the threatening nominal yields move (inflation expectations made a similarly sharp uptick yesterday).The weekly chart shows how little has changed, how minuscule power has been sapped yesterday. The upleg across the precious metals remains alive and well as we aren‘t crashing into a deflation.BitcoinBitcoin reverted back below the 50-day moving average, and neither Ethereum is crashing. The technical outlook is though turning neutral, and the bulls will have to prove themselves. Until prices return back above the blue moving average, Bitcoin remains short-term vulnerable.SummaryS&P 500 got under selling pressure that is showing no signs of abating, yet the weakness remains concentrated in quite a few tech names. Besides these, credit markets aren‘t doing fine either.Gold, silver and miners continue being resilient, and the coming correction would likely be a shallow one. Increasing nominal yields are countered by rising inflation expectations and copper prices, helping to keep the metals out of harm‘s way.Crude oil bulls will have to step up to the plate, and defend the unfolding upsing that‘s threating to crash below the recent lows.Bitcoin is getting sold off today as well, and the bullish to neutral short-term outlook of yesterday, is turning to a neutral one as a minimum.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
Asia Morning Bites: Trade Data from Australia, Taiwan Inflation, and US Fed Minutes Highlighted

Bulls Coming to Terms with Inflation

Monica Kingsley Monica Kingsley 12.05.2021 15:43
Bulls had to fight hard to recover from intraday downside, and hadn‘t managed to close the menacing gap at the open. The VIX gap remained unchallenged too, but the volatility metric soundly retreated from its daily highs, and not even the option traders did add to their bearish bets. The tide seems to be in the early stages of turning as technology caught a solid bid and the behemoths didn‘t disappoint on a daily basis. Growth not lagging as badly is essential to the 500-strong index, but look for it to keep underperforming value.While a lot more needs to be done, the strongest sign of bullish resolve has come from the Russell 2000 and emerging markets. Both welcomed the continuing dollar woes, and faced off with the rising rates that would ultimately cut into their profitability – much further down the road. Let‘s put my yesterday‘s words into perspective:(…) Neither the smallcaps, nor the emerging markets, let alone S&P 500 fell on sharply rising volume, which speaks in favor of a bad day, chiefly driven by tech (yes, I‘m looking at you, $NYFANG) and weak credit markets. Look at market breadth – new highs new lows stunningly rose yesterday in spite of the 500-strong index losing quite a few dozen points.Classic risk off positioning, if only the defensives as a group did a lot better – but it could have been worse had commodities joined in the melee. They didn‘t, and they are thus the dog that didn‘t bark, detracting credibility from yesterday‘s stock market plunge (unless they catch up next, that is).The key points are improving corporate credit markets and commodities rejecting more downside (with the exception of lumber). Copper still keeps doing great, confirming my assessment that this would turn out as another buying opportunity. Gold, silver and miners stood the test, and remain consolidating at the high ground gained. Real rates turning more negative are their powerful ally, which explains why the rising nominal yields haven‘t exerted lasting selling pressure. Miners are by no means lagging behind, and silver isn‘t getting as overheated so as to put the precious metals upleg into danger, and neither are the USD/JPY move consequences (still positive on a daily basis). The sizable open gold profits will continue growing in all likelihood.Overall, we seem to be having a risk-off move in stocks not spilling over to commodities, precious metals or cryptos, all driven by the growing inflation threat – the market is getting attentive again. How long before it forces the Fed to talk, act and not play ostrich? The evidence isn‘t strong thus far, but there is a lot of time left till the Jun Fed meeting. Needless to say, bold moves would crater risk-on assets, which is why I‘m not expecting any real action yet with the 10-year yield at 1.64% only. CPI may force them as much as it wants today, but that won‘t do the trick as I just tweeted..Crude oil remains underpinned in the very short run by the Middle East tensions and the Colonial Pipeline shutdown, making for a positive technical outlook and rising open oil profits.Among cryptos, Ethereum keeps doing fine without any meaningful pullback or deceleration, but Bitcoin remains choppy around its flat 50-day moving average. The rising support line connecting its Apr and May lows better hold as the risk of extending losses should prices break below $56,300 roughly, is very real and would coincide with e.g. Ethereum taking a breather.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookNo daily volume indicative of a true reversal, and market breadth indicators turning deeply negative – such are the consequences of value stocks participating in yesterday‘s selloff. Repeating yesterday‘s notes, deceleration of the daily declines accompanied by a lower knot ideally would be the first sign that I would be looking for – alongside a positive turn in the credit markets. And we‘re near to getting both.Credit MarketsHigh yield corporate bonds made at least some attempt to close the bearish daily gap, and the volume doesn‘t say it was a desperate attempt. Contrast that with the quality debt instruments, and you see risk-on seeking to return.Technology and ValueTechnology bleeding stopped yesterday, yet didn‘t bring about a broader rally. We‘re still waiting for both growth and value to pull in the same direction – for that though, the market has to cope with the inflation fears first though.Gold, Silver and MinersGold and miners keep aligned in a strong position after yesterday‘s downswing was rejected, and it is precisely the 10-year yield lagging woefully behind the inflation expectations this week why the rising nominal yields aren‘t a credible threat.Silver daily outperformance isn‘t too worrying, not even should it be fully retraced next – the copper to 10-year Treasury yield ratio keeps moving in support of the precious metals upleg. We aren‘t crashing into a deflation – the markets are once again facing the high inflation reality.Crude OilCrude oil bullish consolidation is in its latter stages as the the rising volume heralds. Look for the uptrend to reassert itself next.SummaryS&P 500 recovered from heavy intraday selling pressure, and both tech and credit markets appear to be turning. Once the market comes to terms with the rising inflation and stops worrying about a Fed response this early, stocks would take on the recent highs once again. And that includes Nasdaq as the $NDX outlook has flipped bullish throughout yesterday‘s recovery (I hope the bulls were taking advantage – it‘s not too late to do so now).Gold, silver and miners keep chugging along, and the sound rejection of lower values bodes well for the short-term. The only question remains how much basebuilding do we have still ahead before the next upswing, amply supported by the negative real rates.Crude oil bulls look to have no more waiting in front, and amid the headlines arriving, I look for black gold to close solidly above $66 before the week is over.Bitcoin is still hesitating while Ethereum runs, presenting a potential vulnerability in its mostly neutral to bullish short-term outlook. I specifically don‘t like the upside rejection of today, thus striking a cautious tone.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
Asia Morning Bites: Trade Data from Australia, Taiwan Inflation, and US Fed Minutes Highlighted

Is the Selling Madness About Over?

Monica Kingsley Monica Kingsley 14.05.2021 15:43
The inflation scare amplified by CPI data has died down yesterday a little. Buying returned into the S&P 500, lifting Nasdaq ever so little too. VIX steeply rejected moving higher, and looks ready to decline today, but the put/call ratio doesn‘t share the optimism as obviously the bearish scenarios, powered by the inflation scare forcing a deflationary outcome in an overleveraged financial system is emboldened by the downfall‘s steepness since Monday and ineffective attempts to coutner it on Tuesday. While one swallow doesn‘t make a summer, the technical picture in the hardest hit tech is gradually improving, worthy of benefit of the doubt while you dance close to the Nasdaq exit door.Credit markets have crucially improved, with the junk corporate bonds leading the way, and value stocks being soundly bought again. All it took was a decent daily stabilization in long-dated Treasuries coupled with an intraday upswing attempt – no issue that it fizzled out before the close, apparently. The markets are coming to terms with higher inflation, and the commodities hit starting with lumber, stretching to copper, and eventually also oil and soybeans yesterday, would likely recover – first those that hadn‘t been all that overheated. The Fed isn‘t serious about fighting inflation, otherwise it wouldn‘t be rolling out the speaking procession on an almost daily basis. Occam‘s razor at work:(…) all we‘re experiencing now, is:(...) a risk-off move driven by the growing inflation threat – the market is getting attentive again. How long before it forces the Fed to talk, act and not play ostrich? The evidence isn‘t strong thus far, but there is a lot of time left till the Jun Fed meeting. Needless to say, bold moves would crater risk-on assets, which is why I‘m not expecting any real action yet with the 10-year yield...… at 1.66% only, which by no means serious enough to spur the Fed into action.We‘ve been there already, and as stated, 10-year yields above 2% would start to bite stocks, but it‘s only higher levels that would force the Fed into action and pegging them in the 2 to 2.5% range. We‘re far away from that, these are just (mild) birthing cramps, a premature alarm. We‘re still in a reflation – so far.Gold and miners resilience leading to further upswings, is on – and it seems that precious metals would lead select pockets of commodities (yes, silver looks ready to do that job, and that extends to the so far still range bound silver miners one day too) higher as we keep transitioning to a higher inflation environment for months already:(…) With high inflation already here (don‘t look for too much relief once the low year-on-year comparison base is history), real rates are turning more negative – and nominal ones aren‘t yet catching up onto what‘s coming. Seriously, I don‘t know why majority of market participants have been caught this much off guard by the inflation data, which is the basis of cost-push inflation I had been talking quite many times already.Negative real rates would start supporting the metals increasingly more as the decoupling from nominal yields gathers more steam. The precious metals upleg is still in its early stages, and about to add more to my open gold profits.Crude oil would be positively affected by the anticipated rebound in commodities from the weekly setback, as these would balance out the rising yields in a way, and would do well past reflation time. Right on cue, my new oil position is already profitable.Bitcoin had a high volatility day yesterday, but closed almost where it opened. Tentative signs of stabilization and accumulation are here, and Ethereum isn‘t wasting time in returning to growth, which is a positive signal for the best known crypto.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 OutlookS&P 500 recovered, but it‘s all about volume and the upper knot pointing to stiffer headwinds just next.Credit MarketsHigh yield corporate bonds (HYG ETF) made a steep and credible recovery, and the investment grade ones didn‘t perfom all too badly either upon the daily TLT „miracle“.Technology and ValueTech recovery left much to be desired, and the long upper knot isn‘t appetizing. Obviously much depends upon the next TLT and inflation expectations moves, but $NYFANG seems to be readying a temporary respite next. Given how value performed yesterday, that would be overly positive for the S&P 500 as the index needs to be firing on both cylinders to make real progress.Gold, Silver and MinersGold and miners keep trading in harmony, and new precious metals upswing is in the making. See how little an TLT uptick coincided with that turn.Silver daily downswing might not appear to confirm the bullish assessment, but I think that‘s a daily occurence only.Crude OilCrude oil dipped a bit too far yesterday, but doesn‘t appear to be breaking down. I look for more backing and filling before the upswing resumes.SummaryS&P 500 bulls are getting to (and should) flex some muscles, and not muddle through in the 4,130 ramge for too long. The weak retail sales aren‘t exactly a positive catalyst but at least it puts to rest the misguided notions of the Fed springing to action.Gold, silver and miners are well positioned for the upswing resumption, and much of the downside indeed appears to be in already.Crude oil meandering goes on, but without bearish overtones – the chart remains bullish.Bitcoin has started to timidly repair the damage inflicted while Ethereum is back to growth already. The leading crypto‘s position still remains murky at the moment.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
Asia Morning Bites: Singapore Industrial Production and Global Market Updates

Stock Market Cycles Tipping The Balance From Euphoria To Complacency - Is Gold Setting Up For A Rally Above $2000 Again?

Chris Vermeulen Chris Vermeulen 27.05.2021 01:28
Gold has set up a very strong confluence pattern across multiple foreign currencies recently.  This upside confluence pattern suggests that Gold has now moved into a much stronger bullish price phase compared to various currency pairs.  This upside move in precious metals aligns very well with my broad market cycle phase research. I urge traders/investors to start paying attention as we transition into this new longer-term cycle phase.Recently, my team and I published a series of articles related to these longer-term cycle phases and how they related to the current market trends.  The biggest concept we want to highlight is that we've transitioned away from an Appreciation cycle phase and into the early stages of a Depreciation cycle phase.  Often, near this type of transition, the global markets experience a unique type of Excess Phase Peak.  This type of price pattern happens because traders/investors are slower to identify the end of a trend and often attempt to continue the Thrill/Euphoric phase of the previous market trend – until the markets prove them wrong.You can review some of our most recent research posts about these topics here: US Dollar Breaks Below 90 - Continue To Confirm Depreciation Cycle Phase (May 23, 2021); Bitcoin Completes Phase #3 Of Excess Phase Top Pattern - What Next? (May 20, 2021) and; What To Expect - A Critical Breakout Warning For Gold, Silver & Miners Explained (May 18, 2021).Stock Market CyclesThe custom graphic shown below highlights the phases of typical market trends through various stages of market trends.  My team and I believe we have crossed the peak level (or are very near to that crossover point) and have begun to move into the Complacency and Anxiety phases of the market trend.  As suggested, above,  the psychological process for traders/investors at this stage is to hope and plan for the never-ending bullish price trend while the reality of the market trend suggests a transition has already started taking place and the market phase has shifted.Our research suggests the last Appreciation phase in the market took place from mid/late 2010 to mid/late 2019.  That means we started a transition into a Depreciation cycle phase very near to the beginning of 2020.  Our belief that a moderate price rotation is pending within the markets stems from the excess phase rally that took place after the COVID-19 virus event.  We've witnessed the sideways price trend in precious metals over the past 8+ months which suggested that global traders were confident an economic recovery would take place (eventually).  Yet, the question before everyone is, as we move away from an Appreciation cycle phase and into a Depreciation cycle phase, what will that recovery look like?  Can we expect the recovery to be similar to levels seen in the previous Appreciation cycle phase?  Let's take a look at how these phases translated into trends in the past.Appreciation and Depreciation Cycle PhasesThe first Depreciation cycle phase (1983~1992) took place after an extended deflationary period where the debt to GDP was rather low comparatively. It also took place within a decade or so after the US moved away from the Gold Standard.  The strength in trending we saw in the US stock market was directly related to the decreasing interest rates and strong focus on credit/equities growth throughout that phase.The second Depreciation cycle phase (2001~2010) took place after the DOT COM rally prompted a huge boom cycle in equities and as a series of US/global events rocked the US economy.  First, the September 11, 2001 attack in New York, and second, by the engagement in the Iraq War.  Additionally, the US Fed was actively supporting the US economy after the 9/11 terrorist attacks, which prompted many American's to focus on supporting a stronger US economy.  This, in turn, prompted a huge rally in the housing market as banks and policies supported a large speculative rally (FOMO) in Real Estate.The current Depreciation cycle phase (2019~2027+) comes at a time where the US Fed has been actively supporting the US/global economy for more than 11 years and after an incredible rally in Real Estate and the US stock market.  Additionally, a new technology, Crypto currencies, has taken off throughout the world as an alternate, decentralized, asset class – somewhat similar to how the DOT COM rally took off. As we've seen this incredible rally in global equities, Cryptos, commodities and other assets over the past 7+ years, we believe the last Appreciation cycle phase is transitioning into an Excess Phase Peak (see the Euphoria/Complacency phases above), which may lead to some incredibly volatile price trends in the future.Sign up for my free trading newsletter so you don’t miss the next opportunity!You may be asking yourself, “how does this translate into precious metals cycles/trends?” after we've gone through such a longer-term past cycle phase review...The recent upside price trends in precious metals are indicative of two things; fear and demand.  First, the economic recovery and new technology are increasing demand for certain precious metals and rare earth elements (such as battery and other technology).  Second, the move in Gold and Silver recently is related to credit, debt, economic and cycle phase concerns.  As we've seen Bitcoin move dramatically lower and as we start to move into a sideways price trend in the US stock market, there is very real concern that the past price rally has reached an intermediate Excess Phase Peak.Please take a moment to learn about our BAN Trader Pro strategy and how it can help you identify stock market cycles, which phase we are in, and how that will lead us to trade better sector setups.  Every day, we deliver these setups to our subscribers along with the BAN Trader Pro system trades.  You owe it to yourself to see how simple it is to trade 30% to 40% of the time to generate incredible results.Have a great day!!
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

Buy the Dip, Again?!

Monica Kingsley Monica Kingsley 28.05.2021 16:16
S&P 500 attempted a breakout, but retreated. Is that a reversal, or proof of more pressure building up? Much starker move in the high yield corporate bonds would speak in favor of a reversal, but only until the higher end of the debt markets is examined. Or the volume for that matter, as these would put the reversal hypothesis to rest.VIX continues turning lower, and option traders are getting the message – finally, the put/call ratio appears to be on a declining path, meaning that fewer market participants are expecting another shoe to drop. As if one fell in the first place, really. Is that the worst of the inflation scare being over, for now? Probably yes, and the retreating Treasury yields are mollifying – but as explained in ample detail, this calm before the (autumn) storm, is deceptive. Calling the Fed‘s bluff, precious metals (and some commodities) are onto something, really.One more proof why the stock market bears are at a disadvantage, comes from other indices, namely the Russell 2000 (look for value to benefit), and emerging markets. The magic of ample Fed support is making its way through the system, lifting prices in many asset classes amid still rampant speculation. It‘s only the cream of select commodities that has been taken off – in the big scheme of things, nothing but a consolidation within an existing secular bull market, is happening there. While the inflation trades have been dialed back to a degree, they haven‘t been broken as the Fed is in a reactive, not proactive mode. More precisely, it remains in denial of the inflation ahead.Gold is holding up strongly, and has been in little need of miners‘ support lately. Both are consolidating, readying for another push higher that would coincide with further retreat in long-dated Treasury yields – unless these are counterbalanced with the collapse of inflation trades. Once again, I am not looking for that to happen – soft patch, prolonged commodities consolidation yes, turn to deflation no. In such an environment, silver would have a tougher ride and be vulnerable to volatile swings defined by how the inflation, yields, expectations and Fed action bets play out.Crude oil isn‘t offering but token discounts to enter on the buyers‘ side, and remains reasonably well supported by the oil index price action. The lower daily volume isn‘t an issue – the daily chart remains bullish.Bitcoin and Ethereum went through a steep overnight correction, and they would enter the Memorial weekend stormy waters not exactly in a rising mode. While the sellers appear to be in control, odds are that Ethereum would turn around first, followed by Bitcoin moving with less veracity, but still – even later today. The daily indicators are likely to carve out a bullish divergence next. I‘ll discuss it more in the nearest upcoming analysis, which would be on Tuesday – enjoy your long weekend!Let‘s move right into the charts (all courtesy of www.stockcharts.com). S&P 500 OutlookS&P 500 daily hesitation goes on, for as long as Nasdaq 100 plays ball and carves out its own modest consolidation pattern.Credit MarketsDaily struggle in high yield corporate bonds needs to be read in the context of high open, and intrasession reallocation to the quality debt instruments. Unless we push lower in earnest, this is a storm in the tea cup for equities as the HYG:SHY ratio confirms.Technology and Value$NYFANG wasn‘t strong enough to drive tech yesterday, but the many sectors forming value such as financials or consumer discretionaries, performed solidly – and the industrials did smashing too. More market breadth is though what the S&P 500 needs.Gold, Silver and MinersGold very modestly declined even as the miners opened threateningly down. The temporary woes might not be over, but illustrate the yesterday mentioned limited scope for gold to decline.Supported by the copper to 10-year Treasury yield ratio, the precious metals sector stood the test yesterday, but we might be at the higher range of the ratio‘s range, which would send especially silver under pressure once the ratio‘s correction occurs.Crude OilCrude oil‘s slow march higher continues, and neither the oil index nor the volume signal weakness ahead today.SummaryS&P 500 is likely to remain choppy with a general upward bias that only a clear break of 4,180 would invalidate, which is unlikely to happen though – especially with the end of month window dressing.Gold and silver might see modest profit taking today, but the upswing remains on solid footing, awaiting the miners to join and lead again.Crude oil offered an even more modest intraday downswing than the day before – one that tellingly didn‘t attract new sellers.Bitcoin and Ethereum are likely to refuse lower prices, but the only open question remains when that would happen – still before the Memorial weekend, or after.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
European Central Bank's Potential Minimum Reserve Increase Sparks Concerns

No More Bloodbath – Beyond Cryptos

Monica Kingsley Monica Kingsley 01.06.2021 16:06
S&P 500 again rejected within sight of ATHs – again, but not totally convincingly. Especially the credit markets‘ mixed picture leans in effect slightly bullish, yet for the 500-strong index, the source of short-term worry would likely be the tech sector again. Either not pulling ahead as strongly, or taking a breather, which should be more noticeable in XLK than in Nasdaq 100.VIX looks to be done declining, and the option traders have hedged their Thursday‘s bets. Given the wavering risk-on segment of the credit markets, it‘s probably justifiably enough. Inflation expectations rose a little though, faster than the Treasury yields moved, which could be taken as a sign of value likely to do overall fine next – and that‘s also confirmed by smallcaps and emerging markets. As I wrote on Friday:(…) Is that the worst of the inflation scare being over, for now? Probably yes, and the retreating Treasury yields are mollifying – but as explained in ample detail, this calm before the (autumn) storm, is deceptive. Calling the Fed‘s bluff, precious metals (and some commodities) are onto something, really.It‘s only the cream of select commodities that has been taken off – in the big scheme of things, nothing but a consolidation within an existing secular bull market, is happening there. While the inflation trades have been dialed back to a degree, they haven‘t been broken as the Fed is in a reactive, not proactive mode. More precisely, it remains in denial of the inflation ahead.In other words, I am not buying into the taper smoke and mirrors. The Fed knows that it can‘t (seriously) take away the support – it can only talk that, and look what the market does next. It‘s a long journey of preparation, and I am not looking for the central bank to move any time soon:(…) soft patch, prolonged commodities consolidation yes, turn to deflation no. In such an environment, silver would have a tougher ride and be vulnerable to volatile swings defined by how the inflation, yields, expectations and Fed action bets play out.Gold upswing remains well supported by the little lagging miners, and the broader view shows just how little breathing space the bears have. Not enough hot air has left commodities while nominal yields look as likely to retreat further. Silver is similarly bullish as it shows no signs of overheating.Crude oil suffered a daily setback, not nearly enticing enough for the buyers – but the oil index doesn‘t favor more downside at the moment. The daily chart remains bullish, and the pressure to go higher is building up.Bitcoin and Ethereum entered into the long weekend on a weak note, but the buyers stepped in. Having convincingly defended the rising support line, carved out a bullish divergence, and the initiative has moved to the bulls.Let‘s move right into the charts (all courtesy of www.stockcharts.com). S&P 500 and Nasdaq OutlookS&P 500 daily reversal that may or may not be threatening – and in my opinion, it isn‘t. Nasdaq 100 closed higher on the day, signifying that the risk-off shouldn‘t be overrated.Credit MarketsHigh yield corporate bonds are in no mood to steeply decline, and attest to a risk-off whiff merely. As I am looking for TLT to turn up shortly, HYG wouldn‘t likely suffer too much.Technology and ValueSimilarly, the tech downswing shouldn‘t be taken at face value – $NYFANG did fine but value did even better. More market breadth is though what the S&P 500 needs.Gold, Silver and MinersGold rejected yet another downswing attempt, and so did the miners. The chart remains bullish, and the path of least resistance higher.The copper to 10-year Treasury yield ratio remains on fire, amply supporting the precious metals sector – and as silver isn‘t taking the copper cue in full exactly, the appreciation potential is especially juicy.Bitcoin and EthereumThe long weekend volatility was resolved at the rising black support line, and Ethereum trades now at $2,550 with Bitcoin changing hands for $36,100. The path taken to conquer the red resistance will be insightful, and the below ratio is tipping the scales in the bulls‘ favor.A lot of upside pressure building in the Ethereum to Bitcoin ratio, with the weekend attempt at the lows revealing the turning tide. SummaryS&P 500 is upside bias remains unchanged in spite of Friday‘s woes. Any dip would likely be temporary.Gold and silver remain primed to go higher, as much as the miners. The upleg is very far from over, and the only watchout is for the white metal not to get caught in the commodities consolidation trade.Crude oil downswing came on cue, but the bulls might not have gotten a discount steep enough to join, solid oil index performance notwithstanding. At the same time, the largely sideways consolidation is taking a bit too long already.Bitcoin and Ethereum have turned, but expect still volatile trading ahead, albeit with a bullish flavor.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
US Industry Shows Strength as Inflation Expectations Decline

Reversals, Inflation, and Scares of Any Kind

Monica Kingsley Monica Kingsley 02.06.2021 15:59
S&P 500 stumbled in its upward run again, but has it been decisively so? VIX has risen, the put/call ratio as well – but that‘s little more than white noise, for nothing has dramatically changed in the markets. We‘re chopping along without advance clues either way – unless you look at inflation expectations and Treasury yields. The Jun 10 CPI reading is ahead:(…) While I think that the red hot CPI inflation would die down a little (i.e. not keep rising ever as steeply as was the case with Wednesday‘s data) once the year on year base to compare it against normalizes, a permanently elevated plateau of high and rising inflation would be a reality for more than foreseeable future simply because the Fed would be as behind as Arthur Burns was in fighting the 1970s inflation, and upward price pressures in the job market pressures would kick in.The much awaited Jun 10 CPI readings would likely come on the hotter side of the spectrum, but would be part and parcel of a continued move to a higher inflation environment where commodities‘ pressures are amplified by job market ones – not that the distortions and disincentives to work wouldn‘t be there.The Treasury market‘s lull only means that inflation trades have been dialed back somewhat, but haven‘t been broken. As I wrote on May 27, so far it‘s only the precious metals that are relentlessly calling the Fed‘s bluff – by rising almost in a straight line. And when you thought the transitory or permanently elevated inflation debate couldn‘t get any more ridiculous, there comes the Dudley dove talking how transitory could become permanent – it‘s almost as miraculous as being half pregnant.Seriously, it‘s a testament to the Fed communication‘s success that the transitory story has been swallowed hook, line and sinker to this degree. We‘re getting a temporary reprieve but the cost-push inflation isn‘t going away. At the same time, we‘re in a reflationary period before inflation starts biting noticeably more. How close before the wheels come off, and would that come from inflation or growth worries? There are two distinct possibilities: GDP growth and its projections start sputtering, or inflation (including inflation expectations) don‘t come down nearly enough as much as the transient camp believes. I‘m in the latter camp.Timing is everything, though. Any growth scare wouldn‘t materialize before we „discover“ that inflation isn‘t really going away. Add the job market pressures entering the fray – discussed on May 19 – you‘ll sooner take fright over persistent inflation hitting the growth prospects than seeing them downgraded first. No deflationary scare quarters ahead either, sorry – 2021 will be another good year in stocks.This also speaks against a sharp (think 10% and higher) correction in the stock market over the summer, and likewise affects commodities. These would employ a wait and see approach, with precious metals sticking out like a sore finger. Forget the taper dog and pony show. When the Fed is forced to move, precious metals win – either way.Gold and silver aren‘t giving up gained ground – why should they? Miners have awaken from their slumber, and the greater risk in this bull market run is being out rather than in. The new long consolidation will get an upside breakout in its own due time, across the board.Crude oil sharply rose on the OPEC pronouncements (U.S. can‘t possibly act as a swing producer anymore – the policy supporting that isn‘t there anymore), and the upswing has been supported by the oil index. The daily chart remains bullish, and the pressure to go higher I discussed yesterday, is being resolved.Bitcoin and Ethereum are likewise preparing to overcome yesterday‘s modest retracement of prior rebound. The charts in both speak in favor of taking on the red resistance line discussed yesterday. The strength to go higher is there.Let‘s move right into the charts (all courtesy of www.stockcharts.com). S&P 500 and Nasdaq OutlookS&P 500 daily reversal leaves much to be desired, and neither the Nasdaq 100 is plunging.Credit MarketsHigh yield corporate bonds scored gains while the quality debt instruments treaded water. That‘s an inconclusive, yet mildly positive sign for the risk-on trades.Technology and ValueIt‘s only select tech segments that are being hit here. I‘m leaning towards microrotations rather than huge red flag explanation.Gold, Silver and MinersA sideways and volatile day in gold, where rising miners and not throwing a spanner in the works nominal yields, are casting their verdict.The copper to 10-year Treasury yield ratio is the only one to bring about (short-term) wrinkles.No worries though as the copper chart is by no means in a crash mode – nominal yields retreat isn‘t over, and would power both metals higher (as it interplays with inflation). Aka real rates rule.Crude OilCrude oil offered a one-way session, and its upswing was amply supported by volume. Oil companies didn‘t lag behind – the next upswing is underway with not too many resistances ahead.SummaryS&P 500 is getting ready for another upside breakout – it‘s a question of time.Gold and silver remain well bid and technically primed to go higher, let alone fundamentally.The upleg is very far from over, and the only watchout in the short run is the copper to 10-year yield ratio.Crude oil consolidation is over, and odds favor a new upleg to proceed.Bitcoin and Ethereum are consolidating, but rebound continuation is more probable.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
Boosting Stimulus: A Look at Recent Developments and Market Impact

When Markets Get Scared and Reverse

Monica Kingsley Monica Kingsley 03.06.2021 16:09
S&P 500 wasted another good opportunity to rise – one where the credit markets were largely aligned. Is it a sign of upcoming tremors that the 500-strong index couldn‘t defend the daily gains? Commodities weren‘t under pressure, the dollar wasn‘t surging (looking at the closing prices), precious metals did well, and even lumber enjoyed a white candle again.Inflation expectations retreated, and so did Treasury yields – what‘s holding stocks then? Neither uncertainty about the Fed policy, nor surging inflation cutting into P&L, nor crashing bonds – what we‘re seeing is run of the mill volatility as stocks move both into a structurally higher inflation environment, and await Fed moves which are much farther down the time line than the markets appreciate. Heck, even the option traders keep undergoing the earlier announced shift to complacency.Yes, the taper talk has dialed back the inflation trades to a degree, but hasn‘t knocked them off in the least. In a reflation, both stocks and commodities do well, and we‘re still far away from worrying about weakening GDP growth rates (today‘s ADP and unemployment data are a good proof thereof) – in my view, worries about inflation not retreating nearly enough during this Treasury market lull (taking up this summer) would come into the picture first.Reopening trades aren‘t over, the housing market activity (housing starts, new home sales) has slowed down a little while XLRE keeps running, financials remain as strong as value (yes, there is more juice in that trade still), and no mad rush into tech (growth) is underway. Capacity utilization isn‘t at the top of the pre-corona range exactly, and oil prices (these serve as additional tax, a drag on the economy) aren‘t biting nearly enough. The job market isn‘t at the strongest either, and the hours worked don‘t match prior extremes either. Last but not least, global supply chains haven‘t entirely recovered to meet the reopenings-boosted demand.Plenty of extra reasons why I talked the transitory vs. getting structurally elevated (unanchored) inflation yesteerday:(…) The Treasury market‘s lull only means that inflation trades have been dialed back somewhat, but haven‘t been broken. As I wrote on May 27, so far it‘s only the precious metals that are relentlessly calling the Fed‘s bluff – by rising almost in a straight line. And when you thought the transitory or permanently elevated inflation debate couldn‘t get any more ridiculous, there comes the Dudley dove talking how transitory could become permanent – it‘s almost as miraculous as being half pregnant.Seriously, it‘s a testament to the Fed communication‘s success that the transitory story has been swallowed hook, line and sinker to this degree. We‘re getting a temporary reprieve but the cost-push inflation isn‘t going away. At the same time, we‘re in a reflationary period before inflation starts biting noticeably more. How close before the wheels come off, and would that come from inflation or growth worries? There are two distinct possibilities: GDP growth and its projections start sputtering, or inflation (including inflation expectations) don‘t come down nearly enough as much as the transient camp believes. I‘m in the latter camp.Timing is everything, though. Any growth scare wouldn‘t materialize before we „discover“ that inflation isn‘t really going away. Add the job market pressures entering the fray – discussed on May 19 – you‘ll sooner take fright over persistent inflation hitting the growth prospects than seeing them downgraded first. No deflationary scare quarters ahead either, sorry – 2021 will be another good year in stocks.This also speaks against a sharp (think 10% and higher) correction in the stock market over the summer, and likewise affects commodities. These would employ a wait and see approach, with precious metals sticking out like a sore finger. Forget the taper dog and pony show. When the Fed is forced to move, precious metals win – either way.In other words, we‘re undergoing stock market and commodities‘ gyrations as we‘re settling into the new reality of higher inflation including expectations, which isn‘t yet putting the stock market to test. Neither the 10-year yield rising way over 2.5% would derail the sttock bull run – but the associated volatility would be keenly felt already at the 2% level. We‘re very far from that, meaning I am not worried about the stock market leadership baton passing exlusively over to tech (growth) stocks. That would equal panic.Gold ascent is slowing down, but miners don‘t support a lasting downswing. Volatility around the $1,900 mark, yes but a plunge on stock market downswing / Fed tapering / commodities reversal, no – as if any of the three actually applied. After initial selling when liquidity needs to be raised no matter where from (the AMC saga coming soon to a theater near you), gold is likely to recover, and faster than silver (the white metal would suffer from any marked slowdown in inflation, I must add).Crude oil rose strongly once again, and so did the oil index – the energy sector ETF is doing great. The daily chart still remains bullish, offering no clues of a reversal, let alone of a correction.Bitcoin and Ethereum recovery goes on, and I‘m looking for more base building before the bulls take on and overcome the red ETH resistance line featured on Tuesday. Patience is needed before more confidence returns into the sector.Let‘s move right into the charts (all courtesy of www.stockcharts.com). S&P 500 OutlookS&P 500 and Nasdaq wavering in latest days is an eloquent warning sign that the bears will try their luck – and they would ultimately fail.Credit MarketsHigh yield corporate bonds actually outperformed the rest of the crowd, making the SPX stumble harder to stomach.Technology and ValueTechnology had a mixed day while value remains unyielding. It‘s true that the daily leadership was with XLK yesterday, but that still remains white noise as value isn‘t yet down and out. Not by a long shot.Gold, Silver and MinersGold rose a little stronger than the miners yesterday, but the move in either shouldn‘t be overrated. While the yellow metal can‘t break higher with confidence now, its dips remain to be bought.The copper to 10-year Treasury yield ratio stabilized yesterday, but the swing in either copper or long-dated Treasuries spells no short-term calm.Bitcoin and EthereumBitcoin and Ethereum charts are solidly recovering, but some breather next wouldn‘t surprise me. Overall, the stage remains set to go higher.SummaryWhat doesn‘t go up, must come down – but look for any S&P 500 downside to be largely bought when the dust settles.Gold and silver remain well bid, but the slowing pace of gains means that the bears might come out from hibernation – only to be repelled though. Look for copper to stabilize as a precondition, with miners not falling through the floor.Crude oil odds favor a new upleg to proceed, but unless commodities and metals rebound, black gold would get vulnerable.Bitcoin and Ethereum are peeking higher, and rebound continuation is more probable than other scenarios.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
Asia Morning Bites: Singapore Industrial Production and Global Market Updates

Gold – Healthy Pullback or Escalation Until Midsummer?

Florian Grummes Florian Grummes 07.06.2021 18:52
Gold and silver prices experienced quite a roller coaster ride over the last few days. Given the fast recovery on Friday we see two potential scenarios for the precious metal markets to unfold. Gold – Healthy Pullback or Escalation Until Midsummer?ReviewThe double low at US$1,676 in mid-March and at US$1,678 at the end of March marked the end of the eight-month correction in the gold market. In the past two months, gold was able to recover from this double low by a whopping US$240. Our conservative recovery targets of US$1,785 and US$1,855 were quickly achieved. Furthermore, gold continued its recovery until US$1,916 so far.Over the last two weeks however, the bulls (despite various attempts) failed to recapture the psychological US$1,900 level. Not surprisingly, a fast pullback brought prices back to US$1,856 on Friday early morning in the Asian markets. From here, gold came roaring back to US$1,895 as the latest non-farm payroll US job data missed expectations later during that day.The silver price, on the other hand, was able to hold up somewhat better than the gold price during the entire correction since last august. However, once the attack on the resistance zone around US$30 failed at the beginning of February, silver prices got beaten down together with the falling gold price. Accordingly, Silver reached its low on March 31 at US$23.78. But in contrast to gold, this level thus marked a higher low within the correction that began on August 7th. Currently, silver is trading just below US$28 keeping eye contact with the crucial hard resistance zone around US$30.Overall, thanks to the significant recovery over the last two months, the picture for the precious metals sector has improved significantly. The healthy pullback has been completed. The bull-market is intact. The question now remains how much time gold and silver will need to break out to new all-time highs and what type of pullback(s) we are going to see during the run up to new all-time highs.Technical Analysis: Gold in US-DollarWeekly Chart – Clear Breakout from the Downtrend ChannelGold in US-Dollars, weekly chart as of June 6th, 2021. Source: TradingviewOn the weekly chart, gold prices had managed to easily jump above the downtrend line of the previous nine and a half months in mid of May. Thus, the correction, which began with the new all-time high at US$2,075 on August 7th, 2020, has now most likely ended. Ultimately, this healthy correction seems to have unfolded in a bullish flag pattern.At the same time, gold has been reaching the midline of the three-year uptrend channel (currently around US$1,920). In addition, the 61.8% retracement of the correction at US$1,923 has been missed so far. Thus, the zone between US$1,920 and US$1,925 remains a strong hurdle. If the bulls would manage to break through US$1,925 a quick rally towards the next resistance zone around US$1,950 to 1,960 is extremely likely. This zone around US$1,960 however is a concrete resistance as gold had failed miserably in early November and early January at this level.Overall, the weekly chart is bullish with a slightly overbought stochastic. But there aren't any signals pointing to a pullback or a trend change here. In fact, the bullish momentum makes the continuation of the rally towards US$1,960 quite likely. If on the other hand the pullback from last week gains strength, expect a target zone of US$1,820 to US$1,845. Here, a very good buying opportunity would probably arise shortly before the seasonally best time of the year.Daily Chart – Stochastic With A Fresh Sell SignalGold in US-Dollars, daily chart as of June 6th, 2021. Source: TradingviewOn the daily chart gold had to weather a quick pullback last Thursday and early Friday morning. This pullback led prices back to the upper edge of the former downtrend channel, hence testing the resting breakout. So far, bulls managed to come back immediately, and the daily cycle might have ended in an extremely quick fashion with a low Friday morning in Asia.In the best case, the bulls still have enough fuel to extend the recovery towards the 61.8% retracement at US$1,923 and especially towards the hard resistance around US$1,960. Such an advance would likely free some more momentum (especially in silver) and could even create an escalation until midsummer. An escalation would mean that gold would test the US$2,000 to US$2,025 range before any more significant pullback can unfold.A more defensive perspective on the other hand would be, that a healthy but larger pullback has already started last Wednesday. Gold would likely come under some more selling pressure in this scenario. This could mean a continued sell-off down to the 200-day moving average (US$1,843) and the 38,2%-retracement at US$1,825 within June and July.In both cases gold will test its 200-day moving average at some point. In the “escalation” scenario it would take quite some more time and gold would first explode towards around US$2,000 before a larger pullback would then wipe out all the euphoria later in autumn again. Alternatively, we will get the pullback towards the upper edge of the former downtrend now and gold uses this little correction as a launch-pad for higher prices later in the summer. Subsequently, an attack on the US$2,000 level is expected sooner or later this summer (July to September). Overall, the picture in the precious metals sector has certainly improved considerably thanks to the strong recovery over the last two months. As well, it needs to be noted that the real momentum is going to be in silver market, once the resistance at US$30 is has been overcome.Commitments of Traders for Gold – Healthy Pullback or Escalation Until Midsummer?Commitments of Traders for Gold as of June 6th, 2021. Source: SentimentraderDue to the gold price recovery over the last two months, the Commitment of Trades Report (CoT) has deteriorated again. The cumulative net short position stood at 248,175 contracts as of last Tuesday. In the long-term comparison, this set-up however, is rather high and continues to urge caution and patience. Hence, the CoT-report delivers a sell signal.Sentiment for Gold – Healthy Pullback or Escalation Until Midsummer?Sentiment Optix for Gold as of June 6th, 2021. Source: SentimentraderSentiment numbers for gold are showing a rather neutral rating at the moment. So far, the recovery has not created any significant optimism let alone extreme euphoria. It is however extremely likely that the ongoing recovery will at least see some form of exaggerated optimism before it rolls over or pauses. Thus, sentiment does not stand in the way of a continuation of the rally.Seasonality for Gold – Healthy Pullback or Escalation Until Midsummer?Seasonality for Gold over the last 53-years as of June 6th, 2021. Source: SeasonaxOver the last 53-years a strong seasonal pattern has evolved for the gold market. Accordingly, gold would find its typical early summer low somewhere in June or July. Subsequently, a strong advance would follow in the next step pushing gold prices to a seasonal top around late September or early October.In the current situation this could mean a continuation of the pullback that started last Wednesday over the next few weeks. From a projected low around US$1,820 to US$1,840 gold would then be ready to strongly rally during midsummer.Seasonality for Gold over the last 5-years as of June 6th, 2021. Source: SeasonaxHowever, reducing gold´s historical movements to the last five years shows quite a different seasonal cycle! Hence, in the current bull market since 2016 gold tends to show strength up until mid to end of August before rolling over significantly in September. The weakness in June and July has not been evident over the last five years.Given this statistical evidence gold has quite a high probability of simply continuing its rally towards US$1,960 and US$2,000 to US$2,025 over the next two to three months! Only after such a rally a large pullback would be likely.Sound Money: Bitcoin/Gold-RatioSound Money Bitcoin/Gold-Ratio as of June 6th, 2021. Source: TradingviewWith prices of approx. US$36,000 for one Bitcoin and US$1,890 for one troy ounce of gold, the Bitcoin/Gold-ratio is currently sitting at around 19. That means you now have to pay only 19 ounces of gold for one Bitcoin. Put the other way around, an ounce of gold currently only costs 0.052 Bitcoin. Thus, Bitcoin has lost around 45% against gold to where it traded in March and April.You want to own Bitcoin and gold!Generally, buying and selling Bitcoin against gold only makes sense to the extent that one balances the allocation in those two asset classes! At least 10% but better 25% of one’s total assets should be invested in precious metals physically, while in cryptos and especially in bitcoin one should hold at least between 1% and 5%. If you are very familiar with cryptocurrencies and bitcoin, you can certainly allocate much higher percentages to bitcoin on an individual basis. For the average investor, who is primarily invested in equities and real estate, 5% in the still highly speculative and highly volatile bitcoin is a good guideline!Overall, you want to own gold as well as bitcoin, since opposites complement each other. In our dualistic world of Yin and Yang, body and mind, up and down, warm and cold, we are bound by the necessary attraction of opposites. In this sense you can view gold and bitcoin as such a pair of strength. With the physical component of gold and the pristine digital features of bitcoin you have a complementary unit of a true safe haven for the 21st century. You want to own both! – Florian GrummesMacro update and Crack-up-Boom:FED Balance Sheet. © Holger Zschaepitz via Twitter @Schuldensuehner, June 3rd, 2021.As in almost every other week, the Fed balance sheet has hit a fresh all-time high. Fed chairman Jerome Powell keeps the printing press rumbling despite rising inflation. The total assets expanded by 0.4% to a new record of US$7.94 trillion. The Fed’s balance sheet now equals 36% of the GDP for the U.S..ECB Balance Sheet. © Holger Zschaepitz via Twitter @Schuldensuehner, June 5th, 2021.Of course Madame Lagarde is pushing even harder and the ECB balance sheet is now on course to 80% of Eurozone’s GDP. This rise to the moon looks more and more parabolic as the total assets rose by another 14.5 billion EUR on QE . You can be sure that none of these irresponsible central bankers will have the guts to return to a more sustainable monetary policy.World total stock market cap. © Holger Zschaepitz via Twitter @Schuldensuehner, June 6th, 2021.One of the most obvious consequences is asset price inflation of course. While the worldwide economic has been rather muted the market cap of all stock markets combined hit a new all time driven by the overflowing liquidity provided by nearly all central banks on this planet.But while further rising equity portfolios are certainly to be welcomed by most investors, the increased cost of living is becoming a serious problem for many people. This is true especially since the vast majority of people in any society is always struggling to meet ends needs. They simply don´t own anything that they could invest. Hence the rising tension within most western societies. Those who at least understand what’s going on are forced to become speculators and often use credit and margin to somehow profit from the asset price inflation. However, with credit and margin but without experience they only increase the imbalances in the system.Inflation pops © Holger Zschaepitz via Twitter @Schuldensuehner, May 31st, 2021.Overall, the crack-up-boom is up and running and accelerating. Like a dance on the volcano. And Central bankers are doing everything to outpace any deflationary forces by simply printing more and more. Yet, the worldwide race to the bottom has no exit but is a dead end.Conclusion: Gold – Healthy Pullback or Escalation Until Midsummer?Never before in the last 50 years it was more important to own some physical gold and silver. Independently of any price appreciation or any potential speculative gains. Simply as a protection against the loss of purchasing power and many other looming worst case scenarios.As well from a technical point of view it is vital to now own a full physical position in precious metals. The 8-month pullback from the new all-time high is done and the bulls are back in the driving seat. Once gold sustainably takes out its all-time high at US$2,075 expect an acceleration and a rather quick rally towards approx. US$2,500 and probably higher. By then you will only run behind a train that has left the station. Physical supply is already tight, and premiums are often absurdly high.Technically speaking, gold is in a recovery since March 31st which still has room to continue towards US$1,960 and approx. US$2,025. Judging from the past, gold bulls should have enough strength to push prices towards those two numbers over the coming two to four months. Any pullback or breather on the way higher should be welcomed as one of the last chances to buy gold below US$2,000 and silver below US$30.Hence, the “healthy pullback” scenario over the coming weeks might be perfect for anybody who still needs to get positioned. However, in a bull market surprises are usually happening to the upside and a direct escalation until midsummer would leave many marveling at the wayside.To conclude, buy any dip.Source: www.celticgold.euFeel free to join us in our free Telegram channel for daily real time data and a great community.If you like to get regular updates on our gold model, precious metals and cryptocurrencies you can subscribe to our free newsletter.About the Author: Florian GrummesFlorian Grummes is an independent financial analyst, advisor, consultant, trader & investor as well as an international speaker with more than 20 years of experience in financial markets. He is specialized in precious metals, cryptocurrencies and technical analysis. He is publishing weekly gold, silver & cryptocurrency analysis for his numerous international readers. He is also running a large telegram Channel and a Crypto Signal Service. Florian is well known for combining technical, fundamental and sentiment analysis into one accurate conclusion about the markets. Since April 2019 he is also chief editor of the cashkurs-gold newsletter focusing on gold and silver mining stocks.
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

Inflation Soars 5%! Will Gold Skyrocket?

Finance Press Release Finance Press Release 15.06.2021 15:56
With the CPI annual inflation rate spiking 5% in May, gold could have gained a lot in response. However, it rallied only $20. Should we prepare for more?Whoa! Inflation soared 5% in May – quite a lot for a nonexistent (or transitory) phenomenon! But let’s start from the beginning. The CPI rose 0.6% in May, after increasing 0.8% in April. Meanwhile, the core CPI, which excludes food and energy, soared 0.7%, following a 0.9% jump in April. So, given that the pace of the monthly inflation rate decelerated, we shouldn’t worry about inflation, right? Well… we should.First of all, inflation was higher than expected , as the consensus forecast was a 0.4% increase. Inflation surprised pundits once again, but not me. Last month, I wrote in the Fundamental Gold Report that “Inflation escalated in April. In May, however, inflation could be softer, but it will remain relatively elevated, in my view” – and this is exactly what happened. However, the unexpected rise in inflation is positive news for gold, as such a surprise should decrease the real interest rates .Second, pundits cannot blame energy prices for this jump, as the energy index was flat. Apart from energy and medical care services, which decreased slightly, all index components increased last month. In particular, the index for used cars and trucks soared again (7.3%). Also, the indexes for new vehicles and apparel surged in May, which shows that inflationary pressure is broad-based .Last but definitely not least, the latest BLS report on inflation reveals that the overall CPI skyrocketed 5% for the 12 months ending May (before seasonal adjustment), followed by a 4.2% spike in April. For context, the annual inflation rate has been trending up every month since January, when the 12-month change was just 1.4%. Therefore, we’ve just seen the largest move since a 5.4% jump for the period ending in August 2008 , just one month before the bankruptcy of Lehman Brothers that triggered the global financial crisis and deflationary Great Recession .But that’s not all! The annual core CPI rate soared 3.8% last month after rising 3% in April, as the chart below shows. It was the fastest pace since June 1992. So, the Fed cannot by any manner of means blame higher inflation on food or energy prices.Supply disruptions are not a credible explanation either, as the inflation acceleration is broad-based. How likely would it be, that the production of virtually all goods and services would face supply bottlenecks at the same time and extent? Indeed, a significant boost in the broad money supply is a much more convenient explanation for widespread price increases.Implications for GoldWhat does accelerating inflation imply for the gold market? Well, on the one hand, higher inflation should be positive for the yellow metal , as it means a stronger demand for gold as an inflation hedge . Additionally, higher inflation could lower the real interest rates, also supporting gold prices. And indeed, the price of gold has risen from about $1,870 to $1,890 in a response to the inflation spike.On the other hand, some analysts point out that stronger inflation could be rather negative for the yellow metal , as the Fed would have to tighten its monetary policy , taper its quantitative easing and hike the federal funds rate to contain inflation. After all, the overall CPI annual rate is more than twice as high as the Fed’s target. Moreover, the mediocre gold’s reaction to the surge in inflation suggests that investors are worried about a normalization of the ultra-dovish monetary policy .However, the Fed has recently become more tolerant of higher inflation, and Powell is likely to continue claiming that inflation is merely transitory. Also, on Thursday, the European Central Bank held its regular monetary policy meeting and maintained its elevated flow of stimulus, even though recovery takes hold. And the Fed may do the same, i.e., nothing, tomorrow.Nevertheless, the relaxed stance of the ECB and the Fed could come out as incorrect. We have the economy operating above potential, with big fiscal injections along with a very easy monetary policy. Such a combination could bring us to an environment of higher and more lasting inflation, which could disrupt the market later in the future.After all, many indicators suggest that financial markets believe in the narrative of “transitory” inflation. But if inflation proves to be more permanent than expected, there could be some turmoil in the markets – and gold could benefit from it. Gold is not always a good inflation hedge, and it could suffer somewhat if the nominal interest rates increase; however, it should prosper if the real interest rates decline further.If you enjoyed today’s free gold report , we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today . If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care
Boosting Stimulus: A Look at Recent Developments and Market Impact

Fed Didn‘t Tame Inflation

Monica Kingsley Monica Kingsley 21.06.2021 16:45
As resilient as it had been before Wednesday, S&P 500 met selling pressure on Friday, including the best performing tech sector. Bullard‘s comments on the „inflation surprise“ and first rate hike before 2022 is over – are they full of hot air, testing the waters before taper, or serious intent? Given the ease with which precious metals and then select commodities such as copper or soybeans tumbled, rate hikes might appear to be baked in the cake now – but in reality, it‘s the unyielding inflation that would prove rather persistent than transitory.The Fed did the bare minimum, acknowledging inflation in passing, implying it would go away on its own. But it‘s more complicated than that – bank credit creation isn‘t strong, and had been declining before bond yields bottomed in Aug 2020. Are banks reluctant to lend, or customers to borrow? The result of production not ramping up as wildly as expected (reopening trades) is compounding the disturbed supply chains and commodity prices rising (cost-push inflation). Add to that job market pressures, and you have a recipe for inflation being more transitory than originally thought. In other words, cyclical and structural as import-export prices hint at too..Money in the system isn‘t flowing into production or capacities expansion – inventories have instead been drawn down, and need to be replenished. Just as I have written the prior Monday, that would be putting upside pressure on prices as much Europe awakening or hard hit countries such as India springing back. So, fresh money results in excess liquidity, trapped in the system, and flowing to bonds, which explains the Fed‘s need to act and fix repo rate at 0.05%. So much for the recent spike in Treassuries – this whiff of „almost deflation“ has it wrong, and yields will revert to rising – regardless of when exactly (or if) other parts of the intended $6T stimulus package get enacted.Sure, the Fed actions have shortened the (sideways) lull in Treasuries, made the dollar spike, but haven‘t changed the underlying dynamic of the free market not willing to pick up the slack in credit creation should the Fed indeed taper. Chances are, they would still taper, but later in 2022 – such was and still is my expectation, with bank credit creation being (hopefully) the key variable on their watch as a deciding factor. In the meantime, the inflation problem will get even more embedded – not a fast galloping inflation or hyperinflation, but a serious problem raising its ugly head increasingly more through the years to come.In short, the Fed played the dot plot perceptions game which amounts to no serious attempt to nip inflation in the bud. The markets (precious metals, commodities) got thrown off prior trends, but will see through the bluff that can‘t be followed by actions. The inflation trades (and by extension modest rise in yields as we drift towards 2.50% on the 10-year before that tapering actually starts, with positive consequences for financials and cyclicals) haven‘t been killed off, and will reassert themselves when the markets test the Fed (and they will). To be clear, I am calling for persistently elevated (not hyper) inflation (PCE deflator readings coming soon) with the 10-year yield reverting to its more usual trading range – so essential to financial repression reducing the real value of all obligations.Keep also the following macroeconomic point on your mind – inflation isn‘t strong enough currently to knock off the P&L to make stocks roll over, we‘re still in a reflation and commodities super bull market. Lower GDP growth potential equals growth (tech) doing fine, but expect the stock market leadership to broaden yet again to include the beaten down industrials and financials.So, there is no taper (wait for Jackson Hole), but we‘re enduring almost a taper tantrum, and stocks might need to test the 4,050 – 4,100 broad support zone that has more chances of holding than not. Doing so, it would confirm that value is far from down and out, and that we have further to run. As menacing as the VIX looks, the put/call ratio is already positioned on a rather cautious side, meaning that no great S&P 500 correction is starting here. It doesn‘t look so currently – the dislocation in credit markets (high yield end) appears temporary.Gold and silver are being hit by the hawkish Fed bets, and so are the inflation expectations. Miners are buying into it, meaning that the miners to gold ratio is threatening a downswing on the weekly chart. Has the true downtrend in the metals started? The yellow metal is actually sitting at two strong supports, and silver to gold ratio remains still in an uptrend. Simply put, the last 3 days trading action appears too exagerrated given the bond market disequilibrium amplifying the dollar upswing. Sure, it‘s a stiff headwind, but the Fed is still as easy as can be, and the copper to 10-year yield ratio remains constructive on the weekly chart, and starting to doubt the decline‘s veracity on the daily one.Oil is a great example of the commodities fever being far from over, and I‘m looking for more (basing) strength in black gold in spite of the oil index getting inordinarily spooked alongside many real assets. That‘s consistent with the persistent inflation not yielding much at all.Bitcoin and Ethereum also appear buying into the hawkish Fed narrative, when in reality money is still loose. But the dollar effect is in play in cryptos too – even if the dollar is range bound on high time frames, its current upswing hasn‘t fizzled out yet – the markets aren‘t yet near doubting the Fed.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookS&P 500 daily downswing still looks to be part of a correction, and no topping pattern. Nasdaq has held up relatively well, and I‘m expecting more strength in tech, followed gradually by value.Credit MarketsThe intraday reversal in high yield corporate bonds is what matters the most, and better be followed by local bottom forming here.Technology and ValueTechnology has been quite resilient, contrasting with the doom and gloom in value or more lag in smallcaps.Gold, Silver and MinersGold and miners are reacting as if tightening was already on, and real rates actually not declining. While the dollar link has been more influential, gold price action next would decide the fate of both technical factors mentioned in the caption. Another, stronger support line including 2019 lows, is below.Silver has been and is likely to outperform gold, and in hindsight, the current storm would be of the rea cup variety. While copper rebound isn‘t here yet, the ratio to 10-year yield indicates a reprieve.Bitcoin and EthereumNeither Bitcoin nor Ethereum chart is bullish, and the only argument not to boot, is the presence of two BTC supports.SummaryS&P 500 is approaching a deciding point in its still reflationary era. Value stabilizing in the face of rising tech and Treasuries would be the next bull market run objective.Gold and silver aren‘t out of the woods just yet but tentative signs of stabilization look to be here. Conquering the pre-FOMC levels, attacking $1,900 seems for now to be more than a few weeks away.Crude oil remains well positioned to extend gains as the commodity selloff on Thursday barely touched it. The oil outlook remains bullish.Bitcoin and Ethereum aren‘t on an immediate winning streak, and the recent closing lows in Bitcoin (below 33,000) remain to be monitored for a turn in sentiment. The weekly basing pattern though can‘t be ignored, making a break below 30,000 unlikely to succeed the earlier we were to move into the 35,000 – 40,000 range. That‘s a big if.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
GBP: ECB's Dovish Stance Keeps BoE Expectations in Check

Calling the Fed‘s Bluff

Monica Kingsley Monica Kingsley 22.06.2021 15:51
S&P 500 risk-on trading yesterday confirmed that it would have indeed been too early to write off value stocks. Financials, energy sprang higher, accompanied by the as of late usual tech suspect – the heavyweights though merely defended gained ground. Coupled with the credit market perspectives, it was a clear risk-on day as evidenced by the VIX and put/call ratio. The markets have turned on a dime, ignoring the Fed messaging of prior week as shown in the surging CRB index, reversing dollar and Treasuries:(…) Given the ease with which precious metals and then select commodities such as copper or soybeans tumbled, rate hikes might appear to be baked in the cake now – but in reality, it‘s the unyielding inflation that would prove rather persistent than transitory.The Fed did the bare minimum, acknowledging inflation in passing, implying it would go away on its own. But it‘s more complicated than that – bank credit creation isn‘t strong, and had been declining before bond yields bottomed in Aug 2020. Are banks reluctant to lend, or customers to borrow? The result of production not ramping up as wildly as expected (reopening trades) is compounding the disturbed supply chains and commodity prices rising (cost-push inflation). Add to that job market pressures, and you have a recipe for inflation being more transitory than originally thought. In other words, cyclical and structural as import-export prices hint at too.Money in the system isn‘t flowing into production or capacities expansion – inventories have instead been drawn down, and need to be replenished. Just as I have written the prior Monday, that would be putting upside pressure on prices as much Europe awakening or hard hit countries such as India springing back. So, fresh money results in excess liquidity, trapped in the system, and flowing to bonds, which explains the Fed‘s need to act and fix repo rate at 0.05%. So much for the recent spike in Treassuries – this whiff of „almost deflation“ has it wrong, and yields will revert to rising – regardless of when exactly (or if) other parts of the intended $6T stimulus package get enacted.Sure, the Fed actions have shortened the (sideways) lull in Treasuries, made the dollar spike, but haven‘t changed the underlying dynamic of the free market not willing to pick up the slack in credit creation should the Fed indeed taper. Chances are, they would still taper, but later in 2022 – such was and still is my expectation, with bank credit creation being (hopefully) the key variable on their watch as a deciding factor. In the meantime, the inflation problem will get even more embedded – not a fast galloping inflation or hyperinflation, but a serious problem raising its ugly head increasingly more through the years to come.In short, the Fed played the dot plot perceptions game which amounts to no serious attempt to nip inflation in the bud. The markets (precious metals, commodities) got thrown off prior trends, but will see through the bluff that can‘t be followed by actions. The inflation trades (and by extension modest rise in yields as we drift towards 2.50% on the 10-year before that tapering actually starts, with positive consequences for financials and cyclicals) haven‘t been killed off, and will reassert themselves when the markets test the Fed (and they will). To be clear, I am calling for persistently elevated (not hyper) inflation (PCE deflator readings coming soon) with the 10-year yield reverting to its more usual trading range – so essential to financial repression reducing the real value of all obligations.For now, the dollar is supported by all the tightening messaging, and as extended as it had been on a daily basis after Friday‘s close, yesterday‘s reversal had a strong consolidation feel to it, meaning that the dollar upswing might not be over just yet. The same thing can‘t be said about Treasuries, which look set to go on an overall slowly but surely rising yield path. Additionally, more calm on the risk-off (tightening) front means less panicked safe haven flows that leave out gold and silver, whose moves are sensitive to inflation and inflation expectations (among much else).The PCE deflator would surely come below the CPI reading – by default thanks to „weighted substitution“ effects. But the fact of current inflation not meaningfully decelerating remains sticking out as a sore thumb – the Fed is playing games and jawboning inflation expectations, which thanks to the real economy including job market constrainst described above, would prove of temporary effect, springing higher as a temporarily submerged water polo ball.For gold and silver, this means a patience game where the factors remain still arrayed behind their rise. Remember, the Fed can‘t tighten as fast as it projects to – seriously raising tapering looks slated for Jackson Hole, with actual execution coming next year. Provided that bank credit creation springs back to life, this needn‘t be a problem for stocks. Rate hikes though are a different cup of tea – any thought of normalizing yields is misplaced as Greenspan, Bernanke, and Powell were able to hike Fed funds rate to lesser and lesser levels, which means that with my anticipated, persistent inflation for years to come, even the projected (market-based, for it would be the markets who raise rates, not the Fed) return to e.g. 2.5 – 3.0% range on the 10-year, would guarantee real rates conducive to the precious metals bull run.Crude oil, given the extent its prices are set outside of the U.S. control (no longer a swing producer, rig count having troubles reaching pre-corona levels given the current policies), is better positioned than the metals, where we have to wait before these „get it“. Reopening, reflation and uptick in economic activity will work to lift black gold, and energy stocks agree. In spite of short-term technical non-confirmations, the picture remains bullish, and a deep plunge in oil unlikely.Cryptos don‘t offer a happy sight for the bulls as the key 30,000 support in Bitcoin looks likely to be tested soon. Yesterday‘s move also in Ethereum reveals newfound bearish vigor. Not that the news out of China would be helpful here.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookS&P 500 daily downswing looks successfully reversed – just as the Friday‘s intraday attempt to close the HYG gap hinted at. With tech leadership intact, good days for Nasdaq are a mainstay.Credit MarketsHolding on to the gained ground in high yield corporate bonds while TLT doesn‘t run wild again, would be the best scenario for further stock gains.Technology and ValueBoth technology and value did great yesterday, and it‘s been the cyclicals, high beta pockets driving the S&P 500 upswing. Even the Russell 2000 decisively joined, but don‘t look for much of outperformance in smallcaps (still an understatement).Gold, Silver and MinersGold and miners are still trading in corrective depths, with not nearly enough convincing upswing attempt yet. Still, precious metals are well positioned to benefit from the Fed inability to move as much as it gives impression it would. Once silver gets whiff of both the Fed‘s predicament and current (plus expected) inflation not yielding much ground, it would lead gold higher again. It‘s a process though and we haven‘t even started it yet (today‘s Powell testimony would be insightful).Crude OilBlack gold remains well positioned to rise again as the oil index correction ran its course.SummaryS&P 500 looks ready to consolidate gained ground before attempting another push higher, led by Nasdaq again.Gold and silver aren‘t out of the woods just yet but I‘m lookign for tentative return of confidence – a marathon rather than sprint.Crude oil looks likely to extend gains without much deeply reaching consolidation.Bitcoin and Ethereum are approaching decision time, where the floor could fall out pretty fast if the bears aren‘t stopped at 30,000 in BTC. The weekly basing pattern is intact for now, but prices returning good 5,000 higher would help also the ETH bulls with an even chance in this prolonged consolidation – to be resolved with a steep move either way, the risks of which being to the downside, are highly pronounced.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the four publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals and Bitcoin Trading Signals.
Asia Morning Bites: Trade Data from Australia, Taiwan Inflation, and US Fed Minutes Highlighted

Fed’s Liquidity Circus and Gold

Finance Press Release Finance Press Release 23.06.2021 11:23
Fed pumped so much money into the financial system, that the latter started sending it back. How will this and Fed’s more hawkish tone impact gold?With Jerome Powell, Chairman of the U.S. Federal Reserve (FED), testifying before Congress on Jun. 22, his prepared remarks signaled that the FED remains on autopilot. Despite saying that “job gains should pick up in coming months as vaccinations rise,” he added that “we at the FED will do everything we can to support the economy for as long as it takes to complete the recovery.”And while Powell supported our thesis by saying that “labor demand is remarkably strong and over time we will find ourselves with low unemployment and wages going up across the spectrum,” when asked if inflation is transitory, he responded:“[Perhaps] all of the overshoot in inflation comes from categories such as rising used car and trucks, airplane tickets, hotel prices that have been affected by the reopening of the economy. [And while] these effects have turned out to be larger than we expected , the incoming data are consistent with the view that these factors will wane over time .” For context, of course inflationary pressures will “wane over time.” That’s not up for debate. However, “when” is the key question.But in a bid to remove any doubt, he added:" We will not raise interest rates preemptively because we fear the possible onset of inflation . We will wait for evidence of actual inflation or other imbalances."Thus, while investors clearly cheered the FED Chair’s dovish sentiment on Jun. 22, Powell (for better or worse) still remains out of touch with reality. Case in point: the Philadelphia FED released its Nonmanufacturing Business Outlook Survey on Jun. 22. And while “the full-time employment index fell 20 points to 4.3 in June after rising 17 points last month,” the report revealed that “both future activity indexes suggest that the respondents expect overall improvement in nonmanufacturing activity over the next six months.”Please see below: Source: Philadelphia FEDMore importantly, though, with the inflation drama still unfolding, the report showed more of the same:“After reaching its all-time high in May, the prices paid index mostly held steady in June at 49.0 Forty-nine percent of the firms reported increases, none reported decreases , and 33 percent of the firms reported stable input prices. Regarding prices for the firms’ own goods and services, the prices received index rose 12 points to 28.9 in June, its highest reading since June 2018.”Please see below: Source: Philadelphia FEDSimilarly, the Richmond FED also released its Survey of Manufacturing Activity on Jun. 22. And while the report cited that “average growth rates of both prices paid and prices received by survey participants declined slightly but remained elevated in June,” employment was more optimistic, with the report revealing that “many manufacturers increased employment and wages in June and [expect] further increases in the next six months.”Please see below: Source: Richmond FEDWhat’s more, while the FED admitted its inflation error on Jun. 16 – as evidenced by the increase in its forecast for the headline Personal Consumption Expenditures (PCE) Index – Powell is now pretending that growth doesn’t exist. For context, the FED increased its 2021 real GDP growth estimate from 6.5% to 7.0% on Jun. 16, so Powell’s assertion on Jun. 22 that the economy "is still a ways off" is quite the contradiction.Moreover, absent a severe spread of the Delta variant – which White House chief medical advisor Dr. Anthony Fauci said was “the greatest threat in the U.S. to our attempt to eliminate COVID-19” – U.S. economic growth should easily outperform its developed-market peers.For example, many deflationists cite the slowdown in loan activity as a sign of a weak U.S. economy. However, with U.S. commercial banks releasing their deposit figures on Jun. 22, the argument is much more semblance than substance.Please see below:To explain, the green line above tracks deposits held by U.S. commercial banks, while the red line above tracks consumers’ revolving and credit card loans. If you analyze the right side of the chart, you can see that a material gap is present. However, with unprecedented fiscal policy (stimulus checks and enhanced unemployment benefits) flooding consumers’ bank accounts with dollars, why borrow money if you already have the cash to make the purchase?To that point, if we compare U.S. commercial banks’ deposits to the U.S. federal debt, the connection is even clearer.Please see below:To explain, the green line above tracks deposits held in U.S. commercial banks, while the red line above tracks the U.S. federal debt. If you analyze the sharp move higher in 2020, it’s another sign that U.S. citizens don’t need to borrow money when the government is already writing the checks. For context, there is a slight lag because the U.S. federal debt references Q1 data and U.S. commercial banks’ deposits reference Q2 data.Likewise, while rising U.S. nonfarm payrolls remain the key piece to solving the FED’s puzzle, the idea that monetary support is helping the real economy lacks credibility. To explain, the FED sold a record $792 billion worth of reverse repurchase agreements on Jun. 22. Moreover, when the FED buys $120 billion worth of bonds per month, the cash filters throughout the U.S. banking system and then financial institutions exchange that cash for Treasury securities on a daily basis, is QE really helping anyone?Please see below: Source: NY FEDFor context, I wrote previously:A reverse repurchase agreement (repo) occurs when an institution offloads cash to the FED in exchange for a Treasury security (on an overnight or short-term basis). And with U.S. financial institutions currently flooded with excess liquidity, they’re shipping cash to the FED at an alarming rate.More importantly, though, after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. On top of that, the liquidity drain is at extreme odds with the FED’s QE program. For example, the FED aims to purchase a combined $120 billion worth of Treasuries and mortgage-backed securities per month. However, with daily reverse repurchase agreements averaging $520 billion since May 21, the FED has essentially negated 4.33 months’ worth of QE in the last month alone.To that point, the flood of reverse repurchase agreements signals that financial institutions have no use for the FED’s handouts. Think about it: if commercial banks could generate higher returns by originating loans for consumers and businesses, wouldn’t they? And with 74 counterparties participating on Jun. 22 – up from 46 on Jun. 7 – the FED’s liquidity circus is now on display every night.If that wasn’t enough, I’ve highlighted on several occasions that gold exhibits a strong negative correlation with the U.S. 10-Year real yield (inflation-adjusted). And unsurprisingly, when the latter peaked in late 2018 and began its descent, it was off to the races for gold.Please see below:To explain, the gold line above tracks the London Bullion Market Association (LBMA) Gold Price , while the red line above tracks the inverted U.S. 10-Year real yield. For context, inverted means that the latter’s scale is flipped upside down and that a rising red line represents a falling U.S. 10-Year real yield, while a falling red line represents a rising U.S. 10-Year real yield.More importantly, though, if you analyze the relationship, you can see that before the U.S. 10-Year real yield plunged, gold was trading below $1,250 (follow the arrow). Conversely, once the U.S. 10-Year real yield hit an all-time low of – 1.08% in 2020, gold was trading above $2,000.Thus, what emotional gold investors fail to appreciate is that the yellow metal benefited from abnormally low interest rates. And with further strength dependent on another all-time low, the FED’s tightening cycle (which is already subtly underway) paints an ominous portrait of gold’s medium-term future.To that point, with Morgan Stanley telling its clients that “ We are past “Peak Fed” for the cycle and the market knows it ,” overzealous gold investors ignore the difficult realities that lie ahead.Please see below:To explain, the blue line above tracks the U.S. 10-Year real yield and important fundamental developments are marked in red. If you analyze the “Peak Fed” labels near 2012 and 2020 and compare them with gold’s behavior on the first chart above, you can see how abnormally low U.S. 10-Year real yields coincided with abnormally high gold prices. As a result, with the former poised to move higher in the coming months, the yellow metal will likely head in the opposite direction.What’s more, not only are the PMs dodging bullets from the bond market, but the USD Index has barely made its presence felt. For example, while the FED’s hawkish shift (even if Powell won’t admit it) is extremely bullish for the greenback, market participants – who are willing to give the FED the benefit of the doubt – still remain skeptical of the recent rally.Please see below:To explain, the black line above tracks Citigroup’s USD Positioning Alert Indicator (PAIN). For context, the index gauges whether or not positioning is crowded in the currency market. If you analyze the right side of the chart, you can see that U.S. dollar sentiment has fallen off of a cliff. However, with all signs pointing to a September taper, a violent short-covering rally could catch many investors off guard.As further evidence, when the FED delivered its taper announcement in December 2013, the USD Index recorded (with a delay) one of its sharpest rallies ever.Please see below:To explain, the green line above tracks the USD Index. If you analyze the left side of the chart, you can see that after the FED revealed its hand, the USD Index found a bottom and surged roughly six months later. Thus, with a similar announcement likely in the fall, the PMs could be confronted with even more negativity.And no, Basel 3 is not likely to be a game-changer for the gold market in the near term – I discussed that on June 2 .In conclusion, while the gold, silver, and mining stocks remain ripe for a short-term rally (no market moves in a straight line and PMs are no exception), their medium-term outlook remains extremely treacherous. And though Powell calmed investors’ nerves on Jun. 22 and market participants remain loyal followers, it’s important to remember that he is far from omniscient. After a significant about-face regarding the future trajectory of the headline PCE Index – a forecast that he made only three months ago – his confidence game is all about sentiment. Thus, while investors will give him the benefit of the doubt until the bitter end, the recent behavior of the bond market, the USD Index and the precious metals signal that the winds of change have already begun to blow.Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.Przemyslaw Radomski, CFA Founder, Editor-in-chiefSunshine Profits: Effective Investment through Diligence & Care* * * * *All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
European Central Bank's Potential Minimum Reserve Increase Sparks Concerns

Gold’s Behavior in Various Parallel Inflation Universes

Finance Press Release Finance Press Release 23.07.2021 12:44
The current high inflation could theoretically transform into hyperinflation, disinflation, stagflation, or deflation. What does each mean for gold?Inflation, inflation, inflation. We all know that prices have surged recently. And we all know that high inflation is likely to stay with us for a while, even if we assume that the CPI annual rate has already peaked, which is not so obvious. But let’s look beyond the nearest horizon and think about what lies ahead after months of high inflation, and what consequences it could have for the gold market.From the logical point of view, there are three options. Inflation rates could accelerate further, leading to hyperinflation in an extreme case. They could remain more or less the same, resulting possibly in stagflation when the pace of GDP growth decelerates. And, finally, the rates of annual changes in the CPI could slow down, implying disinflation, or they could even become negative – in this scenario, we would enter the world of deflation. So, which of these “flations” awaits us?Although some commentators scare us with the specter of hyperinflation, I would reject this variant. Surely, the inflation rate at 5% is relatively high, but it’s not even close to 50%, which is an accepted hyperinflation threshold. We also don’t see people getting rid of depreciating money as quickly as possible – instead, the demand for money has been rising recently (or, in other words, the velocity of money has been decreasing).It’s also worth remembering that hyperinflation usually occurs when fiscal deficits are financed by money creation, especially when the government cannot raise funds through borrowing or taxes, for example because of a war or other sociopolitical convulsions. Sure, the budget deficits are partially monetized, but we are far from the situation in which the US government would be unable to collect taxes or find lenders ready to buy its bonds. Hence, gold bugs counting on hyperinflation may be disappointed – but I doubt that they would really want to live during the collapse of the monetary system.The opposite scenario, i.e., deflation, is also unlikely. To be clear, asset price deflation is possible if some of the asset bubbles burst, but the absolute declines in the consumer prices, similar to those observed during the Great Depression, or even the Great Recession, are not very probable. The broad money supply is still increasing rapidly, the fiscal policy remains easy as never, and the Fed remains ultra-dovish and ready to intervene to prevent deflation. For deflation to happen, we would need to have the next global financial crisis which would severely hit the aggregate demand and oil prices.Although there are significant vulnerabilities in the financial sector, it’s definitely too early to talk about significant deflation risks on the horizon. As with hyperinflation, this is bad news for gold, as the yellow metal performs well during the deflationary crises (although at the beginning, people usually collect cash, disposing of almost all assets).So, we are left with two options. Inflation will either diminish to its previous levels (maybe to slightly higher readings than before the pandemic), and we will return more or less to the Goldilocks economy, or inflation will stay relatively high (although it may subside a bit), while the economic growth will slow down significantly (and more than inflation). It goes without saying that the latter option would be much better for gold than the former one, as gold doesn’t like periods of decelerating inflation rates and of a decent pace of economic growth (remember 1980 and the 1990s?). So, could gold investors reasonably ask whether we will experience disinflation or stagflation?Well, the Fed believes that the current high inflation readings will prove to be temporary and we will return to the pre-epidemic era of low inflation. But you can’t step in the same river twice, and you can’t step in the same economy twice. You can’t undo all the monetary and fiscal stimulus nor the surge in the broad money supply and the public debt (see the chart below).So, the pre-pandemic low inflation readings are not set in stone. And the impact of some deflationary forces could be exaggerated by the central bankers and the pundits – for example, the recent ECB research shows that “the disinflationary role of globalization has been economically small”.Hence, I worry about stagflation. And I’m not alone. The results of the latest biannual survey of the chief U.S. economists from 27 financial institutions for the U.S. Securities Industry and Financial Markets Association also highlight the risks of high inflation and stagnation. They reveal that 87% of respondents consider “stagflation, as opposed to hyperinflation or deflation, as the bigger risk to the economy.”Actually, the GDP growth is commonly projected to slow down significantly next year. For example, according to the recent Fed’s dot-plot, the pace of the economic growth will decline from 7% in 2021 to 3.3% in 2022. It’s still fast, but less than half of this year’s growth. And it’s likely to be slower, as the FOMC members tend to be overly optimistic.The stagflation scenario could be positive for gold, as the yellow metal likes the combination of sluggish (or even negative) growth and high inflation. Indeed, gold shined in the 1970s, the era of The Great Stagflation. Of course, there are important differences between then and now, but the economic laws are immutable: the mix of easy fiscal policy and monetary policy superimposed on economic reopening is a recipe for overheating and, ultimately, stagflation.However, so far, the markets have bet on transitory inflation. Moreover, they are focused on fast economic expansion and the Fed’s hawkish signals. But we could see more uncertainty later this year when higher interest rates and inflation hamper the economic activity. In that case, gold could get back on track.Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!Arkadiusz Sieron, PhDSunshine Profits: Effective Investment through Diligence & Care.
Rescued by the Fed Again?

Rescued by the Fed Again?

Monica Kingsley Monica Kingsley 22.09.2021 15:55
S&P 500 recovered only to dive again – carving out a base? The bulls are attempting to, but neither value, nor tech, nor the credit markets are convincing. The dust is settling though, and the bears are equally in need of a fresh reason to sell – the intraday tug of war is entirely reasonable as Evergrande failed to spook the markets more. Just wait for what happens when the markets come face to face with another unacknowledged event of this magnitude. In our era, it‘s about the contagion effect, manic-depressive market psychology, and uncertainty of the impact. It‘s not only about China real estate cooling down, spilling over to Hong Kong. Wtll the House approval on the bill to suspend fresh borrowing obstacles and avoid a partial shutdown do? What would the Senate say – and then everyone as the tax tsunami keeps approaching? Global liquidity isn‘t rising after all either.Fed taper is a side show, but still one that too many are glued to. The dollar would suffer if it doesn‘t materialize later today – and it won‘t be announced, which would make precious metals rejoice.Back to stocks, these are also likely to welcome no taper. The Fed has been already tightening (which means these days it was decreasing the pace of expansion) through the back door, bringing down inflation expectations in spite of the real world input costs, shipping rates and frail supply chains challenges on top of the job market issues. Transitory inflation is still the mainstream thesis – the shift to real assets will become more accentuated once the realization of a higher and entrenched inflation arrives. And it‘s not about real estate and owners‘ equivalent rent either.Commodities did welcome yesterday‘s reprieve, and Treasury yields are unlikely to clobber them the way perceived systemic risks could (did). In a decelerating real economy faced with numerous deflationary pressures, the slow and steady rising yields phase, is deferred for now. And when these do rise again, it may or may not be about returning economic growth, but forced by the systemic realities. Remember that rates are very low by historic comparisons, and the resilence to absorb a modest rise (think 10-year more than a bit above 2%) won‘t be there without consequences.Cashing in on the S&P 500 short profits yesterday, was reasonable from the total portfolio risk point of view (did I say a fresh high was reached?).Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookDaily hesitation followed by more downside, but volume is decreasing – stocks look readying an upswing attempt.Credit MarketsHigh yield corporate bonds merely kept opening gains – there is still hesitation, and the window of opportunity for the bulls is narrow.Gold, Silver and MinersPositive price action of gold, joined by silver – the waiting miners reveal that a little consolidation is likely before the Fed speaks.Crude OilOil stocks show that the appetite for oil might be returning, and that‘s confirmed by the volume examination. Commodities such as oil and copper stand to benefit from calming the Evergrande and central bank jitters.CopperCopper gave up opening losses only to rebound before the closing bell. Volume could have been larger, but the beaten down red metal can keep rebounding at its own pace – the smaller volume is an indication it won‘t be a one-way path.Bitcoin and EthereumBitcoin and Ethereum haven‘t really recovered from the selloff, and the bears are holding the upper hand now.SummaryMy yesterday‘s question „Is the selling over, is it not?“ has the same answer „Still inconclusive, but time for the bears is running short.“ It looks like the markets are positioning for a return to risk-on based on today‘s FOMC, which is what quite a few would like to take as an opportunity to sell into strength. The point is the Fed won‘t surprise today, and the price gyrations are likely to continue, albeit at a lesser magnitude.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
GBP: ECB's Dovish Stance Keeps BoE Expectations in Check

So Much for Hawkish Fed

Monica Kingsley Monica Kingsley 23.09.2021 15:54
So long – better said (as if it did apply in the first place). If June FOMC showed us anything, it was the power of (cheap) talk. We‘ve gone a long way since inflation‘s (getting out of hand) existence was acknowledged – yesterday, we were treated to very aggressive $10-15bn a month taper plans, cushioned with the „may be appropriate“ and Nov time designations. Coupled with the few and far away rate hikes on the dot plot, something fishy appears going on.While the real economy recovery progress has been acknowledged (how does that tie in with GDP downgrades and other macroeconomic realities I raised in yesterday‘s extensive analysis?), I think that the bar is being set a bit too high. Almost as if to give a (valid) reason for why not to taper right next. And the theater of taper on-off could go on, otherwise called jawboning, as markets reaction to this fragile phase of the economic recovery (marked by increasing deflationary undercurrents as shown by declining Treasury yields and contagion risks – make no mistake, Evergrande is the tip of the iceberg, real estate has been heating up over the last 1+ year around the world, and in the U.S. we have BlackRock mopping up residential real estate supply, underpinning high real estate prices especially when measured against income). Don‘t forget the weak non-farm payrolls either when it comes to the list of excuses to choose from.At the same time, we have not been entertained by the debt ceiling drama nearly enough yet. Right, the Fed is projecting the aura of independence, which made a Sep decision all the more unlikely. And who says we‘re short of drama these days?So, S&P 500 looks seeing through the Fed fog, but don‘t forget about the historical tendency to fade the first day (FOMC day) move during the next 1-2 days. So, I‘m looking for a certain paring off of yesterday‘s upswing in both paper and real assets. And that includes backing and filling in both commodities, precious metals and cryptos.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookThe bulls are on the move, running into headwinds though – more intraday hesitation (inan overall up day with a notable upper knot) is expected.Credit MarketsHigh yield corporate bonds again merely kept opening gains – there is still hesitation, but the bullish spirits are ever so slowly returning.Gold, Silver and MinersGold was still stunned by the taper plans presented, and miners are bidding their time. We haven‘t turned the corner yet.Crude OilOil stocks confirmed the oil upswing, and black gold‘s chart still maintains bullish posture.CopperCopper didn‘t really hesitate – the red metal produced another wild upswing, but the volume and base is lacking, and might take a moment to establish itself.Bitcoin and EthereumBitcoin and Ethereum rebounded, but the volume could have been larger – what was amiss there, could be compensated by prices hanging above at least the midpoint of yesterday‘s white candle.SummaryThe balance of power is shifting to the bulls, who are about to face a retracement attempt of yesterday‘s upswing, however. The degree of its mildness would hint at what to expect next – crucially, the dollar is getting the Fed (not a hawk) message, which would serve to cushion any hiccups taking markets lower over the nearest days.Thank you for having read today‘s free analysis, which is available in full here at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
US Industry Shows Strength as Inflation Expectations Decline

So Much for Hawkish Fed - 23.09.2021

Monica Kingsley Monica Kingsley 23.09.2021 15:55
So long – better said (as if it did apply in the first place). If June FOMC showed us anything, it was the power of (cheap) talk. We‘ve gone a long way since inflation‘s (getting out of hand) existence was acknowledged – yesterday, we were treated to very aggressive $10-15bn a month taper plans, cushioned with the „may be appropriate“ and Nov time designations. Coupled with the few and far away rate hikes on the dot plot, something fishy appears going on.While the real economy recovery progress has been acknowledged (how does that tie in with GDP downgrades and other macroeconomic realities I raised in yesterday‘s extensive analysis?), I think that the bar is being set a bit too high. Almost as if to give a (valid) reason for why not to taper right next. And the theater of taper on-off could go on, otherwise called jawboning, as markets reaction to this fragile phase of the economic recovery (marked by increasing deflationary undercurrents as shown by declining Treasury yields and contagion risks – make no mistake, Evergrande is the tip of the iceberg, real estate has been heating up over the last 1+ year around the world, and in the U.S. we have BlackRock mopping up residential real estate supply, underpinning high real estate prices especially when measured against income). Don‘t forget the weak non-farm payrolls either when it comes to the list of excuses to choose from.At the same time, we have not been entertained by the debt ceiling drama nearly enough yet. Right, the Fed is projecting the aura of independence, which made a Sep decision all the more unlikely. And who says we‘re short of drama these days?So, S&P 500 looks seeing through the Fed fog, but don‘t forget about the historical tendency to fade the first day (FOMC day) move during the next 1-2 days. So, I‘m looking for a certain paring off of yesterday‘s upswing in both paper and real assets. And that includes backing and filling in both commodities, precious metals and cryptos.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookThe bulls are on the move, running into headwinds though – more intraday hesitation (inan overall up day with a notable upper knot) is expected.Credit MarketsHigh yield corporate bonds again merely kept opening gains – there is still hesitation, but the bullish spirits are ever so slowly returning.Gold, Silver and MinersGold was still stunned by the taper plans presented, and miners are bidding their time. We haven‘t turned the corner yet.Crude OilOil stocks confirmed the oil upswing, and black gold‘s chart still maintains bullish posture.CopperCopper didn‘t really hesitate – the red metal produced another wild upswing, but the volume and base is lacking, and might take a moment to establish itself.Bitcoin and EthereumBitcoin and Ethereum rebounded, but the volume could have been larger – what was amiss there, could be compensated by prices hanging above at least the midpoint of yesterday‘s white candle.SummaryThe balance of power is shifting to the bulls, who are about to face a retracement attempt of yesterday‘s upswing, however. The degree of its mildness would hint at what to expect next – crucially, the dollar is getting the Fed (not a hawk) message, which would serve to cushion any hiccups taking markets lower over the nearest days.Thank you for having read today‘s free analysis, which is available in full here at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
Deflationary Winds Howling

Deflationary Winds Howling

Monica Kingsley Monica Kingsley 24.09.2021 15:54
Without looking back, S&P 500 rallied in what feels as a short squeeze in ongoing risk-off environment. Daily rise in yields was not only unable to propel the dollar, but resulted in a much higher upswing in tech than value stocks – and that‘s a little fishy, especially when the long upper knot in VTV is considered.The post-Fed relief simply took the bears for a little ride, and the Evergrande yuan bond repayment calmed the nerves. As if though the real estate sector was universally healthy – I think copper prices and the BHP stock price tell a different story. Things will still get interested in spite of PBOC moving in. The current macroeconomic environment will be very hard (economically and politically) to tighten into – have you noticed that the Turkish central bank unexpectedly cut rates?As I have written yesterday:(…) If June FOMC showed us anything, it was the power of (cheap) talk. We‘ve gone a long way since inflation‘s (getting out of hand) existence was acknowledged – yesterday, we were treated to very aggressive $10-15bn a month taper plans, cushioned with the „may be appropriate“ and Nov time designations. Coupled with the few and far away rate hikes on the dot plot, something fishy appears going on.While the real economy recovery progress has been acknowledged (how does that tie in with GDP downgrades and other macroeconomic realities I raised in yesterday‘s extensive analysis?), I think that the bar is being set a bit too high. Almost as if to give a (valid) reason for why not to taper right next. And the theater of taper on-off could go on, otherwise called jawboning, as markets reaction to this fragile phase of the economic recovery (marked by increasing deflationary undercurrents as shown by declining Treasury yields and contagion risks – make no mistake, Evergrande is the tip of the iceberg, real estate has been heating up over the last 1+ year around the world, and in the U.S. we have BlackRock mopping up residential real estate supply, underpinning high real estate prices especially when measured against income). Don‘t forget the weak non-farm payrolls either when it comes to the list of excuses to choose from.At the same time, we have not been entertained by the debt ceiling drama nearly enough yet. Right, the Fed is projecting the aura of independence, which made a Sep decision all the more unlikely. And who says we‘re short of drama these days?Given the S&P 500 sectoral performance and not exactly stellar market breadth, this is the time to be cautious, if you‘re a bull. Precious metals haven‘t yet caught the safe haven bid, but aren‘t decisively declining either. Dialing back the risk in stocks makes select commodities more vulnerable – copper more so than oil or natural gas, and cryptos are a chapter in its own right.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookThe bulls closed yesterday on a strong note, but the upswing was arguably a bit too steep on a very short-term basis.Credit MarketsHigh yield corporate bonds giving up their intraday gains coupled with rising yields in quality debt instruments, that‘s not entirely a picture of strength in the credit markets.Gold, Silver and MinersGold declined on the no Fed taper celebrations, and the sectoral weakness is concentrated in the miners. When it comes to silver, the white metal would be influenced by the copper woes – look for good news on the red metal front before expecting the same for silver, that‘s the short-term assessment.Crude OilOil stocks performance lends credibility to the oil upswing, and black gold‘s chart is still bullish – energies are likely to do well even if any CRB hiccups occur.CopperCopper hesitation is back, and both the bulls and bears are waiting as shown by the low volume. The bears have the advantage here.Bitcoin and EthereumBitcoin and Ethereum are suffering on renewed China headlines about cracking on crypto trading. The bears haven‘t gained full traction, though.SummaryYesterday‘s risk-on turn is likely to get questioned, with one day delay – revealing that it‘s not about the Fed setting a tad unrealistic taper pace and conditions. With no fresh stimulus coming, financial assets are facing a fiscal cliff in their own right, that‘s the big picture conclusion, which should temper the bullish appetite across many an asset class.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
California Leads the Way: New Climate Disclosure Laws Set the Standard for Sustainability Reporting

Reflation vs. Stagflation

Monica Kingsley Monica Kingsley 27.09.2021 13:17
S&P 500 didn‘t give in to the opening weakness, and eked out minor gains. There was no selling into the close either – the table looks set for the muddle through to continue on Monday. Tech and value – uninspiring on the day, and the same could be said of the credit markets. Rising yields (the market believes in taper, it appears) across the board, with high yield corporate bonds holding up much better than quality debt instruments – I have seen stronger risk-on constellations really.Importantly, the huge weekly jump in Treasury yields (the 10-year yield jumped over 20 basis points to 1.47%) failed to lift the dollar, which says a lot given the risk-off entry to the week. Meanwhile, the Fed jawboning continues, and the bigger picture leaves the ambitious Nov tapering suspect.At the same time, the Fed‘s foot is to a large degree off the gas pedal, and even global liquidity is shrinking. New taxes are kicking in, job market woes are persisting, inflation isn‘t going away any time soon, challenged supply chains are forcing globalization into reverse, workforce is shrinking, GDP growth is decelerating, and no fresh fiscal initiatives are on the horizon – sounds like a recipe for stagflation.As I wrote on Friday:(…) The post-Fed relief simply took the bears for a little ride, and the Evergrande yuan bond repayment calmed the nerves. As if though the real estate sector was universally healthy – I think copper prices and the BHP stock price tell a different story. Things will still get interested in spite of PBOC moving in. The current macroeconomic environment will be very hard (economically and politically) to tighten into – have you noticed that the Turkish central bank unexpectedly cut rates?Precious metals should love the ever more negative real rates, and the financial repression that does accompany them. Commodities and real assets are bound to do great long-term, and stocks would enjoy the most the reflationary stage, the early stage of inflation where everyone benefits and no one pays. In spite of all the real world inflation, we‘ve not yet entered its nasty, late phase.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookFriday brought a daily pause in the upswing – the bulls however didn‘t yield to the sellers through the day.Credit MarketsHigh yield corporate bonds gave up less ground than quality debt instruments, whose downswing was arguably a bit too steep. The non-confirmation of the stock market advance though is barely visible.Gold, Silver and MinersGold managed to hold ground in spite of the steep rise in yields, but miners keep on being more and more undervalued – if you‘re a long-term investor, these are very interesting prices throughout the PMs sector. Silver keeps trading at odds with copper, and both metals (including a couple more), are required for the green economy shift.Crude OilOil stocks paused on Friday, and so will the oil upswing likely too next. Energies though remain bullish, and dips are to be bought.CopperCopper closed at weekly highs, but hesitated still when compared to the CRB Index. All isn‘t well if you look at BHP (or FCX), which is a proxy for both copper and China.Bitcoin and EthereumBitcoin and Ethereum have recovered from the China crypto trading crackdown notice, and keep repelling the bears successfully.SummaryRisk-on wasn‘t dethroned on Friday, but didn‘t convince either. Apart from select commodities, strong gains were absent. Wait and see on low volume day – one that is likely to carry over into Monday. Risk-on assets still haven‘t cut the corner (no recapturing of the 50-day moving average), and the VIX below 19 is slowly approaching the lower border of its recent range, meaning that volatility can surprise us shortly again.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
Boosting Stimulus: A Look at Recent Developments and Market Impact

Gauntlet to the Fed

Monica Kingsley Monica Kingsley 28.09.2021 15:49
S&P 500 was unable to sustain intraday gains, and both VIX and volume show the bears want to move. Arguably, the key market to watch, are the Treasuries – the 10-year yield continues rising, knocking on the 1.50% door again. On the day of Powell‘s testimony, that‘s quite a message to the central bank.As I wrote yesterday:(…) Rising yields (the market believes in taper, it appears) across the board, with high yield corporate bonds holding up much better than quality debt instruments – I have seen stronger risk-on constellations really.Importantly, the huge weekly jump in Treasury yields (the 10-year yield jumped over 20 basis points to 1.47%) failed to lift the dollar, which says a lot given the risk-off entry to the week. Meanwhile, the Fed jawboning continues, and the bigger picture leaves the ambitious Nov tapering suspect.At the same time, the Fed‘s foot is to a large degree off the gas pedal, and even global liquidity is shrinking. New taxes are kicking in, job market woes are persisting, inflation isn‘t going away any time soon, challenged supply chains are forcing globalization into reverse, workforce is shrinking, GDP growth is decelerating, and no fresh fiscal initiatives are on the horizon – sounds like a recipe for stagflation.The Fed can adjust (and even reverse) the tapering projections any time it pleases – it has played the job market card already. The dollar failing to gain traction though, is telling. Not even commodities as such are rolling over to the downside – actually, energies (oil, natural gas) have been the star performers (even within the S&P 500 sectors), and agrifoods are well positioned to do great as well. Copper and precious metals are feeling the short-term heat (still, the red metal offered a great entry point earlier today, making the open position profitable from the get-go), but the metals would stop reacting to the bad news while ignoring negative real rates (yes, transitory inflation is another myth the market place believes in) at some point. All roads lead to gold – inflationary and deflationary ones alike.What can the Fed do? Underestimate inflation, be behind the curve, carefully play expectations while real world inflation coupled with shattered supply chains wreck the stock market bull over the quarters ahead? Or throughtfully slam on the brakes (which is what the markets think it‘s doing now), which would force a long overdue S&P 500 correction that could reach even 10-15% from the ATHs? Remember that the debt ceiling hasn‘t been resolved yet, so an interesting entry to the month of October awaits.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookThe real question mark is where the bulls step in next, and whether they could carry prices over Monday‘s highs (4,470s) – this question is a bit too early to ask.Credit MarketsCredit markets haven‘t moderated their pace of decline, but the yield spreads show we have higher to go once the current dust settles.Gold, Silver and MinersGold managed to hold ground yesterday, but further yields pressure is likely to affect it, whether or not it translates to (marginally) higher USD Index.The bears have the short-term initiative till bonds turn.Crude OilCrude oil didn‘t treat us to much of an intraday dip, and the oil sector shows the rush into energies is on – no matter how short-term extended and approaching the late Jun highs black gold is.CopperCopper hesitation goes on, with the red metal failing to gain traction the CRB Index way. Still, it‘s range bound, and FCX (which is important for gold too) is showing signs of life.Bitcoin and EthereumBitcoin and Ethereum bears have reasserted themselves, and would confirm the initiative with a break below $44K in BTC. For now, it‘s too early to declare the end of the trading range.SummarySeptember storms aren‘t over yet, and declining bonds are a warning sign. Commodities are the most resilient, and will likely remain so, until precious metals sniff out the room for Fed‘s hawkishness as radically decreasing. The question marks over the timing and actual pace of taper, are persisting.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
New York Climate Week: A Call for Urgent and Collective Climate Action

Wishing Away Inflation

Monica Kingsley Monica Kingsley 29.09.2021 15:44
S&P 500 bears did indeed move, and the dip wasn‘t much bought. VIX with its prominent upper knot may not have said the last word yet, but a brief consolidation of the key volatility metrics is favored next. Even the overnight rebound (dead cat bounce, better said), is losing traction, prompting me to issue a stock market update to subscribers hours ago – fresh short profits can keep growing:(…) Following yesterday’s slide, the S&P 500 upswing appears running into headwinds as credit markets keep putting pressure on the Fed. Rising dollar is thus far having little effect on commodities, and precious metals have retraced a sizable part of the intraday downswing. Tech remains more vulnerable than value, and this correction appears as not (at all) yet over.While the dollar upswing hasn‘t been strongest over the prior week, higher yields are causing it to rise somewhat still. The commodity complex is remarkably resilient – the open long positions are likely to keep doing well – and I don‘t mean only energies. Copper is holding up in the mid 4.20s while precious metals are giving the bears a break – a tentative one, but nonetheless encouraging – as I have written yesterday:(…) the metals would stop reacting to the bad news while ignoring negative real rates (yes, transitory inflation is another myth the market place believes in) at some point. All roads lead to gold – inflationary and deflationary ones alike.What can the Fed do? Underestimate inflation, be behind the curve, carefully play expectations while real world inflation coupled with shattered supply chains wreck the stock market bull over the quarters ahead? Or throughtfully slam on the brakes (which is what the markets think it‘s doing now), which would force a long overdue S&P 500 correction that could reach even 10-15% from the ATHs? Remember that the debt ceiling hasn‘t been resolved yet, so an interesting entry to the month of October awaits.Bonds are signalling that the Fed‘s image of inflation fighter (right or wrong, have your pick) is losing the benefit of the doubt it was given with the Jun FOMC – bond yields have abruptly ended their descent and subsequent trading range. This spells not only inflation (the risk of Fed‘s policy mistake – warnings it would take longer with us than originally anticipated coupled with the professed faith it would just naturally subside all by itself), but smacks of stagflation.Let‘s move right into the charts (all courtesy of www.stockcharts.com).S&P 500 and Nasdaq OutlookRising volume and some lower knot hint at the possibility of overnight rebound, but the real question is whether that would stick. So far, it doesn‘t seem so.Credit MarketsCredit markets haven‘t moderated their pace of decline, but TLT attempted to find bottom intraday, which would coincide with tech temporarily pausing as well. The dust hasn‘t yet settled.Gold, Silver and MinersGold is having harder and harder time declining, and the miners pause makes yesterday‘s modest downswing suspect. When silver joins in showing some relative strength, we would know the focus is shifting to inflation again, in precious metals as much as in Treasuries – this hasn‘t happened thus far.Crude OilCrude oil finally paused, and its candlestick favors consolidation – oil stocks have remained well performing, pointing out still more upside in the current black gold upleg.CopperCopper hesitation goes on, with the red metal once again trading at odds with the CRB Index, which makes further downside rather limited. Bitcoin and EthereumBitcoin and Ethereum bears haven‘t confirmed the initiative with a break below $40K in BTC (sorry for yesterday‘s typo stating $44K – corrected on my site). It‘s too early to declare the end of the trading range – similarly to gold, cryptos have a hard time falling, and that means something.SummaryStocks aren‘t out of the woods yet, and monetary policy has turned into a headwind. Damned if you do, damned if you don‘t – the Fed is having a hard time walking the fine taper line. Rising Treasury yields are a warning sign – commodities are likely to remain the most resilient, and precious metals would join just like cryptos. The question marks over the debt ceiling, the timing and actual pace of taper, keep persisting.Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
When Will the Party End?

When Will the Party End?

Michael Pento Michael Pento 04.02.2021 16:45
When Will the Party End? I’d like to explain why these already-stretched markets could crash by the start of the 3rd quarter. I’ve been warning over the past month, or about, that my Inflation/Deflation and Economic Cycle Model SM is forecasting a potential crash in equities around the start of Q3 this year. Of course, this timing could change and I would only take action in the portfolio if the Model validates this forecast to be correct. Nevertheless, here’s why the bubble we are currently riding higher in the portfolio could burst around that time. During the late Q2 early Q3 timeframe the following macroeconomic conditions will be occurring: The second derivative of y/y growth and inflation will be surging. As a direct consequence, Bond yields will be surging Whatever tax increases to pay for the Biden administration’s stimulus packages should have been passed. The next trillion-dollar COVID stimulus package will be months in the rear-view mirror and the $900 billion package signed by Trump in late December will be even further behind. The chatter around Fed tapering its $120 billion per month bond purchase program will then reach a crescendo. Just look how the market sold off today on just a routine Fed meeting—one without the spiking inflation yet to come. By the way, Mr. Powell reinforced his record-breaking easy monetary policy. Finally, the COVID vaccines will be close to reaching maximum distribution and their genuine efficacy and effect on the economy will then be known. If the vaccines work anywhere near as advertised, Powell indicated in his press conference today that it would be a strong catalyst towards normalizing monetary policy. Hence, the economy will then realize its maximum re-opening status--thus, putting further upward pressure on interest rates. To sum up: we will have higher taxes, much higher interest rates and rapidly rising inflation. All this will occur at the same time the market will be worrying about front-running the Fed’s exit from record manipulation of bond and stock prices. There will be immense pressure on the Fed to cut back on monetary stimulus at exactly the wrong time: the cyclical peak of economic growth. Indeed, the ROC in growth will be on the precipice of rapidly falling during late Q3 and Q4 because of waning fiscal stimulus, the threat of reduced monetary stimulus and interest rates that are becoming intractable. This will leave Mr. Powell with a huge problem. If the stock and bond prices are already crashing due to inflation (while the Fed Funds Rate is already at 0% and QE is at a record high rate, then the Fed won’t be automatically able to save the day by instituting more QE and rate cuts. While it is true that a central banker can easily fix a bear market caused by recession and deflation--simply by pledging to create more inflation--it cannot easily arrest a bear market if it is caused by spiking rates and inflation. Powell may be rendered powerless to stop the market from plunging precipitously. It may only be in the wake of the carnage of a deflationary depression that Powell’s potential move to buy stocks has any real benefit. Only then will his printing press become effective. Alas, that will be way too late for those who suffered going over the cliff and the multiple years you have to wait to make up the loss. PPS will try to protect our gains and profit from the coming gargantuan reconciliation of asset prices. In contrast, the deep state of Wall Street will buy and hold your retirement account into the abyss.
November Monthly

November Monthly

Marc Chandler Marc Chandler 03.11.2021 15:17
Three main forces are shaping the business and investment climate:  Surging energy prices, a dramatic backing up of short-term interest rates in Anglo-American countries, and the persistence of supply chain disruptions.  The US and Europe have likely passed peak growth.  Fiscal policy will be less accommodative, and financial conditions have tightened. Japan appears to be getting a handle on Covid and after a slow start.  Its vaccination rate has surpassed the US.  The lifting of the formal state of emergency and a hefty dose of fiscal stimulus is expected to be delivered in the coming months. Many developing economies have already lifted rates, some like Brazil and Russia, aggressively so.  They will likely finish earlier too.      US light sweet crude oil rose nearly 12% last month, even though US inventories rose last month for the first time since April.   The price of WTI rose almost 10% in September.  Statistically, the rise in oil prices is strongly correlated with the increase in inflation expectations.  OPEC+ will boost supplies by another 400k barrels a day at the start of November and is committed to the same monthly increase well into 2022.   At the same time, new Covid infections in several Asia-Pacific countries, including China, Singapore, and Australia, warn of the risk of continued supply-chain disruptions.  In Europe, Germany and the UK recently reported the most cases since the spring. Belgium is tightening curbs.  Bulgaria is seeing a rise in infections, and Romania was at full capacity in its intensive care facilities.  The fact that Latvia lags the EU in vaccination at about 50% leaves it vulnerable.  The US may be lagging behind Europe, and the next four-six weeks will be critical.  Roughly 40% of Americans are not fully vaccinated.   The rise in price pressures and the gradual acknowledgment by many central bankers that inflation may be more persistent have helped spur a significant backing up of short-term rates in the Anglo-American economies. The ultimately deflationary implications of the surge in energy prices through demand destruction and the implications for less monetary and fiscal support still seem under-appreciated. Yet, the market has priced in aggressive tightening of monetary policy over the next 12 months.   The focus of the foreign exchange market seems squarely on monetary policy.  From a high level, the central banks perceived to be ahead in the monetary cycle have seen stronger currencies. The likely laggards, like the Bank of Japan, the Swiss National Bank, and the ECB, have currencies that underperformed.  Norway and New Zealand have already raised rates and are expected to do so again in November.    Of course, as you drill down, discrepancies appear.  In October, the Australian dollar was the top performer among the major currencies with a 4% gain.  It edged out the New Zealand dollar and the Norwegian krone, whose central banks are ahead of the Reserve Bank of Australia.  The RBA has pushed against market speculation that has 90 bp of tightening priced into 12-month swaps.  The Australian dollar outperformed sterling by about 2.5% in October even though the Bank of England has been so hawkish with its comments that the market had little choice but to price in a high probability of a hike as early as the November meeting.  In fact, the market has the UK's base rate above 50 bp by the end of Q1 22.  This is important because in its forward guidance that BOE has identified that as the threshold for it to begin unwinding QE by stopping reinvesting maturing issues.  Interestingly enough, when the BOE meets on March 17 next year, it will have a sizeable GBP28 bln maturity in its portfolio.   In an unusual quirk of the calendar, the Federal Reserve meets before the release of the October jobs report.  All indications point to the start of the tapering process.  It is currently buying $120 bln a month of Treasuries ($80 bln) and Agency Mortgage-Backed Securities.  The pace of the reduction of purchases is a function of the duration, and the Fed has clearly indicated the tapering will be complete around mid-year. That suggests reducing the purchases by about $15 bln a month.  Chair Powell indicated that unlike the Bank of England, the Fed will stop its bond purchases before raising rates. A faster pace of tapering would be a hawkish signal as it would allow for an earlier rate hike.  The gap between when the tapering ends and the first rate hike does not appear predetermined. Powell has talked about the economic prerequisites, which emphasize a full and inclusive labor market in the current context. The Fed funds futures entirely discount a 25 hike in July, with the risk of a move in June.  Comments by several officials hint that the Fed may drop its characterization of inflation as transitory, which would also be understood as a hawkish development.   Partly owing to the extended emergency in Japan, it is marching to the beat of a different drummer than the other high-income countries. Inflation is not a problem.  In September, the headline rate rose to 0.2% year-over-year, the highest since August 2020.  However, this is a function of fresh food and energy prices, without which the consumer inflation stuck below zero (-0.5%).  In December 2019, it stood at 0.9%.  In addition, while fiscal policy will be less accommodative in Europe and the US, a sizeable supplemental budget (~JPY30 trillion) is expected to be unveiled later this year.   After expanding by 1.3% quarter-over-quarter in Q2, the Chinese economy slowed to a crawl of 0.2% in Q3, which was half the pace expected by economists. Some of the decline in economic activity resulted from the virus and natural disasters (floods). Still, some of it stemmed from an effort to cut emissions in steel and other sectors.  The problems in China's property development space, accounting for a large part of its high-yield bond market,  unsettled global markets briefly.  Talk of a Lehman-like event seems a gross exaggeration. Still, given the sector's importance to China's economy (30% broadly measured) and the use of real estate as an investment vehicle, it may precipitate a structural shift in the economy.   The Communist Party and the state are reasserting control over the economy's private sector and the internet and social network.  It has also weighed in on family decisions, like the number of children one has, how long a minor should play video games, the length of men's hair, what kind of attributes entertainers should have, and appropriate songs to be played with karaoke.   It seems to be reminiscent of part of the Cultural Revolution and a broader economic reform agenda like Deng Xiaoping did in the late 1970s and Zhu Rongji in the 1990s.  At the same time, Beijing is wrestling with reducing emissions and soaring energy prices, which also dampen growth. Even though consumer inflation is not a problem in China (0.7% year-over-year in September), Chinese officials still seem reluctant to launch new stimulative fiscal or monetary initiatives. Moreover, new outbreaks of the virus could exacerbate the supply chain disruptions and delays fuel inflation in many countries.  The aggressiveness in which investors are pricing G10 tightening weighed on emerging market currencies in October.  The JP Morgan Emerging Market Currency Index fell by almost 0.8% last month after falling 2.9% in September, the largest decline since March 2020.  The continued politicization of Turkey's monetary policy and the aggressive easing saw the lira tumble nearly 7.5% last month, which brings the year-to-date depreciation to 22.5%.   On the other hand, Brazil's central bank has aggressively hiked rates, and the 150 bp increase in late October brought this year's tightening to 575 bp and lifting the Selic to 7.75%.  Yet, it is still below the inflation rate (10.34% October), and the government has lost the confidence of domestic and international business.  The Brazilian real fell nearly 3.5% last month to bring the year-to-date loss to almost 7.8%.   Our GDP-weighted currency basket, the Bannockburn World Currency Index, snapped a two-month decline and rose by 0.35%.  The rise in the index reflects the outperformance of the currencies against the dollar.  The currencies from the G10 countries, including the dollar, account for about two-thirds of the index, and emerging markets, including China, the other third.  The yen was the weakest of the majors, falling 2.3%.  It has a weighting of 7.5% in the BWCI.   Among the emerging market currencies in our GDP-weighted currency index, the Brazilian real's 3.4% decline was the largest, but its 2.1% weighting minimizes the drag.  It was nearly offset by the Russian rouble's 2.5% advance.  It has a 2.2% weighting in our basket.  The Chinese yuan, which has a 21.8% share, rose by 0.6%.      Dollar:   The market is pricing in very aggressive tightening by the Federal Reserve.  As recently as late September, only half of the Fed officials anticipated a hike in 2022.  The December 2022 Fed funds futures are pricing in a little more than two hikes next year. More than that, the market is discounting the first hike in June next year, implying a transition from completing the bond-buying to raising rates with no time gap.  The disappointing 2% Q3 GDP exaggerated the slowing of the world's largest economy.  We note that the supply-side challenges in vehicle production halved the growth rate.  Growth is likely to re-accelerate in Q4, but we continue to believe that the peak has passed.  While inflation is elevated, the pace of increase slowed in Q3.  Consider that the PCE deflator that the Fed targets rose at an annualized rate of 4.0% in Q3 after a 5.6% pace in Q2.  The core rate slowed to an annualized pace of 3.3% last quarter, half of the speed in the previous three months.  The infrastructure spending plans have been reduced, and some of the proposed tax hikes, including on corporations, appear to be dropped as part of the compromise among the Democratic Party.   Euro:  For most of Q3, the euro has been in a $1.17-$1.19 trading range.  It broke down in late September, and was unable to recapture it in October.  Instead, it recorded a new low for the year near $1.1525.  A convincing break of the $1.1500 area could signal a move toward $1.1300. The single currency drew little support because growth differentials swung in its favor in Q3:  the Eurozone expanded by 2.2% quarter-over-quarter while the US grew 2% at an annualized pace.  The ECB is sticking to its analysis that the rise in inflation is due to transitory factors while recognizing that energy prices may prove more sticky.  That said, news that Gazprom may boost gas sales to Europe after it finishes replenishing Russian inventories after the first week in November, natural gas prices fall at the end of October.  After the Pandemic Emergency Purchase Program ends next March, decisions about the asset purchases next year will be announced at the December ECB meeting along with updated forecasts.   (October indicative closing prices, previous in parentheses)   Spot: $1.1560 ($1.1580) Median Bloomberg One-month Forecast $1.1579 ($1.1660)  One-month forward  $1.1568 ($1.1585)    One-month implied vol  5.1%  (5.1%)         Japanese Yen:  The dollar rose 2.3% against the yen in October to bring the year-to-date gain to nearly 9.5%.  The Bank of Japan will lag behind most high-income countries in the tightening cycle, and the higher US yields are a crucial driver of the greenback's gains against the yen.  Japan's headline inflation and core measure, which only excludes fresh food, may be rising, but they are barely above zero and, in any event, are due to the surge in energy prices. In response to the weakening yen, Japanese investors appear to have boosted their investment in foreign bonds, while foreign investors increased their holdings of Japanese stocks.  The LDP and Komeito maintained a majority in the lower chamber of the Diet. A sizeable stimulus supplemental budget is expected to help strengthen the economic recovery now that the formal emergencies have been lifted.  In Q3, the dollar traded mainly between JPY109 and JPY111.  It traded higher in the second half of September rising to nearly JPY112.00.  The dollar-yen exchange rate often seems to be rangebound, and when it looks like it is trending, it is frequently moving to a new range.  We have suggested the upper end of the new range may initially be the JPY114.50-JPY115.00.  The four-year high set last month was about JPY114.70.  A move above JPY115.60 could target the JPY118.50 area.     Spot: JPY113.95 (JPY111.30)       Median Bloomberg One-month Forecast JPY112.98 (JPY111.00)      One-month forward JPY113.90 (JPY111.25)    One-month implied vol  6.4% (5.6%)   British Pound:  Sterling rallied around 4 1/3 cents from the late September low near $1.34.  The momentum stalled in front of the 200-day moving average (~$1.3850).  After several attempts, the market appeared to give up.  We anticipate a move into the $1.3575-$1.3625 initially, and possibly a return toward the September low. The implied yield of the December 2021 short-sterling interest rate futures rose from 22 bp at the end of September to 47 bp at the end of October as the market.  It was encouraged by Bank of England officials to prepare for a hike at the meeting on November 4, ostensibly while it is still providing support via Gilt purchases.  If there is a surprise here, it could be that, given the unexpected softening of September CPI and the fifth consecutive monthly decline in retail sales, rising Covid cases, that the BOE chooses to take the more orthodox route.  This would entail ending its bond purchases, as two MPC members argued (dissented) at the previous meeting and holding off lifting rates a little longer.        Spot: $1.3682 ($1.3475)    Median Bloomberg One-month Forecast $1.3691 ($1.3630)  One-month forward $1.3680 ($1.3480)   One-month implied vol 6.8% (7.1%)      Canadian Dollar:  The three drivers for the exchange rate moved in the Canadian dollar's favor in October and helped it snap a four-month slide against the US dollar.  First, the general appetite for risk was strong, as illustrated by the strength of global stocks and the record highs in the US.  Second, the premium Canada pays on two-year money more than doubled last month to almost 60 bp from 25 bp at the end of September.  Third, commodity prices in general and oil, in particular, extended their recent gains.  The CRB Index rose 3.8% last month, the 11th monthly increase in the past 12, to reach seven-year highs.  The Bank of Canada unexpectedly stopped its new bond purchases and appeared to signal it would likely raise rates earlier than it had previously indicated.  The swaps market is pricing 125 bp of rate hikes over the next 12 months, with the first move next March or April.  Still, the US dollar's downside momentum stalled near CAD1.2300.  There is scope for a corrective phase that could carry the greenback into the CAD1.2475-CAD1.2500 area.     Spot: CAD1.2388 (CAD 1.2680)  Median Bloomberg One-month Forecast CAD1.2395 (CAD1.2580) One-month forward CAD1.2389 (CAD1.2685)    One-month implied vol 6.2% (6.9%)      Australian Dollar:  The Aussie's 4% gain last month snapped a four-month, roughly 6.5% downdraft.  Despite RBA Governor Lowe's guidance that the central bank does not anticipate that the condition to hike rates will exist before 2024 is being challenged by the market.  Underlying inflation rose above 2% in Q3. The central bank's failure to continue defending the 10 bp target of the April 2024 bond spurred speculation that it would be formally abandoned at the November 2 policy meeting.  The RBA's inaction unsettled the debt market.  The two-year yield soared almost 70 bp last month, and the 10-year yield rose nearly 60 bp.  Although the RBA could have handled the situation better, New Zealand rates jumped even more.  Its two-year yield jumped 80 bp while the 10-year yield surged by 58 bp.  Last month, the Australian dollar's rally took it from around $0.7200 to slightly more than $0.7550, where it seemed to stall, just in front of the 200-day moving average.  We suspect the October rally has run its course and see the Aussie vulnerable to a corrective phase that could push it back toward $0.7370-$0.7400.  The New Zealand dollar has also stalled ($0.7220), and we see potential toward $0.7050.       Spot:  $0.7518 ($0.7230)        Median Bloomberg One-Month Forecast $0.7409 ($0.7290)      One-month forward  $0.7525 ($0.7235)     One-month implied vol 9.1  (9.0%)        Mexican Peso:  The peso eked out a minor gain against the dollar last month.  However, the nearly 0.4% gain understated the swings in the exchange rate last month.  The dollar's recovery seen in the second half of September from almost MXN19.85 to nearly MXN20.40 at the end of the month was extended to a seven-month high around MXN20.90 on October 12.  It then proceeded to fall to almost MXN20.12 before the greenback was bought again.  A move above the MXN20.60 area now would likely signal a test on last month's high and possibly higher. Recall that the dollar peaked this year's peak set in March was near MXN21.6350. The economy unexpectedly contracted in Q3  by 0.2% (quarter-over-quarter).  Nevertheless, with the year-over-year CPI at 6% in September, Banxico will see little choice but to hike rates at the November 11 meeting. The market expects a 25 bp increase.  A 50 bp hike is more likely than standing pat.       Spot: MXN20.56 (MXN20.64)   Median Bloomberg One-Month Forecast  MXN20.42 (MXN20.41)   One-month forward  MXN20.65 (MXN20.74)     One-month implied vol 9.6% (11.0%)      Chinese Yuan: Our starting point is the yuan's exchange rate is closely managed.  The fact that the yuan rose to four-month highs against the dollar and a five-year high against the currency basket (CFETS) that the PBOC tracks imply a tacit acceptance.  While it is tempting for observers to link the appreciation to securing an advantage as it secures energy supplies and other commodities, we note that the yuan's gains are too small (0.6% last month and less than 2% year-to-date) to be impactful.  We suspect that the dollar's recent weakness against the yuan will be unwound shortly.  The US government continues to press its concerns about the risk for investors in Chinese companies listed in the US and American companies operating in China. At the same time, the FTSE Russell flagship benchmark began including mainland bonds for the first time.  China's 10-year government bond is the only one among the large bond markets where the yield has declined so far this year (~16 bp).  On the other hand, Chinese stocks have underperformed.  That said, some investors see this underperformance as a new buying opportunity.  The NASDAQ Golden Dragon Index that tracks Chinese companies listed in the US fell by 30% in Q3 and gained 5% in October, its best month since February.  Lastly, the Central Committee of the Chinese Communist Party meets November 8-11 this year, a prelude to the important National Party Congress in 2022 that is expected to formally signal the third term for President Xi.     Spot: CNY6.4055 (CNY6.4450) Median Bloomberg One-month Forecast  CNY6.4430 (CNY6.4470)  One-month forward CNY6.4230 (CNY6.4725)    One-month implied vol  3.5% (3.4%)    Disclaimer
Bitcoin, a battle for freedom

Bitcoin, a battle for freedom

Korbinian Koller Korbinian Koller 17.11.2021 08:01
We find ourselves ensued in various battles. Environmentally, economically, and from a human perspective. As much as it is questionable if coal and oil, centralized money, and wars (attacks on ourselves) hold a prosperous future, change is typically avoided. There have been moments in history where rapid change happened. Most often introduced by a charismatic human being with a compelling principle at a defining moment when a change was needed. S&P 500 Index versus BTC in US-Dollar, Monthly Chart, bitcoin an answer to crisis? S&P 500 Index versus Bitcoin in US-Dollar, Monthly chart as of November 16th, 2021. The bitcoin idea was born as a response to the crash of 2008. In its principles, diametrical to fiat currencies. Bitcoin is decentralized, limited, deflationary and digital. There is no historical event where increased money printing has resolved economic turmoil. And yet, we have not come up with a better solution, or at least we have not implemented it yet. The chart above shows how shortly after the crash of 2008, the first transaction ever sent on the bitcoin blockchain was completed in January 2009.Coincidence? It took some time until the cryptocurrency’s pseudonymous creator Satoshi Nakamoto found traction with his idea reflected in bitcoin’s price rise. Still, it has not just caught up but outperformed the market by a stunning margin. BTC in US-Dollar, Monthly Chart, don’t underestimate powerful ideas: Bitcoin versus gold and silver in US-Dollar, Monthly chart as of November 16th, 2021. Covid provided like a steroid a means to illustrate many shortcomings in a magnified way. The chart above shows that bitcoin speculation was an answer to where many find a more prosperous future compared to precious metals. In addition to fundamentals and technical, the underlying idea and hope for a transitory future got traction when people were most afraid.   BTC in US-Dollar, Monthly Chart, sitting through turmoil with ease: Bitcoin in US-Dollar, Monthly chart as of November 16th, 2021. Dissecting markets like this in all their shades and facets is necessary for discovering underlying currents, motivation, and sustainability of trends. In bitcoins case, the found strength of application, beliefs, and principles inherent in bitcoin itself and its traders allows for sitting more easily through its volatility swings. Once the mind grasps reason, it tolerates easier, otherwise hardships to trade a volatile vehicle like bitcoin. With a battle ensured on this magnitude and for an expected long duration, one can accept deep retracements in a more tranquil fashion. The monthly chart above shows that bitcoin might face one of those quick dips that hodlers accept, knowing that the battle isn’t over yet. Bitcoin, a battle for freedom: Mills are grinding slowly. Change typically takes time, and those holding the reign over financial power will certainly not surrender such summoned energies lightly. While this world certainly needs a more adaptive behavior of humanity both for its wellbeing and the planet itself, it is unlikely that a shift, if at all, will be swift. This means that bitcoin is a continued struggle to establish itself. And this will result in continued high volatility for the years to come. As such, it will remain an excellent opportunity for the individual investor. Feel free to join us in our free Telegram channel for daily real time data and a great community. If you like to get regular updates on our gold model, precious metals and cryptocurrencies you can subscribe to our free newsletter. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision. The views, thoughts and opinions expressed here are the author’s alone. They do not necessarily reflect or represent the views and opinions of Midas Touch Consulting.
Covid Wave Knocks Euro Down and to new 6-year Lows Against the Swiss Franc

Covid Wave Knocks Euro Down and to new 6-year Lows Against the Swiss Franc

Marc Chandler Marc Chandler 19.11.2021 13:58
Overview:  Concerns about the virus surge in Europe cut short the euro's bounce and sent it back below $1.1300 and are also weighing on central European currencies, including the Hungarian forint, despite yesterday's aggressive hike of the one-week deposit rate.  Austria has reintroduced a hard 20-day lockdown.  Germany's health minister warned that the situation deteriorated and vaccines were not enough to break the wave.  He was explicit that a lockdown cannot be ruled out.  The US dollar is trading broadly higher.  Only the yen is resilient on the day, but sterling is the only major currency that has edged higher this week.  The Scandis and euro are off more than 1%.  Speculation that Turkey may announce measures over the weekend to stabilize the lira may be helping to deter new sales today after yesterday's rout.  In the nine-day drop through today, it is depreciated by almost 15%.  The JP Morgan Emerging Market Currency Index is off for the fourth consecutive session to bring this week's loss to more than 2%, the most in five months.  Equities do not know of the consternation in the foreign exchange market.  Disappointing Alibaba results weighed on the Hang Seng (~-1%), while most other large regional bourses but Taiwan and India closed the week on an up note.   Europe's Stoxx 600 snapped a six-day advance yesterday. It was only the second loss since October.  It began firmer today but has reversed lower, putting at risk the six-week rally.   US futures are mixed, with the NASDAQ outperforming.  Bond markets are in rally mode as well.   The US 10-year yield is off three basis points to approach the week's low near 1.53%.  European bonds are off mostly 3-5 basis points, even in the UK, where retail sales surprised on the upside.  Gold is steady, finding support near $1850.  Oil initially extended yesterday's recovery but is reversing lower, leaving the January WTI contract set to test yesterday's low near $76.45.  This is the fourth consecutive weekly fall in crude oil.  European natural gas (Netherlands benchmark) is off 4.4% today, the third drop in a row, and pares the week's gain to almost 19%.  In Singapore, iron ore prices jumped 5.7% to break a five-week slide that saw prices tumble by about 28%.   Copper is firmer and paring this week's loss to around 2%.   Asia Pacific There were two developments in Japan to note.  First, October CPI was largely in line with expectations.  Surging gasoline prices (seven-year highs) helped keep the headline rate positive for the second month (0.1% year-over-year).  Excluding fresh food, the core rate was steady at 0.1%.  However, the deflationary forces are evident when fresh food and energy are removed.  The measure deteriorated to -0.7% from -0.5%, the most since June (-0.9%).    Second, Prime Minister Kishida unveiled an overall package of JPY78.9 trillion (~$690 bln). It is larger than the previous two pandemic packages. "Fiscal measures" refer to spending, investment, and loans, and this is seen worth about JPY55.7 trillion.  It is not clear yet, how much represents new spending as opposed to the reallocation of funds from earlier budgets that were not used. However, it appears to be about JPY32 trillion of new spending.   The Chinese yuan, up a modest 2.1% for the year, is the strongest currency.   Against a trade-weighted basket (CFETS), the yuan is pulling back from a six-year high set earlier this week as the euro recovers a cent.  Consider that the yuan has appreciated by more than 9% against the euro and 11.5% against the yen this year.  That means that investment in China has the same tailwind as the dollar and is compensated a bit for the relative lack of transparency and liquidity.  The Financial Times estimates that foreign holdings of Chinese bonds and stocks rose to around $1.1 trillion at the end of September, about a 13% increase this year.  China's stock market has underperformed this year, and the CSI 300 is off around 7% this year.  On the other hand, China's bonds have fared well.  It is the only 10-year bond that has not weakened this year.  China's figures show foreign direct investment has risen by almost 18% this year through October to nearly $142 bln.   The dollar is posting an outside down day against the Japanese yen by first rising above yesterday's high before reversing and taking out yesterday's low. It is approaching the week's low near JPY113.75 in the European morning.  Below there, support is seen around JPY113.60.  A break would warn of a return to JPY113.00.  The Australian dollar has been sold to its lowest level since October 6, when it recorded a low of almost $0.7225.   It has broken the trendline that connected the August and September lows (~$0.7250).  The September low was around $0.7170 and maybe the next important technical target.  The dollar is trading with a firmer bias against the Chinese yuan, but the greenback remains in the range set on Tuesday (~CNY6.3670-CNY6.3965).  The dollar gained on the yuan four sessions this week, the most since July, but the net gain of less than 0.2% still shows an extraordinarily steady exchange rate.   With the yuan near six-year highs against its trade-weighted basket (CFETS), the PBOC warned against one-way moves and encouraged financial institutions to bolster fx risk management.  It set the dollar's reference rate at CNY6.3825, slightly above expectations (Bloomberg survey) for CNY6.3822.   Europe The stronger than expected October retail sales capped the week's data that points to a rebounding economy and boosts the chances of a rate hike next month.  A strong jobs report was followed by a larger than expected rise in CPI and PPI.  Retail sales jumped 0.8% in October, and the September series was revised to flat from -0.2%. It was the first increase since April.  Pre-Xmas sales were reported.  Separately, the UK government reported that the cost of servicing the national debt has risen more than three-fold over the past year, leaving the budget deficit higher than anticipated.  It appears that the swaps market is pricing in a 15 bp hike at the December 16 BOE meeting, though some are talking about a bigger move.    Several ECB officials, including President Lagarde, have successfully pushed back against expectations of a 20 bp rate hike next year that had appeared discounted by the swaps market earlier this month. The market has pushed it into early 2023.  The implied yield of the December 2022 Euribor futures contract has fallen 20 bp this month.  The December 2022 Eurodollar futures contract is moving in the opposite direction.  The implied yield has risen by about 4.5 bp this month.  The net result is the US premium has increased to over 125 bp, the highest since last March.  In late 2019, the premium was around 180 bp.  This is recognized as a factor helping lift the dollar against the euro, and it appears to have become more salient recently.   The euro's bounce yesterday, its first gain in seven sessions (since the US CPI shocker), stalled near $1.1375, where a 780 mln euro option expires today.   The euro traded quietly in Asia before being sold aggressively as news of the virus hit the wires.  The euro traded through $1.1285 before catching a bid.  Resistance now will likely be encountered around $1.1320.  The euro is posting its first back-to-back weekly of more than 1% since March 2020.  Sterling is also sliding back toward the week's lows, just above $1.3400.  A break could signal a test on the $1.3350 area, but it appears stretched on an intraday basis.  While the euro-sterling cross is practically flat, the euro has punched below CHF1.05 for the first time in six years.  It would not be surprising to learn that the SNB has been intervening.  There appears to be little chart support until closer to CHF1.0250. America The nonpartisan Congressional Budget Office offered its evaluation of the Biden administration's Build Back Better initiative.  It sees $1.636 trillion in spending over the next decade and almost $1.27 trillion in revenue.  That leaves a deficit of $367 bln.  A notable difference between it and the administration is how much more revenue will be generated by increasing the number of IRS agents.  Even if it passes the House of Representatives, it will likely be marked up in the Senate.  The jockeying for position and spin around it will likely dominate the session, which sees no US economic reports outside of the rig count later today.  The Fed's Clarida and Waller speaker today.  It seems that most market participants still see the Fed behind the curve and disagree with our idea that to secure the ability to respond to a wide range of possible outcomes, the Federal Reserve may accelerate its tapering starting in January.   It is not clear exactly when the debt ceiling will be reached, but it is being played.  The Democrats do not want to lift it through the reconciliation process, though they have forced the Republicans to do so in the past.  The Republicans appear to have the discipline and will to oppose.  No one seems to think the US will really default, and getting even this close seems undignified.  Yet, the desire to avoid being caught out encouraged investors to demand a high yield on the four-week bill sold.  Yesterday's auction saw the yield more than double to 11 bp (annualized).  It is the highest yield since July 2020.  In contrast, the eight-week bill, which is thought to be beyond the shenanigans, yield slipped to 4.5 bp from six previously and a higher bid-cover ratio.   Canada reports September retail sales figures today.  After a 2.1% rise in August, some weakness is expected.  Ahead of it, the Canadian dollar is trading at new lows for the week, though it is faring better than the other dollar-bloc currencies.  The US dollar is approaching the (61.8%) retracement objective of the decline since the CAD1.29 level was tested on September 20.  The retracement level is near CAD1.2665, and a break would target CAD1.2700-CAD1.2750.  The upper  Bollinger Band is found near CAD1.2655 today.   The Mexican peso is also under pressure.  It, too, has fallen to a new low for the week today.  The greenback looks set to test the eight-month high set earlier this month near MXN20.98.  Note that the central bank's Deputy Governor warned that inflation was accelerating, and it could rise to 7% this month and 7.1%-7.3% next month.  In October, the CPI stood at 6.24% year-over-year.  Banxico meets next on December 16, the day after the FOMC meeting.  Lastly, we note that the Brazilian real is off for four consecutive sessions coming into today.  The dollar closed above its 20-day moving average against it yesterday and looks poised to probe above BRL5.60 today. The high for the month was closer to BRL5.70.   Disclaimer
The Telegraph Publishes Misleading Story about Omicron

Covid Surge Compounds Monetary Divergence to give the Euro its Biggest Weekly Loss in Five Months

Marc Chandler Marc Chandler 22.11.2021 09:39
Strong US consumption and production figures kept the greenback well supported last week on the heels of the jump in CPI to 6.2%.  Meanwhile, the surge of Covid cases in Europe underscores the divergences with the US, sending the euro to new lows for the year.   At the same time, oil prices headed south for the fourth consecutive week, matching the longest decline in more than two years.  It did not favor the Norwegian krone, the weakest of the majors, with a 2.15% drop.  It brought this year's loss to almost 3.5%, despite it being the first G10 central bank to hike rate, with another likely next month.   The prospects of a Bank of England rate hike next month were lifted by the strong inflation and retail sales figures.  Sterling was the best performing major currency, rising a little more than 0.25% against the dollar.  It also traded at its best level against the euro since March 2020.  At the end of the week, the euro also broke down against the Swiss franc, trading below CHF1.05 for the first time since July 2015.   Japan's October CPI showed that excluding fresh food and energy, the world's third-largest economy has still not broken free of deflation's grip (-0.7% year-over-year).  A weaker yen is not a problem for Japanese policymakers or corporates.  Japan has averaged a monthly trade surplus this year through October of about JPY7.8 bln a month, hardly the stuff that should excite protectionists.  The BIS estimates that eurozone inflation would be closer to 1.5% than the 4.1% reported in October without the supply chain disruptions. The weakness of the euro does not appear problematic for the ECB either.  With the Fed already slowing the pace of its monetary accommodation, a stronger dollar reinforces the policy thrust. Even though net exports shaved Q3 growth by about 1.1 percentage points, it has yet to spur criticism, and September was a record shortfall.   Dollar Index:  The Dollar Index rose for the fourth consecutive week.  It met the (50%) retracement objective of its slide from March 2020 (~103.00) to the January 6 low (~89.20), which is found near 96.10.  DXY stalled ahead of the weekend, just shy of the high set in the middle of the week near 96.25. A move above there targets the next retracement (61.8%), which is close to 97.75.    The MACD is over-extended but still headed higher, while the Slow Stochastic appears to be turning lower.  Support is seen around 95.50.  The market seems to have discounted much of the good news for the dollar and Fed policy.  We note that the US 2-year yield fell almost six basis points last week.  That leaves it off about 4.5 bp this month, despite the strong CPI reading, robust retail sales, and industrial output figures. Euro: The divergence of monetary policy has been the critical weight on the euro, but at the end of last week, it seemed that surge in Covid cases in Europe helped drive the single currency to new lows. It fell to $1.1250 ahead of the weekend to take out the mid-week low near $1.1265.  The weekly loss of about 1.3% is the biggest in five months.  Recall that the $1.1290 area represented the (61.8%) retracement of the rally that began in March 2020.  The momentum indicators are stretched, but a possible bullish divergence is appearing in the Slow Stochastic. A cap seems to be forming around $1.1375.  After repeated tests, and much to the chagrin of the Swiss National Bank, the euro was sold through CHF1.05 ahead of the weekend for the first time since July 2015.  Given its modus operandi, the SNB is likely resisting.  There is little on the charts ahead of CHF1.0250.  In the second half of last week, the euro found support near GBP0.8385, its lowest level since March 2020.  Support is seen close to GBP0.8275-GBP0.8300.  Lastly,  the euro found support near JPY128.00, which has more or less withstood several tests since moving above there in February.   Japanese Yen:  The greenback recorded a new four-year high against the yen, less than a handful of pipis from JPY115 in the middle of last week.  It reversed lower and settled ever so slightly below the previous session's low to leave a key reversal in its wake.  It recorded the week's low ahead of the weekend near JPY113.60.  Since the dollar pushed above JPY112 early last month, we have suggested a JPY113-JPY115 trading range.  It did trade to about JPY112.75 on November 10 and 11 but snapped back into the range.  The US 10-year note futures (December contract) posted a key reversal in the middle of last week, too, and also ended the week at eight-session highs, which, of course, means lower yields.  The dollar-yen exchange rate still seems to be a range-bound creature, more the most part, and heavily influenced by external factors, like US 10-year yield and broader risk appetites.  British Pound:  Sterling outperformed the other major currencies last week, but the 0.3% gain is nothing to write home about.  It remained within the previous week's range. It was unable to sustain the upside momentum after approaching the (50%) retracement objective of the decline since the month's high and outside down day on November 4 (BOE meeting).  That retracement stands at $1.3525.  The strong CPI report on November 17 helped lift sterling to the week's high near $1.3515.  However, the underlying strength of the dollar proved too much, and ahead of the weekend, sterling traded a little below $1.3410.  The momentum indicators have turned higher, and as long as $1.3400 holds, sterling looks attractive.  However, the market appears to have a 15 bp hike at next month's meeting fully discounted.  While it remains a distinct possibility, if not a likelihood, but 100% confidence may leave sterling vulnerable to a reassessment.  Canadian Dollar:  The US dollar rose for the fourth consecutive week against the Canadian dollar, matching the longest advance since early last year.  With the pre-weekend gain, the greenback met the  (61.8%) retracement objective of decline since CAD1.29 was approached on September 20, found near CAD1.2665. The US dollar's broad strength, coupled with the stock market wobble (a proxy for risk), and the drop in crude prices by around 4.25%, the fourth consecutive weekly decline shaved about 0.75% off the Canadian dollar.  The implied yield of the June 2022 Banker Acceptances fell last week and is now about 10 bp lower than at the end of last month.  The MACD is headed up though over-extended, while the Slow Stochastic has flatlined at extreme levels and has not yet confirmed the new highs.  The US dollar continues to hug the upper Bollinger Band, which will begin the new week near CAD1.2650. Australian Dollar:   The Aussie fell for the third straight week, and ahead of the weekend, approached $0.7225, last seen in early October.  As seen with some of the other currency pairs, the MACD is still warning of currency weakness, while the Slow Stochastic is flatlining but over-extended.  The trendline connecting the August and September lows initially held last week. It (~$0.7240) yielded ahead of the weekend, but the Aussie managed to close back above it.   It needs to resurface above $0.7300 to be anything meaningful.  Softer than expected, wage growth may have reinforced the RBA's message to the markets, and the yield of the June 2022 T-bill futures fell seven basis points last week and is now down 31 bp on the month.   Mexican Peso:  Emerging markets currencies remain out of favor in a strong dollar environment.  The JP Morgan Emerging Market Currency Index slumped by more than 2% last week, the most since June.  The Turkish lira collapsed by nearly 11%.  The Indian rupee rose by 0.3%, the strongest in the EM space.  The greenback made a new marginal high in two-and-a-half weeks before the weekend, slightly below MXN20.89.  The momentum indicators are constructive for the dollar, but it is at the upper end of its recent range (~MXN20.12-MXN21.00).  The high for the year was set in March near MXN21.64, and it will come into view when the greenback rises above MXN21.15.   Chinese Yuan:   By shadowing the dollar so tightly, the yuan is dragged higher on a trade-weighted basis in the stronger greenback environment. The yuan is at six-year highs on the basket the PBOC tracks (CFETS).  The PBOC reportedly stressed the importance of exchange risk management ahead of the weekend, and it may be a warning that its willingness to tolerate a stronger yuan is limited.  The yuan slipped an inconsequential 0.12% against the dollar last week.  For nearly the past five weeks, the exchange rate has been mostly confined to a CNY6.38-CNY6.40 range.  It is a fuzzy range and allows for around a big figure in both directions. The index of Chinese companies listed in the US (NASDAQ Golden Dragon Index) fell about 5.7% last week.  The major benchmarks in China, including the CSI 300, posted small gains.  The Hang Seng fell 1.1% last week, and most of that was before the weekend on disappointing earnings from Alibaba (-10.3% in HK).     Disclaimer
Best Pick for Corona Woes

Best Pick for Corona Woes

Monica Kingsley Monica Kingsley 22.11.2021 15:49
S&P 500 stumbled as value plunged – corona fears are back as Austria lockdown might very well be followed soon by Germany. The mood on the continent is souring, and coupled with accelerating German inflation data, helping to underpin the dollar. Overall, the reaction reminds me of the corona market playbook of Feb-Mar 2020 when I aggresively took short positions, riding them all the way down to the Mar 23 bottom. So, why am I not beating the bearish drum today as well? We have a lot of incoming stimulus (both monetary and fiscal), the economy is slow but the yield curve hasn‘t inverted the way it did in 2019 – make no mistake, we‘re in a rate raising cycle (even if the Fed didn‘t move, the markets would force it down the road). I know, pretty ridiculous notion with 10-year yield at 1.54% and Oct YoY CPI at 6.2% - but the rates being even more negative elsewhere, help to explain the dollar 2021 resilience. That‘s the bullish side to last week‘s bearish argument. What gold and silver are sniffing out, is that the Fed would have to reverse course once the tapering effects start biting some more – not now, with still more than $100bn monthly addition. Cyclicals and commodities that had massively appreciated vs. year ago (oil doubled), are feeling the pinch of fresh economic activity curbs speculation in spite of the polar shift of U.S. strength in energy of 2019 and before. Begging the OPEC+ to increase production might not do the trick, and with so much inflation already in (and still to come), the key investment theme is of real assets strength. Precious metals have broken out, are no longer an underdog, and the inflation data will not decelerate for quite a few months still. And even as they would, it would come at a palpable cost to the real economy, and the resolute fresh stimulus action wouldn‘t be then far off. As I wrote in Apr 2020, it‘s about the continuous stimulus that‘s the go-to response anytime the horizon darkens, for whatever reason. Wash, rinse, repeat. Let‘s move right into the charts (all courtesy of www.stockcharts.com). S&P 500 and Nasdaq Outlook S&P 500 bulls still have the upper hand, and value recovery accompanied by good tech defence of high ground gained, is the awaited mix. The market breadth is narrowing, and needs to be reversed to give the bulls more breathing room. Credit Markets Once corona returns to the spotlight, bets on „reversion to the mean“ in credit markets are off. Weakening data get more focus, and flight to safety is on, puncturing the trend of rising yields that would inevitably lead to yield curve control. Gold, Silver and Miners It‘s as if the gold and silver bulls don‘t trust the latest rally – I think that‘s a mistaken belief for we have turned the corner, and precious metals are about to shine – of course, invalidating the latest miners weakness in the process. Crude Oil Crude oil bulls didn‘t recover from Friday‘s spanner in the works, and while the dust hasn‘t settled, black gold is prone to an upside reversal at little notice. I‘m not overrating the oil index weakness. Copper Copper smartly recovered, moving at odds with the CRB Index, which I treat (especially given Friday‘s Austria news repercussions) as a vote of confidence that the economy isn‘t rolling over to a deflationarry hell (pun intended). Bitcoin and Ethereum Bitcoin and Ethereum are still going sideways in this correction, but today‘s lower knot is encouraging. The consolidation though still appears to have a bit further to go in time. Summary S&P 500 bulls keep hanging in there, and the waiting for bonds to come to their senses might take a while longer. Tech keeps cushioning the downside, and we haven‘t peaked in spite of the many warnings. Value and Russell 2000 upswings would be good confirmations of the stock bull market getting fresh fuel. Precious metals would have the easiest run in the weeks ahead – commodities in general not so much. Their breather is though of a temporary nature as all roads lead to real assets. Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
Saxo Bank 2022 Outrageous Predictions: Here comes a revolution!

Saxo Bank 2022 Outrageous Predictions: Here comes a revolution!

Saxo Bank Saxo Bank 02.12.2021 14:35
Saxo Bank has today released its 10 Outrageous Predictions for 2022. The predictions focus on a series of unlikely but underappreciated events which, if they were to occur, could send shockwaves across financial markets: The plan to end fossil fuels gets a rain check Facebook faceplants on youth exodus The US mid-term election brings constitutional crisis US inflation reaches above 15% on wage-price spiral EU Superfund for climate, energy and defence announced, to be funded by private pensions Women’s Reddit Army takes on the corporate patriarchy India joins the Gulf Cooperation Council as a non-voting member Spotify disrupted due to NFT-based digital rights platform New hypersonic tech drives space race and new cold war Medical breakthrough extends average life expectancy 25 years While these predictions do not constitute Saxo’s official market forecasts for 2022, they represent a warning against the potential misallocation of risk among investors who might typically assign just a one percent chance of these events materialising.  It’s an exercise in considering the full extent of what is possible, even if not necessarily probable, and particularly relevant in the context of this year’s unexpected Covid-19 crisis. Inevitably the outcomes that prove the most disruptive (and therefore outrageous) are those that are a surprise to consensus. Commenting on this year’s Outrageous Predictions, Chief Investment Officer at Saxo Bank, Steen Jakobsen said:   “The theme for 2022 Outrageous Predictions is Revolution. There is so much energy building up in our inequality-plagued society and economy. Add to that the inability of the current system to address the issue and we need to look into the future with a fundamental view that it’s not a question of whether we get a revolution but a more a question of when and how. With every revolution, some win and some lose, but that’s not the point—if the current system can’t change but must, a revolution is the only path forward. A culture war is raging across the globe and the divide is no longer simply between the rich and the poor. It’s also the young versus the old, the educated class versus the less educated working class, real markets with price discovery versus government intervention, stock market buy-backs versus R&D spending, inflation versus deflation, women versus men, the progressive left versus the centrist left, virtual signalling on social media versus real changes to society, the rentier class versus labour, fossil fuels versus green energy, ESG initiatives versus the need to supply the world with reliable energy—the list go on. We collaborated globally on Covid vaccines in 2020 and 2021. Now we need a new Manhattan Project–-type endeavour to set the marginal cost of energy, adjusted for productivity, on the path to much lower levels while eliminating the impact of our energy generation on the environment. Such a move would unleash the most significant productivity cycle in history: we could desalinate water, make vertical farms feasible almost anywhere, increase computer powers to quantum states, and continue to explore new boundaries in biology and physics.” Remember that the world is forever evolving if at varying speeds, while business and political cycles are always finite.” The Outrageous Predictions 2022 publication is available here with headline summaries below: 1. The plan to end fossil fuels gets a rain check Summary: Policymakers kick climate targets down the road and support fossil fuel investment to fight inflation and the risk of social unrest while rethinking the path to a low-carbon future. Realising the inflationary threat from surging commodities prices and the risk of an economic train wreck due to the unrealistic timeline for the green energy transition, policymakers kick climate targets down the road. They relax investment red tape for five years for oil production and ten years for natural gas production, to encourage producers to ensure adequate and reasonably priced supplies that bridge the gap from the energy present to the low-carbon energy future. This development has already jacked up prices and price volatility, not only for energy, but also for industrial metals, most of which are needed in greater quantities for the green transformation push. On top of this, surging energy prices have spiked prices for diesel and especially fertiliser, important farming costs that raise concerns about the production of key food crops. Market impact: The iShares Stoxx EU 600 Oil & Gas ETF (Ticker: EXH1:xetr) surges 50 percent as the whole energy sector gets a new lease on life 2. Facebook faceplants on youth exodus Summary: The young abandon Facebook’s platforms in protest at the mining of personal information for profit; the attempt by Facebook parent Meta to reel them back in with the Metaverse stumbles. Facebook has gone from being a vibrant hub of young people, to a platform for older “boomers” as young people would say. Young people are increasingly turned off by Facebook’s algorithms turning their social media experiences into that of homogenous feedback loops of identical content, or even worse, hateful and disinforming content. Facebook’s own research suggests that teens spend 2 to 3 times longer on TikTok than on Instagram (which is Facebook’s youngest social media asset), and that Snapchat is the preferred way to communicate with friends. A new company name (Facebook is now called Meta) and brand identity to separate and shield Instagram (its most valuable current asset), together with creating a new product tailored towards young people, is the exact same playbook tobacco companies have used for years. But in 2022, investors will realise that Meta is rapidly losing the young generation and thus the future potential and profitability of the company. In a desperate move, Meta tries to acquire Snapchat or TikTok while throwing billions of dollars into building the creepy Metaverse, which is aimed at surveilling users more directly than ever before and getting young people back into Meta’s universe of social media platforms, in the perceived wisdom that being a first mover is always best in technology. The plan struggles to take off as the young generation fails to sign up. Market impact: Facebook parent company Meta struggles, down 30 percent versus the broader market and is urged to spin off its components as separate entities, shattering Zuckerberg’s monopolistic dreams. 3. The US mid-term election brings constitutional crisis Summary: The US mid-term election sees a stand-off over the certification of close Senate and/or House election results, leading to a scenario where the 118th Congress is unable to sit on schedule in early 2023. The chaotic 2020 US Presidential Election was a scary moment for many US institutions. The sitting president Donald J. Trump initially refused to conceded defeat in the election and complained that the election was stolen, a claim that was never seriously challenged in a court of law but one which had widespread sympathy among the Trump base. A crowd of hard-core believers in the stolen election conspiracy was encouraged by the President’s rhetoric to a sufficient degree to storm Capitol Hill and “stop the steal”, i.e., to prevent the election result from being made official on January 6, 2021, in a scene unprecedented in US history. Prior to this, and then again later in the hotly contested Senate run-off elections in Georgia, dedicated election officials—many of them Republican—were doing their duty to tally the real results while risking their life amidst threats—even death threats—from extremists. In 2022, the Republicans ensure that no such traditional duty-bound officials are in the “wrong” place, with all election-related positions filled by toe-the-line partisans ready to do anything to tilt the results to suppressing voter turnout. In the wake of the 2022 election, a handful of key Senate and House races come down to the wire and one or both sides move against certifying the vote, making it impossible for the new Congress to form and sit on its scheduled first day of January 3, 2023. Joe Biden rules by decree and US democracy is suspended as even Democrats also dig in against the Supreme Court that was tilted heavily by Trump. A full-blown constitutional crisis stretches over the horizon over the stand-off as 2023 gets under way. Market impact: extreme volatility in US assets, as US treasury yields rise and the USD drops on hedging against the existential crisis in the world’s largest economy and issuer of the world’s reserve currency of choice. 4. US inflation reaches above 15% on wage-price spiral Summary: By the fourth quarter of 2022, the wages for the lower half of US incomes are rising at an annualised 15% clip as companies scramble to find willing and qualified workers who are increasingly selective due to a rising sense of entitlement as jobs are plentiful relative to the meagre availability of workers at all skill levels. The official US CPI reached a peak at 11.8% in February 1975. It wasn’t until the recession of 1980-82 and brutal policy rate increases to levels as high as 20% that inflation was finally killed. In 2022, the Federal Reserve and Fed chair Jerome Powell repeats the same mistake all over again as the post-Covid outbreak economy and especially the labour market are severely supply constrained, making a mockery of the Fed’s traditional models. Powell believes millions of Americans will return to work and fill some of the 10.4 million open job positions as Covid-19 fades. But this is plain wrong. Some have retired early due to the crisis and thus have permanently left the US workforce. The big difference between today and yesterday is that the pandemic has fuelled a great awakening of workers. Across sectors and income classes they realise they are now more empowered than ever. They demand a better experience: better job conditions, higher wages, more flexibility and a sense of purpose from work. Coupled with persistent inflationary pressures coming from the production side, the energy crisis and labour shortage, this results in unprecedented broad-based double-digit annualised wage increases by Q4. As a consequence, US inflation reaches an annualised pace above 15% before the start of 2023, for the first time since WWII. This prompts the Federal Reserve into a too-little, too-late move to tighten monetary policy faster in a desperate effort to tame inflation. But the central bank has lost credibility; it will take time to regain it. Market impact: extreme volatility in US equity and credit markets. The JNK high-yield ETF falls as much as 20% and the VIXM mid-curve volatility ETF soars as much as 70%. 5. EU Superfund for climate, energy and defence announced, to be funded by private pensions Summary: To defend against the rise of populism, deepen the commitment to slowing climate change, and defend its borders as the US security umbrella recedes, the EU launches a bold $3 trillion Superfund to be funded by pension allocations rather than new taxes. The security umbrella provided by the US during the Cold War and afterwards over much of Eastern Europe is rapidly fading and threatens to fail entirely in the years ahead as the US looks east at far more serious economic and military rivals. French President Macron, backed by a Draghi moving to stave off Italy’s own rise of the populists, rolls out a vision for an “EU Superfund” that will address the three-fold priorities of defence, climate and the related clean energy transition. Given the EU’s aging population and heavy tax burdens, policymakers know that it will be impossible to finance the Superfund with higher taxes on incomes or other traditional tax revenues. Instead, France has a light-bulb moment as it seeks to overhaul its pension system and looks at Europe’s enormous pensions. It decides that all pensions for all workers above the age of 40 must allocate a progressively larger portion of their pension assets into Superfund bonds as they age. This allows new levels of fiscal stimulus in the EU even with the sleight-of-hand trick of hiding the spending in inflation and negative real returns on low-yielding Superfund bonds that are actually EU bonds in disguise. At the same the younger generation enjoys a stronger job market and less unfair tax burdens as the system proves such a success that income taxes are lowered progressively. Market impact: Bond yields harmonise across Europe, leading to German Bunds underperforming. EU defence, construction and new energy companies are some of the best performers. 6. Women’s Reddit Army takes on the corporate patriarchy Summary: Mimicking the meme stock Reddit Army tactics of 2020-21, a group of women traders launch a coordinated assault on companies with weak records on gender equality, leading to huge swings in equity prices for targeted companies. Women are not willing to wait any longer. Tired of the lack of progress, 2022 sees a massive grass-roots effort based on social media platforms to force companies that break civil rights laws to address unfair and sexist, racist, ageist and ableist practices. Although women have been struggling with lower salaries, they have higher saving rates than men. Those savings will now come in handy as they decide to take the situation into their own hands and throw their considerable influence around in a #metoo movement in financial markets. In contrast to the often-nihilistic original Reddit Army, the Women’s Reddit Army will be more sophisticated, with women traders coordinating a long squeeze by shorting stocks of selected patriarch companies. At the same time, they will direct funds to companies with the best metrics on female representation in middle management and among executives. Instead of condemning the development, politicians worldwide welcome and support their cause, putting even more pressure on companies with outdated patriarchal attitudes, poor gender equality in pay, and under-representation of women on boards and in management to address the errors of their ways. Market impact: The movement gets real results as the broader market catches on to the theme and joins in, forcing targeted company prices sharply lower, which sees companies scrambling to change their ways. It marks the beginning of a gender parity renaissance in markets. 7. India joins the Gulf Cooperation Council as a non-voting member Summary: The world’s geopolitical alliances will lurch into a phase of drastic realignment as we have an ugly cocktail of new deglobalising geopolitics and much higher energy prices. Countries reliant on imports for the majority of their energy inputs in a rapidly deglobalising world will need to move fast to strategically reorientate strategic alliances and secure long-term energy supplies. One such alliance could involve India, with its mighty technology sector, joining the Gulf Cooperation Council (GCC) as non-voting member, or in some sort of free trade zone. This alliance would see a reduction in India’s energy insecurity as it secures long-term import commitments. Interregional trading zones will secure “closer to home” production and investment, combined with the security of reliable supplies from India’s point of view, and a reliable destination market from the GCC’s point of view. The alliance helps lay the groundwork for the GCC countries to plan for their future beyond oil and gas and for India to accelerate its development via huge new investments in infrastructure and improvements in agricultural productivity together with fossil fuel imports, bridging the way to a post-carbon longer-term future. Market impact: The Indian rupee proves far more resilient than its EM peers in a volatile year for markets. The bubbly Indian stock market corrects with other equity markets in early 2022 but proves a strong relative performer from the intra-year lows. 8. Spotify disrupted due to NFT-based digital rights platform Summary: Musicians are ready for change as the current music streaming paradigm means that labels and streaming platforms capture 75-95 percent of revenue paid for listening to streamed music. In 2022, new blockchain-based technology will help them grab back their fair share of industry revenues. While the early days of NFTs have looked chaotic and dangerous for asset buyers, the outlook is bright for NFT technology. Not only does an NFT-based platform offer a new way to verify the ownership of rights, but also a way to distribute rights without intermediaries, i.e., a completely decentralised system obviating the need for a centralised platform. The use case for NFTs could prove particularly compelling in the next step for the technology for content generators in the music industry as musicians feel unfairly treated by the revenue sharing models of the current streaming platforms like Spotify and Apple Music. These models don’t guide individual subscribers’ fees to the actual music an individual subscriber listens to. Rather, all subscription fee revenues are aggregated and distributed based on every artist’s share of total streams. In addition, the platforms take a substantial cut, which together with the cut paid to labels is some 75 percent or more of the total revenue. In 2022, an NFT-based service takes hold and begins offering music from notable stars – perhaps the likes of Katy Perry, The Chainsmokers and Jason Derulo, all of whom have recently backed an effort to create a new blockchain-powered streaming platform. Other well-known artists begin pulling their music from the now “traditional” streaming platforms, which suddenly find themselves terminally disrupted. Investors see the eventual writing on the wall for podcasts, movies and other forms of digitisable contents as well. Market impact: Investors recognise that Spotify’s future is bleak, sending its shares down 33 percent in 2022. 9. New hypersonic tech drives space race and new cold war Summary: The latest hypersonic missile tests are driving a widening sense of insecurity as this tech renders legacy conventional and even nuclear military hardware obsolete. In 2022 a massive hypersonic arms race develops among major militaries as no country wants to feel left behind. In 2022, it is clear from funding priorities that hypersonics and space are the heart of a new phase of the deepening rivalry between the US and China on all fronts—economic and military. Other major powers with advanced military tech join in as well, likely including Russia, India, Israel and the EU. Hypersonic capabilities represent a game-changing threat to the long-standing military strategic status quo, as the technology brings asymmetric new defensive and offensive capabilities that upset the two massive pillars of military strategy of recent decades. The first is the potential for devastating hypersonic tech defence against the conventional attack capabilities of long-range bombing aircraft, as well as the so-called “deep water” navy of ships that can bring the fight to any corner of the globe without refuelling. The second pillar of the old Cold War era was the principle of mutually assured destruction (MAD) in the event of nuclear war, under which it was pointless to launch a nuclear war as long as there was still time for the opponent to launch an equally destructive ICBM counterattack from land- and submarine-based ballistic missiles. But the speed and agility of hypersonic tech introduces the belief that superior defence could thwart an attack entirely and even allow for new first-strike capabilities. Market impact: massive funding for companies like Raytheon that build hypersonic tech with space delivery capabilities and underperformance of “expensive conventional hardware” companies in the aircraft and ship-building side of the military hardware equation. 10. Medical breakthrough extends average life expectancy 25 years Summary: Young forever, or for at least a lot longer. In 2022, a key breakthrough in biomedicine brings the prospect of extending productive adulthood and the average life expectancy by up to 25 years, prompting projected ethical, environmental and fiscal crises of epic proportions. The year 2022 sees a breakthrough from a multi-factor approach, as a cocktail of treatments is put together that tweaks cell-level processes in order to extend their life and thus the life of the organism composed of those cells. It’s not cheap, but it’s effective and has already been demonstrated on laboratory mice containing human DNA, extending their lives some 30% and more. The prospect of a massive leap in human quality of life and life expectancy are huge wins for mankind but bring an enormous ethical and financial quandary. Imagine that almost everyone can look forward to living to an average age of 115 and more healthily. What would this mean for private and government pensions, or even the ability or desire to retire? And what about the cost to the planet if it is set to support billions more people, not to mention whether or not there is enough food to go around? And then there is the ethical question of whether it is humane to not make the cocktail available to everyone. In short, how would our value systems, political systems and planet cope?
December Monthly

December Monthly

Marc Chandler Marc Chandler 02.12.2021 15:00
December 01, 2021  $USD, Macro The pandemic is still with us as the year winds down and has not yet become endemic, like the seasonal flu.  Even before the new Omicron variant was sequenced, Europe was being particularly hard hit, and social restrictions, especially among the unvaccinated, were spurring social strife.  US cases, notably in the Midwest, were rising, and there is fear that it is 4-6 weeks behind Europe in experiencing the surge.  Whatever herd immunity is, it has not been achieved.  Moreover, despite plenty of vaccines in high-income countries, inoculation efforts in many low-income countries won't begin in earnest until next year.   That said, the new variant has injected a new element into the mix, and it is with a heightened degree of uncertainty that we share our December outlook.  Given the unknowns, policymakers can choose the kind of error they are willing to make. They are trying to minimize their maximum regret.  The utmost regret is that the mutation is dangerous and renders the existing vaccines and treatment significantly less effective.  This will leave them vulnerable to accusations of over-reacting if the Omicron turns out to be a contagious but less deadly variation.   Meanwhile, there has been some relief to the supply chain disruptions.  Covid-related factory closures in Asia, the energy shortage, and port congestion are easing. Large US retailers have stocked up for the holiday shopping season, some of which chartered their own ships to ensure delivery. There are also preliminary signs that the semiconductor chip shortage may be past its worst.  Indeed, the recovery of the auto sector and rebuilding of inventories will help extend the economic expansion well into next year, even though fiscal and monetary policy are less supportive for most high-income countries.  The flash November US manufacturing PMI saw supplier delivery delays fall to six-month lows.   We assume that the US macabre debt ceiling ritual will not lead to a default, and even though it distorted some bill auctions, some resolution is highly probable.  The debate over the Build Back Better initiative, approved by the House of Representatives, will likely be scaled back by moderate Democratic Senators and Republicans.  Besides assessing the risks posed by the new variant, the focus in December is back on monetary policy.  Four large central banks stand out.  The Chinese economy has slowed the People's Bank of China quarterly monetary report modified language that signals more monetary support may be forthcoming.  Many observers see another reduction in reserve requirements as a reasonable step.  Unlike in the US and Europe, which saw bank lending dry-up in the housing market crisis (2008-2009), Beijing is pressing state-owned banks to maintain lending, including the property sector.   The Federal Reserve meets on December 15.  There are two key issues.  First, we expect the FOMC to accelerate the pace of tapering to allow it to have the option to raise rates in Q2 22.  The Fed's commitment to the sequence (tapering, hikes, letting balance sheet run-off) and the current pace of tapering deny the central bank the needed flexibility.  The November CPI will be reported on December 10.  The headline will likely rise to around 6.7%, while the core rate may approach 5%.  Second, the new "Summary of Economic Projections" will probably show more Fed officials seeing the need to hike rates in 2022.  In September, only half did.  The rhetoric of the Fed's leadership has changed.  It will not refer to inflation as transitory and is signaling its intention to act.  The European Central Bank and the Bank of England meet the day after the FOMC.  The ECB staff will update its forecasts, and the key here is where it sees inflation at the end of the forecasting period.  In September, it anticipated that CPI would be at 1.5% at the end of 2023.  Some ECB members argued it was too low.   It may be revised higher, but the key for the policy outlook is whether it is above the 2% target.  We doubt that this will be the case.  While the ECB will likely announce that it intends on respecting the current end of the Pandemic Emergency Purchase Program next March, its QE will persist. The pre-crisis Asset Purchase Program is expected to continue and perhaps even expand in Q2 22.  The "modalities" of the post-emergency bond-buying program, size, duration, and flexibility (self-imposed limits) will be debated between the hawks and doves.  With eurozone inflation approaching 5% and Germany CPI at 6%, the hard-money camp will have a new ally at the German Finance Ministry as the FDP leader Linder takes the post.  On the other hand, the Social Democrats will name a Weidmann's replacement at the head of the Bundesbank, and nearly anyone will be less hawkish.   While we correctly anticipated that the Bank of England would defy market expectations and stand pat in November, the December meeting is trickier.  The decision could ultimately turn on the next employment and CPI reports due 1-2 days before the BOE meeting.  The risk is that inflation will continue to accelerate into early next year and that the labor market is healing after the furlough program ended in September.  On balance, we suspect it will wait until next year to hike rates and finish its bonds purchases next month as planned.   Having been caught wrong-footed in November, many market participants are reluctant to be bitten by the same dog twice. As a result, the swaps market appears to be rising in about a 35% chance of a 15 bp move that would bring the base rate up to 25 bp.  Sterling dropped almost 1.4% (or nearly two cents) on November 4, the most since September 2020 when the BOE failed to deliver the hike that the market thought the BOE had signaled.   The combination of a strong dollar and the Fed tapering weighed emerging market currencies as a whole.  The JP Morgan Emerging Market Currency Index fell by about 4.5% in November, its third consecutive monthly decline, bringing the year-to-date loss to almost 10%.  It fell roughly 5.7% in 2020.  Turkey took the cake, though, with the lira falling nearly 30% on the month.  It had depreciated by 15% in the first ten months of the year.  This follows a 20% depreciation last year.  Ten years ago, a dollar would buy about 1.9 lira.  Now it can buy more than 13 lira.  The euro's weakness was a drag, and the geopolitical developments (e.g., Ukraine, Belarus) weighed on central European currencies. The central bank of Hungary turned more aggressive by hiking the one-week deposit rate by 110 bp (in two steps) after the 30 bp hike in the base rate failed to have much impact.  The forint's 3.1% loss was the most among EU members.   Colombian peso was the weakest currency in Latam, depreciating by almost 5%. It was not rewarded for delivering a larger than expected 50 bp rate hike in late October.  Bannockburn's GDP-weighted global currency index (BWCI) fell by nearly 1% in November, the largest monthly decline since June.  It reflected the decline of the world's largest currencies against the dollar.  Three currencies in the index proved resilient  On the GDP-weighted basis, China has immense gravity, with a 21.8% weighting (the six largest EM economies, including China, account for a 32.5% of the BWCI). It appreciated by about two-thirds of a percent. The Brazilian real managed to rise (~0.25%) too.  Since the day before the Omicron variant was sequenced, the Japanese yen gained a little more than 2%, reversing the earlier decline that had brought it to four-year lows.  It rose by  0.7% in November, making it the strongest currency in the index.  Among the major currencies, the Australian dollar fell the most, declining about 5.2%.  The Canadian dollar was next, with around a 3% loss.   As it turns out, the dollar (Dollar Index) recorded its low for the year as shocking events were unfolding in Washington on January 6.  The bottomed against the yen and euro the same day.   The greenback did not bottom against the Australian dollar until February, but it took it until early June to put in a low against sterling and the Canadian dollar.  The BWCI peaked in early June and, by the end of last month, had retreated by about 2.7%.  We suspect it may decline by another 2%, which would return it the levels of late 2019.  That, in turn, implies the risk of a stronger dollar into the first part of next year.     Dollar:  The jump in US CPI to above 6%, and a strong sense that it is not the peak, spurred speculation that the Federal Reserve would likely accelerate the pace of tapering at the December meeting. Several Fed officials seemed sympathetic, including San Francisco President Daly, who is perceived to be a dove. The minutes of the November meeting underscored the central bank's flexibility over the pace of tapering.  At the same time, most of the high-frequency data for October came in stronger than expected, lending credence to ideas that after a disappointing Q3, the world's largest economy is accelerating again in Q4.  The divergence of monetary policy and the subsequent widening interest rate differentials is the primary driver of expectations for dollar appreciation against the euro and yen.  The market had been leaning toward three rates hikes in 2022 before news of the new Covid mutation emerged and trimmed the odds.  Powell was renominated for a second term at the helm of the Federal Reserve, Brainard was nominated to be Vice-Chairman.  There is still the Vice-Chair for supervision and an empty governor seat for President to Biden to fill.  In addition to the changes in leadership, the rotation of the voting members of the FOMC brings in a somewhat more hawkish bias next year.   Euro:  In contrast with the US, eurozone growth is set to slow in Q4. After two quarters that growth exceeded 2% quarter-over-quarter, growth is likely to moderate to below 1% in Q4 21 and Q1 22.  Food and energy are driving inflation higher.  The EC continues to negotiate with the UK over changes to the Northern Ireland Protocol.  The dispute over fishing licenses and migrant crossing of the channel are also unresolved sources of tension with the UK. Tensions between the EC and Poland/Hungary over the rule of law, judicial independence, and civil liberties have also not been settled.  As was the case in the spring, Russia's troop and artillery movement threatened Ukraine, though the tension on the Poland/Belarus border has eased.  The ECB's leadership continues to maintain the price pressures are related to the unusual set of circumstances but are ultimately temporary.  Its December 16 meeting, the last one before Bundesbank President Weidmann steps down, is critical. In addition to confirming the end of the Pandemic Emergency Purchase Program in March 2022, and the expansion of the Asset Purchase Program, the ECB staff will update its inflation forecasts.  The focus here is on the 2023 CPI projection of 1.5%.  There was a push back against it in September, and a slight upward revision is likely. Nevertheless, it will probably remain below the 2% target.  The swaps market is pricing in a 25 bp hike in 2023.   (November indicative closing prices, previous in parentheses)   Spot: $1.1335 ($1.1560) Median Bloomberg One-month Forecast $1.1375 ($1.1579)  One-month forward  $1.1350 ($1.1568)    One-month implied vol  7.1%  (5.1%)         Japanese Yen:  Japan has a new prime minister who has put together a large fiscal stimulus package that will help fuel the economic recovery that had begun getting traction since the formal state of emergency was lifted at the end of September.  After a frustratingly slow start, the inoculation efforts have started bearing fruit, with vaccination rates surpassing the US and many European countries.  Unlike most other high-income countries, Japan continues to experience deflationary pressures.  Food and energy prices may be concealing it in the CPI measure, but the GDP deflator in Q2 and Q3 was  -1.1%. However, the BOJ does not seem inclined to take additional measures and has reduced its equity and bond-buying efforts.  The exchange rate remains sensitive to the movement of the US 10-year note yield, which has chopped mostly between 1.50% and 1.70%. With a couple of exceptions in both directions, the greenback has traded in a JPY113-JPY115 range.  The emergence of the new Covid mutation turned the dollar back after threatening to break higher.  A convincing move above the JPY115.50 area would likely coincide with higher US rates and initially target the JPY118 area.    Spot: JPY113.10 (JPY113.95)       Median Bloomberg One-month Forecast JPY113.30 (JPY112.98)      One-month forward JPY113.00 (JPY113.90)    One-month implied vol  8.2% (6.4%)   British Pound:  Sterling never fully recovered from disappointment that the Bank of England did not hike rates in early November.  Market participants had understood the hawkish rhetoric, including by Governor Bailey, to signal a hike.  The implied yield of the December 2021 short-sterling interest rate futures plummeted by 30 bp by the end of the month, and sterling has not seen $1.36, let alone $1.37, since then.  Indeed, sterling chopped lower and recorded new lows for the year in late November near $1.3200.  Growth in the UK peaked in Q2 at 5.5% as it recovered from the Q1 contraction.  It slowed to a 1.3% pace in Q3 and looks to be slowing a bit more here in Q4.  The petty corruption scandals and ill-conceived speeches by Prime Minister Johnson have seen Labour move ahead in some recent polls.  An election does not need to be called until May 2024, but the flagging support may spur a cabinet reshuffle.  The next important chart point is not until around $1.3165 and then the $1.30 area, which holds primarily psychological significance.       Spot: $1.3300 ($1.3682)    Median Bloomberg One-month Forecast $1.3375 ($1.3691)  One-month forward $1.3315 ($1.3680)   One-month implied vol 7.5% (6.8%)      Canadian Dollar:  The Canadian dollar appreciated by almost 2.4% in October and gave it all back, plus some in November.  Indeed, the loss was sufficient to push it fractionally lower for the year (-0.4%), though it remains the best performing major currency against the US dollar.   The three major drivers of the exchange rate moved against the Canadian dollar last month.  First, its two-year premium over the US narrowed by 17 bp, the most in four years.  Second, the price of January WTI tumbled by around 18.2%.  Commodity prices fell more broadly, and the CRB Index snapped a seven-month rally with a 7.8% decline.  Third, the risk appetites faltered is reflected in the equity markets. The Delta Wave coupled with the new variant may disrupt growth.  Still, the swaps market has a little more than two hikes discounted over the next six months.   The government is winding down its emergency fiscal measures, but the spring budget and election promises mean that the fiscal consolidation next year will be soft.     Spot: CAD1.2775 (CAD 1.2388)  Median Bloomberg One-month Forecast CAD1.2685 (CAD1.2395) One-month forward CAD1.2770 (CAD1.2389)    One-month implied vol 7.2% (6.2%)      Australian Dollar:  The Australian dollar fell by more than 5% last month, slightly less than it did in March 2020.  It did not have an advancing week in November after rallying every week in October.  Australia's two-year premium over the US was chopped to less than 10 bp in November from nearly 28 bp at the end of October.  The Reserve Bank of Australia pushed back against aggressive rate hike speculation.   The unexpected loss of jobs in October for the third consecutive month took a toll on the Australian dollar, which proceeded to trend lower and recorded the low for the year on November 30, slightly below $0.7065.  A break of $0.7050 would initially target $0.7000, but convincing penetration could spur another 2-2.5-cent drop.  The 60-day rolling correlation between- changes in the Australian dollar and the CRB commodity index weakened from over 0.6% in October to below 0.4% in November. The correlation had begun recovering as the month drew to a close.       Spot:  $0.7125 ($0.7518)        Median Bloomberg One-Month Forecast $0.7195 ($0.7409)      One-month forward  $0.7135 ($0.7525)     One-month implied vol 9.7%  (9.1%)        Mexican Peso:  The broadly stronger US dollar and the prospects of more accelerated tapering weighed on emerging market currencies in November, but domestic considerations also weighed on the peso.   The Mexican peso fell by around 4.1%, the most since March 2020.  The economy unexpectedly contracted by 0.4% in Q3.  There is little fiscal support to speak of, while monetary policy is becoming less accommodative too slowly compared with some other emerging markets, such as Brazil.  Price pressures are still accelerating, and the bi-weekly CPI rose above 7% in mid-November. The swaps market discounts nearly a 25 bp hike a month for the next six months.  The government's policies, especially in the energy and service sectors, are not attractive to investors.  President AMLO dealt another blow to investor confidence by retracting the appointment of former Finance Minister Herrera for his deputy to head up the central bank starting in January.  This is seen potentially undermining one of the most credible institutions in Mexico.  Lastly, Mexico's trade balance has deteriorated sharply in recent months and through October has recorded an average monthly trade deficit of nearly $1.2 bln this year.  In the same period, in 2020, it enjoyed an average monthly surplus of almost $2.5 bln, and in the first ten months of 2019, the average monthly trade surplus was a little more than $150 mln.     Spot: MXN21.46 (MXN20.56)   Median Bloomberg One-Month Forecast  MXN21.23 (MXN20.42)   One-month forward  MXN21.60 (MXN20.65)     One-month implied vol 14.9% (9.6%)      Chinese Yuan:  The Chinese yuan has been remarkably stable against the US dollar, and given the greenback's strength, it means the yuan has appreciated sharply on a trade-weighted basis.  Going into the last month of the year, the yuan's 2.6% gain this year is the best in the world.  Chinese officials have signaled their displeasure with what it sees as a one-way market.  At best, it has orchestrated a broadly sideways exchange rate against the dollar, mainly between CNY6.37 and CNY6.40. The lower end of the dollar's range was under pressure as November drew to a close.   Even though the Chinese economy is likely to accelerate from the near-stagnation in Q3 (0.2% quarter-over-quarter GDP), it remains sufficiently weak that the PBOC is expected to consider new stimulative measures.  It last reduced reserves requirements in July, and this seems to be the preferred avenue rather than rate cuts.  Yet, given the interest rate premium (the 10-year yield is around 2.85%), record trade surpluses ($84.5 bln in October), portfolio inflows, and limited outflows, one would normally expect a stronger upward pressure on the exchange rate.    Spot: CNY6.3645 (CNY6.4055) Median Bloomberg One-month Forecast  CNY6.38 (CNY6.4430)  One-month forward CNY6.3860 (CNY6.4230)    One-month implied vol  3.5% (3.5%)    Disclaimer
NFP Quick Analysis: Weak report? Not when looking under the hood, and not for stocks

NFP Quick Analysis: Weak report? Not when looking under the hood, and not for stocks

FXStreet News FXStreet News 04.12.2021 17:39
The US has gained only 210K jobs in November, and wage growth slowed to 4.8%. Participation finally increased and the jobless rate dropped. The Fed will likely speed up tapering, but with less rush. Company profits are set to rise, paving the way for a Santa Rally. Less than half of expectations – that is the headline from November's Nonfarm Payrolls, which showed an increase of only 210K jobs vs. 550K expected. Wage growth also fell short of expectations with only 4.8% YoY instead of 5% projected. A halt in salaries is undoubtedly deflationary. Less money in Americans' pockets means less price pressure, especially in core inflation – what matters to the Federal Reserve. The figures come shortly after Fed Chair Jerome Powell said it is time to retire the term "transitory" when referring to inflation. Will he change his mind? Barely. The 0.2% miss in annual wage growth could result in a slower acceleration of tapering – currently at $15 billion – but not a cancellation of the policy. That explains the drop in the dollar, albeit a mild one. The greenback could find other reasons to rise, such as Omicron fears, or other developments. However, the Unemployment Rate dropped from 4.6% to 4.2%, a substantial drop, while the PArticipation Rate advanced from 61.6% to 61.8%, Finally, more Americans are returning to the workforce. While that goes hand in hand with weaker wages – more employees mean more competition for jobs and lower salaries – it initially seems confusing that jobs grew by only 210K. The reason for the confusion is the Bureau of Labor Statistics' separate surveys for constructing the NFP. Beyond the details of these surveys, the important thing to note is that the US economy continues growing at a fast pace, drawing people back in. That implies more sales for corporations, albeit with lower inflation. In one word – Goldilocks. Stocks are set to weather Fed tightening and rally into Christmas. Somewhat weaker Fed action with more people able to buy is good news for investors.
Gold's 1780s Are Driving Us Crazy!

Gold's 1780s Are Driving Us Crazy!

Mark Mead Baillie Mark Mead Baillie 06.12.2021 08:31
The Gold Update by Mark Mead Baillie --- 629th Edition --- Monte-Carlo --- 04 December 2021 (published each Saturday) --- www.deMeadville.com In completing its 48th trading week of 2021, Gold settled yesterday (Friday) at 1784. 'Twas the eighth week this year that Gold has settled in the 1780s (the first occurrence being on 19 February). Indeed, Gold's median weekly settle price year-to-date is 1788. Yet as anybody engaged in the Gold Story knows, Gold first traded in the 1780s a decade ago on 09 August 2011, the U.S "M2" money supply that day at $9.5 trillion; (today 'tis $21.5 trillion). So to reprise that from the "You Cannot Be Wrong Dept.": should anyone ask you "off the cuff" what is the price of Gold, your instantaneous response of "1780" shall (so 'twould seem for the foreseeable future) not only be correct, but enhance your dazzling intellectual image. To reprise as well "The M Word" crowd, clearly their parking place of preference is Gold's 1780s. Of the 233 trading days year to date, 27 of Gold's closures exceeding 1800 have -- within the five ensuing trading days -- found price settle in the 1780s, or lower. "1800? SELL!" Sheesh... Gold's 1780s are driving us crazy! Regardless, Gold -- and moreover Silver -- are doing what markets do when their technicals turn negative: price goes down. Per our Market Magnets page, Gold from 1861 on 18 November found price then pierce down through its Magnet: "SELL!" From our Market Trends page, Gold from 1847 on 19 November found the "Baby Blues" of trend consistency begin to plummet: "SELL!" From our Market Values page, Gold from 1805 on 22 November crossed below its smooth valuation line: "SELL!" More mainstream technical signals have since followed to "SELL!" And recall -- just prior to it all in our anticipating near-term selling -- we nonetheless deemed the 1800s as "safe": "WRONG!" Having thus now driven you crazy, we obviously deem holding and buying Gold as "RIGHT!" especially as the stock market -- be this another false signal or otherwise -- finds the S&P 500 doing its dance of a snake in death throes. To be sure we've seen such before, only to see the Index magically survive, indeed thrive. You veteran readers of The Gold Update may recall some six years ago (on 23 January 2016) our characterizing the S&P as being in such "death throes", the ensuing three weeks then finding the Index fall 5% from a "live" price/earnings ratio of 43x; (today 'tis 47x). "But don't forget it's now time for the Santa Claus Rally, mmb..." Yet another conventional wisdom notion there, Squire, via your appreciated "leading comment". Irrespective of what "everybody says" and expects, Santa Claus doesn't always come to Wall Street. Since 1980, as measured yearly from 01-to-24 December, Santa has skipped gifting the stock market 11 times. "WHAT?" 'Tis true. For those of you scoring at home, the S&P recorded net losses across that festive stint in '80, '81, '83, '86, '96, '97, '00, '02, '08, '15 and '18, the latter being a 409-point (-14.8%) loss. (Advice to the stocking stuffer: buy coal ... nudge-nudge, wink-wink, elbow-elbow). Moreover, have you been monitoring the major market dislocations of late? Talk about the maligning of conventional wisdom! In yesterday's session, the €uro, Swiss Franc, ¥en -- and yes the Dollar Index too -- all closed higher. "WHAT?" 'Tis true. Still, even as there is Dollar demand given the prospect of it paying a positive interest rate, the yield on the U.S. Treasury Bond continues to fall: 'twas 2.177% on 08 October, but is down now to 1.678%. In fact across our BEGOS Markets (Bond, Euro/Swiss, Gold/Silver/Copper, Oil, S&P 500), the price of the Bond is the only component with a positive 21-day linear regression trend. "WHAT?" 'Tis true. And then there's Oil: by our Market Values page, Black Gold settled yesterday 15 points below its smooth valuation line (66.22 vs. 81.51), even as Oil Inventories fell. "WHAT?" 'Tis true, (albeit OPEC is gonna keep a-pumpin'). Still, by that measure, Oil's price is massively, -- indeed deflationarily -- dislocated near-term from value. Too as noted, the Price of the S&P continues to be ridicously dislocated from the support of its Earnings; but if you get your dumbed-down P/E of 28.1x from the media, when 'tis honestly 47.4x, go ahead and say it: "WHAT?" 'Tis true. 'Course, the ongoing and most overwhelming dislocation is the price of Gold vis-à-vis our Scoreboard Dollar-debasement valuation (1784 vs. 4008). Say no more, Igor. A December to remember? Early on, 'tis the season to be dislocated. To which naturally (as subtly stated) we find Gold located in the 1780s. Why expect it to be anywhere else? So spot-on is Gold in the 1780s that per the following graphic of weekly price, the rightmost close is right on the dashed regression trendline. So are the 1780s driving you crazy, too? At least Gold's parabolic trend still is Long, although the aforementioned negative technicals have kept on the lid, (to say nothing of "The M Word" crowd?). Note as well the 79.1x reading of the Gold/Silver, ratio, essentially at a two-month high, the white metal having been terribly on the skids of late: Anything but skidding these last couple of months has been our Economic Barometer, it now having reached its highest oscillative level in better than three years. Whilst nominally last week's 13 incoming metrics were quite mixed, their overall effect net of prior period revisions and consensus expectations was to launch the Baro higher still as we here see: Amongst the improvers were November's Unemployment Rate and Average Workweek, plus both the Manufacturing and Services readings from the Institute for Supply Management, along with October's Construction Spending, Factory Orders and Pending Home Sales. However: November's ADP Employment data, Labor's Non-farm Payrolls and Hourly Earnings, the Chicago Purchasing Managers' Index and the Conference Board's read on Consumer Confidence were all weaker. Therein, too, is the red line of the S&P 500, its aforementioned snaky death throes throwing the Index all over the place this past week. The S&P's intra-day runs were as follows: Mon +48, Tue -86, Wed -143, Thu +91, Fri -113. Want some perspective for that? The entire trading range of the S&P 500 for the year 2004 was less than this past Wednesday's session alone. "WHAT?" 'Tis true. 'Course, back in 2004, 'twas a greater percentage range, but at least the average P/E for that year was a "reasonable" (vs. today) 26.4x. Thus again is begged the question: "Has the S&P crashed yet?" Obviously not, but we're feelin' very leery 'bout January. "As goes January..."(although you regular readers know we've demonstrably debunked that conventional notion as well). BUT... As for the Federal Reserve's removing of the punch bowl, Atlanta FedPrez Raphael "Ready to Raise" Bostic again says its time to step up the Taper of Paper Caper, whilst FedGov Randal "Have No" Quarles says 'tis time for The Bank to prepare to raise. And as noted in last week's missive: were it not for the "Oh my! Omicron!" scare, we could well see a FedFunds rate hike in the FOMC's 26 January Policy Statement. So just keep wearing your masque such that everything's great, and in turn let the Fed increase its rate! Here's another positive from the "Good Is Bad Dept.": the StateSide government shan't run out of money this time 'round until 18 February. Low on dough? To Congress you go! Just ask TreaSec Yellen, for she's in the know! Ho-ho-ho... Either way, west of The Pond "inflation" remains the watchword -- or if you prefer the real word -- as the word "transitory" is being transited away. East of The Pond, the EuroZone (just 23 years young) sees its inflation level hitting record high levels; but should it be peaking, 'tis thought any European Central Bank rate rise shan't next year materialize. And lacking any upside mobility of late (duh) are our precious metals, the following two-panel graphic bearing along as butt ugly. On the left we've Gold's daily bars from three months ago-to-date, their cascading "Baby Blues" reinforcing price's downtrend, (although price never really departs the 1780s, right?). On the right similarly is the same story for Sister Silver, who clearly is suffering the ravages of DDS ("Dangerfield Disrespect Syndrome"), by which she's none too happy. For from the precious metals' respective highs of just three weeks back, Gold has dropped as much as -5.8% ... but Silver more than double that at -12.6%! "WHAT?" 'Tis true: Meanwhile, still dwellers in their Profile cellars are Gold (below left) and Silver (below right). Here is the entirety of their trading across the last two weeks, the high volume price apices as labeled. And that is a lot of overhead work to do: So after all of that, are you ready to tune out? You can't be so blamed. Gold's 1780s have got us all crazy! Puts us in mind of that iconic glamour rock hit by Sparks from back in '83 -- supportive of the film by the same name -- "Get Crazy"Tune it in on your radio dial: sure to bring a you a Golden Smile! Cheers! ...m... www.deMeadville.com
Gold – Recovery ahead

Gold – Recovery ahead

Florian Grummes Florian Grummes 14.12.2021 13:26
https://www.midastouch-consulting.com/13122021-gold-recovery-ahead December 13th, 2021: The gold market is nearing the end of a difficult and very challenging year. Most precious metal investors must have been severely disappointed. Gold – Recovery ahead. Review 2021 started quite bullish, as the gold price climbed rapidly towards US$1,960 at the beginning of the year. In retrospect, however, this peak on January 6th also represented the high for the year! In the following 11.5 months, gold did not even come close to reaching these prices again. Instead, prices came under considerable pressure and only bottomed out at the beginning and then again at the end of March around US$1,680 with a double low. Interestingly, the low on March 8th at US$1,676 did hold until today. The subsequent recovery brought gold prices back above the round mark of US$1,900 within two months. But already on June 1st, another violent wave of selling started, which pushed gold prices down by US$150 within just four weeks. Subsequently, gold bulls attempted a major recovery in the seasonally favorable early summer phase. However, they failed three times in this endeavor at the strong resistance zone around US$1,830 to US$1,835. As a result, sufficient bearish pressure had built up again, which was then unleashed in the flash crash on August 9th with a brutal sell-off within a few minutes and a renewed test of the US$1,677 mark. Despite this complete washout, gold bulls were only able to recover from this shock with difficulty. Hence, gold traded sideways mainly between US$1,760 and US$1,815 for the following three months. It was not until the beginning of November that prices quickly broke out of this tenacious sideways phase and thus also broke above the 15-month downtrend-line. This was quickly followed by another rise towards US$1,877. However, and this is quite indicative of the ongoing corrective cycle since the all-time high in August 2020, gold prices made another hard U-turn within a few days and sold off even faster than they had risen before. Since this last sell-off from US$1,877 down to US$1,762, gold has been stuck and kind of paralyzed for three weeks, primarily trading in a narrow range between US$1,775 and US$1,785. Obviously, the market seems to be waiting for the upcoming FOMC meeting. Overall, gold has not been able to do much in 2021. Most of the time it has gone sideways and did everything to confuse participants. These treacherous market phases are the very most dangerous ones. Physical investors can easily sit through such a sideways shuffling. But leveraged traders had nothing to laugh about. Either the movements in gold changed quickly and abruptly or almost nothing happened for days and sometimes even weeks while the trading ranges were shrinking. Technical Analysis: Gold in US-Dollar Weekly Chart – Bottoming out around US$1,780? Gold in US-Dollars, weekly chart as of December 13th, 2021. Source: Tradingview Despite the 15-month correction, gold has been able to easily hold above the uptrend channel, which goes back to December 2015. The steeper uptrend channel that began in the summer of 2018 is also still intact and would only be broken if prices would fall below US$1,700. Support between US$1,760 and US$1,780 has held over the last three weeks too. The weekly stochastic oscillator is currently neutral but has been slowly tightening for months. Overall, gold is currently trading right in the middle of its two Bollinger bands on the weekly chart. Thus, the setup is neutral. However, bottoming out around US$1,780 has a slightly increased probability. Daily Chart – New buying signal Gold in US-Dollars, daily chart as of December 13th, 2021. Source: Tradingview On the daily chart, gold has been searching for support around its slightly rising 200-day moving average (US$1,793) over the last three weeks. However, eye contact has been maintained, hence a recapturing of this important moving average is still quite possible. Despite the failed breakout in November, the current price action has not moved away from the downtrend-line. A further attack on this resistance thus appears likely. Encouragingly, the daily stochastic has turned up from its oversold zone and provides a new buy signal. In summary, the chances of a renewed recovery starting in the near future predominate on the daily chart. In the first step, such a bounce could run to around US$1,815. Secondly, the bulls would then have to clear the downtrend-line, which would release further upward potential towards US$1,830 and US$1,870. The very best case scenario might see gold being able to rise to the psychological number of US$1,900 in the next two to four months. On the downside however, the support between US$1,760 and US$1,780 must be held at all costs. Otherwise, the threat of further downward pressure towards US$1,720 and US$1,680 intensifies. Commitments of Traders for Gold – Recovery ahead Commitments of Traders for Gold as of December 12th, 2021. Source: Sentimentrader The commercial net short position in the gold futures market was last reported at 245,623 contracts sold short. Although the setup has somewhat improved due to the significant price decline in recent weeks, the overall constellation continues to move in neutral waters. There is still no clear contrarian bottleneck in the futures market, where professional traders should have reduced their net short positions to below 100,000 contracts at least. Until then, it would still be a long way from current levels, which could probably only happen with a price drop towards US$1,625. As long as this does not happen, any larger move up will probably have a hard time. In summary, the CoT report provides a neutral signal and thus stands in the way of a sustainable new uptrend. However, given the current futures market data, temporary recoveries over a period of about one to three months are currently possible. Sentiment for Gold – Recovery ahead Sentiment Optix for Gold as of December 12th, 2021. Source: Sentimentrader Sentiment for gold has been meandering in the neutral and not very meaningful middle zone for more than a year. Furthermore, a complete capitulation or at least very high pessimism levels are still missing to end the ongoing correction. Such a high pessimism was last seen in spring of 2019, whereupon gold was able to rise more than US$800 from the lows at US$1,265 to US$2,075 within 15 months. This means that in the big picture, sentiment analysis continues to lack total capitulation. This can only be achieved with deeply fallen prices. In the short term, however, the Optix for gold has almost reached its lows for the year. At the same time, german mainstream press is currently asking, appropriately enough, “Why doesn’t gold protect against inflation? This gives us a short-term contrarian buy signal, which should enable a recovery rally over coming one to three months. Seasonality for Gold – Recovery ahead Seasonality for Gold over the last 53-years as of December 12th, 2021. Source: Sentimentrader As so often in recent years, precious metal investors are being put to the test in the fourth quarter of 2021. In the past, however, there was almost always a final sell-off around the last FOMC meeting between mid-November and mid-December. And this was always followed by an important low and a trend reversal. This year, everything points to December 15th or 16th. Following the FOMC interest rate decision and the FOMC press conference, the start of a recovery would be extremely typical. Statistically, gold prices usually finish the last two weeks of the year with higher prices, because trading volume in the west world is very low over the holidays, while in Asia, and especially in China and India, trading is more or less normal. Also, the “tax loss selling” in mining stocks should be over by now. Overall, the seasonal component turns “very bullish” in a few days, supporting precious metal prices from mid-December onwards. Typically, January in particular is a very positive month for gold, but the favorable seasonal period lasts until the end of February. Macro update and Crack-up-Boom: US-Inflation as of November 30th, 2021. ©Holger Zschaepitz Last Friday, inflation in the U.S. was reported to have risen to 6.8% for the month of November. This is the fastest price increase since 1982, when Ronald Reagan was US president, and the US stock markets had started a new bull market after a 16-year consolidation phase. Today, by contrast, the financial markets have been on the central banks’ drip for more than a decade, if not more than two. The dependence is enormous and a turn away from the money glut is unthinkable. Nevertheless, the vast majority of market participants still allow themselves to be bluffed by the Fed and the other central banks and blindly believe the fairy tales of these clowns. The Global US-Dollar Short Squeeze However, while inflation figures worldwide are going through the roof due to the gigantic expansion of the money supply and the supply bottlenecks, the US-Dollar continues to rise at the same time. A nasty US-Dollar short squeeze has been building up since early summer. The mechanism behind this is not easy to understand and gold bugs in particular often have a hard time with it. From a global perspective, the US-Dollar is still the most important reserve currency and thus also the most important international medium of exchange as well as the most important store of value for almost all major countries. Completely independently of this, many of these countries still use their own currency domestically. International oil trade and numerous other commodities are also invoiced and settled in US-Dollar. For example, when France buys oil from Saudi Arabia, it does not pay in its own currency, EUR, but in USD. Through this mechanism, there has been a solid demand for US-Dollar practically non-stop for decades. The US-Dollar system The big risk of this “US-Dollar system”, however, is that many foreign governments and companies borrow in US-Dollar, even though most of their revenue is generated in the respective national currency. The lenders of these US-Dollar are often not even US institutions. Foreign lenders also often lend to foreign borrowers in dollars. This creates a currency risk for the borrower, a mismatch between the currency of their income and the currency of their debt. Borrowers do this because they have to pay lower interest rates for a loan in US-Dollar than in their own national currency. Sometimes dollar-denominated bonds and loans are also the only way to get liquidity at all. Thus, it is not the lender who bears the currency risk, but the borrower. In this way, the borrower is basically taking a short position against the US-Dollar, whether he wants to or not. Now, if the dollar strengthens, this becomes a disadvantage for him, because his debt increases in relation to his income in the local currency. If, on the other hand, the US-Dollar weakens, the borrower is partially relieved of debt because his debt falls in relation to his income in the local currency. Turkish lira since December 2020 as of December 13th, 2021.©Holger Zschaepitz Looking, for example, at the dramatic fall of the Turkish lira, one can well imagine the escalating flight from emerging market currencies into the US-Dollar. Since the beginning of the year, Turks have lost almost 50% of their purchasing power against the US-Dollar. A true nightmare. Other emerging market currencies such as the Argentine peso, the Thai baht or even the Hungarian forint have also come under significant pressure this year. On top, the Evergrande bankruptcy and the collapse of the real estate bubble in China may also have contributed significantly to this smoldering wildfire. All in all, the “US-Dollar short squeeze” may well continue despite a technically heavily overbought situation. Sooner or later, however, the Federal Reserve will have to react and row back again. Otherwise, the strength of the US-Dollar will suddenly threaten a deflationary implosion in worldwide stock markets and in the entire financial system. The global house of cards would not survive such shock waves. The tapering is “nearish” It is therefore highly likely that the Fed will soon postpone the so-called “tapering” and the “interest rate hikes” until further notice. To explain this, they will surely come up with some gibberish with complicated-sounding words. All in all, an end to loose monetary policy is completely unthinkable. Likewise, the supply bottlenecks will remain for the time being. This means that inflation will continue to be fueled by both monetary and scarcity factors and, on top of that, by the psychological inflationary spiral. In these crazy times, investors in all sectors will have to patiently endure temporary volatility and the accompanying sharp pullbacks. Conclusion: Gold – Recovery ahead With gold and silver, you can protect yourself well against any scenario. In the medium and long term, however, this does not necessarily mean that precious metal prices will always track inflation one-to-one and go through the roof in the coming years. Most likely, the exponential expansion of the money supply will continue and accelerate. Hence, significantly higher gold and silver prices can then be expected. If, on the other hand, the system should implode, gold and silver will be able to play out their monetary function to the fullest and one will be glad to own them when almost everything else must be written down to zero. In the bigger picture, however, gold and silver fans will have to remain patient for the time being, because the clear end of the months-long correction has not yet been sealed. Rather, the most important cycle in the gold market should deliver an important low approximately every 8 years. The last time this happened was in December 2015 at US$1,045. This means that the correction in the gold market could continue over the next one or even two years until the trend reverses and the secular bull market finally continues. In the short term, however, the chances of a recovery in the coming weeks into the new year and possibly even into spring are quite good. But it should only gradually become clearer after the Fed’s interest rate decision on Wednesday what will happen next. A rally towards US$1,815 and US$1,830 has a clearly increased probability. Beyond that, US$1,870 and in the best case even US$1,910 could possibly be reached in February or March. For this to happen, however, the bulls would have to do a lot of work. Analysis initially written and published on on December 13th, 2021, by www.celticgold.eu. Translated into English and partially updated on December 13th, 2021. Feel free to join us in our free Telegram channel for daily real time data and a great community. If you like to get regular updates on our gold model, precious metals and cryptocurrencies you can subscribe to our free newsletter. By Florian Grummes|December 13th, 2021|Tags: Gold, Gold Analysis, Gold bullish, Gold Cot-Report, gold fundamentals, gold mining, Gold neutral, Silver, The bottom is in|0 Comments About the Author: Florian Grummes Florian Grummes is an independent financial analyst, advisor, consultant, trader & investor as well as an international speaker with more than 20 years of experience in financial markets. He is specialized in precious metals, cryptocurrencies and technical analysis. He is publishing weekly gold, silver & cryptocurrency analysis for his numerous international readers. He is also running a large telegram Channel and a Crypto Signal Service. Florian is well known for combining technical, fundamental and sentiment analysis into one accurate conclusion about the markets.
Considering Portfolios In Times Of, Among Others, Inflation...

Till the Dollar Yields

Monica Kingsley Monica Kingsley 17.11.2021 15:53
S&P 500 staged a very risk-off rally, not entirely supported by bonds. Value declined, not reflecting rising yields. Paring back recent gains on a very modest basis was palpable in financials and real estate, while (encouragingly for the bulls) consumer discretionaries outperformed staples. That‘s a testament to the stock bull run being alive and well, with all the decision making for the medium-term oriented buyers being a choice of an entry point. The brief short-term correction, the odds of which I saw as rising, is being postponed as the divergence between stocks and bonds grows wider on a short-term basis. Even the yield spreads on my watch keep being relatively compressed, expressing the Treasury markets doubts over the almost jubilant resilience in stocks. Make no mistake though, the path of least resistance for S&P 500 remains higher, and those trading only stocks can look forward for a great Dec return. Faced with the dog and pony debt ceiling show, precious metals dips are being bought – and relatively swiftly. What I‘m still looking for to kick in to a greater degree than resilience to selling attempts, is the commodities upswing that would help base metals and energy higher. These bull runs are far from over – it ain‘t frothy at the moment as the comparison of several oil stocks reveals. It‘s still about the dollar mainly: (…) The elephant in the room is (the absence of) fresh debt issuance lifting up the dollar, making it like rising yields more. Not only that these are failing to push value higher, but the tech resilience highlights the defensive nature of S&P 500 performance. Crucially though, precious metals are seeing through the (misleading dollar strength) fog, and are sharply rising regardless. Make no mistake, with the taper reaction, we have seen what I had been expecting (or even better given that I prefer reasonably conservative stance without drumming up expectations either way) – I had been telling you that the hardest times for the metals are before taper. Commodities and cryptos are feeling the greenback‘s heat most at the moment. It remains my view though that we aren‘t transitioning into a deflationary environment – stubborn inflation expectations speak otherwise, and the Fed‘s readiness to face inflation is being generally overrated, and that‘s before any fresh stimulus is considered. Let‘s move right into the charts (all courtesy of www.stockcharts.com). S&P 500 and Nasdaq Outlook S&P 500 bulls recaptured the reins in the very short-run, but it‘s the upswing sectoral internals that‘s preventing me from sounding the all clear. Credit Markets Credit markets look to be potentially stabilizing in the very short run – it‘s too early to draw conclusions. Gold, Silver and Miners Gold and silver declined, but the volume doesn‘t lend it more credibility than what‘s reasonable to expect from a correction within an uptrend. Forthcoming miners performance is key to assessing the setback as already over, or not yet. Crude Oil Crude oil bulls didn‘t got anywhere, and the oil sector resilience is the most bullish development till now. The absence of solid volume still means amber light, though. Copper The copper setback is getting extended, possibly requiring more short-term consolidation. Unless commodities swing below the early Nov lows, the red metal won‘t be a source of disappointment. Bitcoin and Ethereum Bitcoin and Ethereum crack in the dam is still apparent and open – the bulls haven‘t yet returned prices to the recent (bullish) range. I‘m though looking for a positive Dec in cryptos too, and chalk current weakness to the momentary dollar strength. Summary S&P 500 bulls leveled the short-term playing field, but the credit markets non-confirmation remains. Even though this trading range might not be over yet, it would be followed by fresh ATHs. Precious metals still have a lot of catching up to do, and will lead commodities into the debt ceiling showdown, after which I‘m looking for practically universally brighter real asset days - inflation expectations aren‘t declining any time soon. Thank you for having read today‘s free analysis, which is available in full at my homesite. There, you can subscribe to the free Monica‘s Insider Club, which features real-time trade calls and intraday updates for all the five publications: Stock Trading Signals, Gold Trading Signals, Oil Trading Signals, Copper Trading Signals and Bitcoin Trading Signals.
US Fed Actions 1999 to Present – What's Next?  - Part II - 15.12.2021

US Fed Actions 1999 to Present – What's Next? - Part II - 15.12.2021

Chris Vermeulen Chris Vermeulen 16.12.2021 08:53
Part II Let's continue to explore the past 20 years of US Fed actions. I believe the US Fed has created a global expansion of both economies and debts/liabilities that may become somewhat painful for foreign nations – and possibly the US. Reading The Data & What To Expect in 2022 And Beyond In the first part of this research article, I highlighted the past 25 years of US Fed actions related to the DOT COM bubble, the 9/11 terrorist attack, the 2008-09 US Housing/Credit crisis, and the recent COVID-19 virus event. Each time, the US Federal reserve had attempted to raise interest rates before these crisis events – only to be forced to lower interest rates as the US economy contracted with each unique disruption. The US Fed was taking what it believed were necessary steps to protect the US economy and support the global economy into a recovery period. Sign up for my free trading newsletter so you don’t miss the next opportunity! The following few charts highlight the results of the US Fed's actions to keep interest rates extremely low for most of the past 20 years. I want to highlight what I believe is an excessive credit/debt growth process that has taken place throughout most of the developing world (China, Asia, Africa, Europe, South America, and other nations). At the same time, the US has struggled to regain a functioning growth-based economy absent of US Federal Reserve ZERO interest policies and stimulus. Extreme Growth Of World Debt (excluding the US) This Rest Of The World; Debt Securities & Loans; Liabilities chart highlights the extreme, almost parabolic, growth in debt and liabilities that have accumulated since 2005-06. If you look closely at this chart, the real increase in debt and leverage related to global growth started to trend higher in 2004-05. During this time, the US housing market was on fire, which likely pushed foreign investors and foreign housing markets to take advantage of this growing trend in US and foreign real estate. This rally in speculative investments, infrastructure, and personal/corporate debt created a huge liability issue throughout many developing nations. Personal and Corporate debt levels are at their highest levels in decades. A recent Reuters article suggests global debt levels have risen in tandem with real estate price levels and is closing in on $300 Trillion in total debt. (Source: fred.stlouisfed.org) GDP Implicit Price Deflator Rallies To Levels Not Seen Since 1982~83 The rally in the US markets and the incredible rise of inflation over the past 24 months have moved the consumer price levels higher faster than anything we've seen over the past 50+ years. We've only seen price levels rise at this pace in the 1970s and the early 1980s. These periods reflected a stagflation-like economic period, shortly after the US Fed ended the Gold Standard. This was also a time when the US Federal Reserve moved the Fed Funds Rate up into the 12% to 16% range to combat inflationary trends. If the GDP Implicit Price Deflator moves above 5.5% over the next few months, the US Fed may be forced to take stronger action to combat these pricing issues and inflationary trends. They have to be cautious not to burst the growth phase of the markets in the process – which could lead to a very large deflationary/deleveraging price trend. (Source: fred.stlouisfed.org) We need to focus on how the markets are reacting to these extreme debt/liability trends and extreme price trends. The markets have a natural way of addressing imbalances in supply/demand/pricing functions. The COVID-19 virus event certainly amplified many of these issues throughout the globe by disrupting labor, supply, shipping, and manufacturing for a little more than 12+ months. The future decisions of the US Federal Reserve will either lead to a much more orderly deleveraging/devaluation process for the US and global markets – supporting the natural economic functions that help to process and remove these excesses. Or, the US Federal Reserve will push interest rates too high, too fast, and topple the fragile balance that is struggling to process the excesses throughout the global markets. What does this mean? I believe this data, and all the charts I've shared with you in this research article, suggest the US Fed is trapped in a very strenuous position right now. I'll share more information with you regarding my predictions for December 2021 and 2022 in the third part of this article. I will also share my proprietary Fed Rate Modeling System's results in Part III of this article and tell you what I expect from the US Federal Reserve and US stock markets. WANT TO LEARN MORE ABOUT HOW I TRADE AND INVEST IN THE MARKETS? Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals. If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio. Have a great day! Chris VermeulenChief Market Strategist
Financial Sector May Rally 11% - 15% Higher Before End Of January 2022

Financial Sector May Rally 11% - 15% Higher Before End Of January 2022

Chris Vermeulen Chris Vermeulen 11.12.2021 10:25
The financial sector is poised for a very strong rally into the end of 2021, and early 2022 as revenues and earnings for Q4:2021 should continue to drive an upward price trend. The US Federal Reserve is keeping interest rates low. At the same time, the US consumer continues to drive home purchases and holiday shopping. Strong economic data should drive Q4 results for the financial sector close to levels we saw in Q3:2021. If that happens, we may see a robust rally in the US Financial sector over the next 45 to 60+ days. The strength of the recent rally in the US major indexes shows just how powerful the bullish trend bias is right now. Some traders focus on the downside risks associated with the US Federal Reserve actions and/or the concerns related to inflation and global markets. I, however, continue to focus on the strength in the US major indexes and various sector trends that show real opportunities for profits. Comparing Sector Strength The following two US market sector charts highlight the performance over the last 12 vs. 24 months. I want readers to pay attention to how flat the Financial Sector has stayed since just before the 2020 COVID event and how the Financial Sector has started to trend higher over the past 12 months. This is because the shock of COVID briefly disrupted consumer activity. Yet, consumers are coming back strong, driving retail sales, home sales, and the continued strong US economic data. Therefore, it makes sense that the Financial sector should continue to show firm revenue and earnings growth while the US consumer is active and spending. Sign up for my free trading newsletter so you don’t miss the next opportunity! Over the past two years, Discretionary, Technology, and Materials drove market growth compared to other sectors. Remember, the initial COVID virus event disrupted market sector trends over the last 24+ months. (Source: StockChart.com) Taking a look at this 1 Year US Market Sector chart shows how various sectors have rebounded and how the Discretionary and Materials sectors have flattened/weakened. Pay attention to how the Energy and Real Estate sectors have been over the past 12 months. Also, pay attention to how the Financial sector is strengthening. I believe that the continued deflation/deleveraging that is taking place throughout most of the world will continue to drive global central banks to stay relatively neutral regarding rising interest rates. This will likely prompt an easy money policy throughout most of 2022 and drive continued revenues/earnings for sectors associated with consumers' engagement with the economy. If inflation weakens into 2022 while wage and jobs data stays strong, we may see more moderate strength in the Financial, Healthcare, Discretionary, and Technology sectors over the next 6 to 12+ months. Read more about Global Deleveraging Here: Delivering Covid Bubble Possible Volatility Risks In Foreign Markets (Source: StockChart.com) Financials May Pop 11% Or More Over The Next 6+ Months This Weekly IYG, IShares US Financial Service ETF, highlights the recent sideways price trend in the Financial sector and the potential for a 9% to 13% rally that may take place as the markets shift into focus for the Q4:2021 earnings. Yes, inflation is still a concern, but as long as the US consumer continues spending and engaging in the economy, the Financial Services and US Banks should show strong returns. If the US markets rally into the end of 2021, possibly reaching new all-time highs again, this trend may carry well into 2022 and drive Q4:2021 and Q1:2022 revenues and earnings for the Financial sector even higher. This Weekly XLF chart shows a very similar setup to IYG. I firmly believe the recent fear in the markets related to the US Federal Reserve, the new COVID variants, and the global markets deleveraging process is missing one critical component – the strength of the US markets and the strength of the US Dollar. As the rest of the world struggles to find support and economic strength, the US markets continue to rebound on the strength of the US consumer, the recovering economy, and the growth of these sectors. As long as the US Federal Reserve does not disrupt this trend, I believe Q1:2022 could be much more robust than many people consider. I also think the deflation/deleveraging process will work to take the pressures away from recent inflation trends. What could this mean for 2022? Early 2022 may well work as a "rebalancing" process for the global markets – possibly taking the pressures away from the strength in energy, commodities, and staple products/materials. This means pricing pressures will decrease while consumers are still earning and spending. The Financial sector should benefit from these trends over the next 6+ months. Watch for the Financials to start to increase throughout the end of 2021 and into early 2022. There are many ways to consider trading this move, but ideally, I think the rally will take place before the end of February 2022. Q1 is usually relatively strong, so that this trend may last well into April/May 2022. It all depends on what happens that could disrupt the current market sector trends. If nothing happens to disrupt the strength of the US Dollar and the strength of the US markets, then I believe the Financial Sector has a very strong opportunity for at least 10% to 11% growth. Want to learn more about the potential for a financial sector rally? Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals. If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP - Total ETF Portfolio. Have a great day! Chris VermeulenChief Market Strategist
Financial Sector ETF XLF $37.50 Continues To Present Opportunities

Financial Sector ETF XLF $37.50 Continues To Present Opportunities

Chris Vermeulen Chris Vermeulen 26.01.2022 23:16
Recent volatility in the US markets ahead of the Fed comments/actions have prompted a relatively big pullback in almost every sector. Many traders are concerned the Fed may take immediate action to raise rates. Yet, a small portion of traders believes the Fed may be trapped in a position to act more conservatively in addressing inflation going forward. I think the Fed will continue to talk firmly about potentially raising rates. The Fed is more interested in decreasing the assets on their balance sheet before they risk doing anything to disrupt support for the global markets.Suppose my analysis of the Fed predicament is correct. In that case, the recent collapse of the US markets represents a fear-based emotional selloff of many sectors that may still represent a strong opportunity for a recovery rally in 2022. One of those sectors is the Financial sector – particularly XLF.I wrote about this on January 7, 2022, in this article: FINANCIAL SECTOR STARTS TO RALLY TOWARDS THE $43.60 UPSIDE TARGETI also wrote how the US Fed might be playing with fire regarding their stern positioning and statements recently in this article on January 14, 2022: US FEDERAL RESERVE - PLAYING WITH FIRE PART 2Critical Components Of Recent Inflationary TrendsIf you attempt to follow my logic as I read into the Fed's intentions. There are three critical components to navigating the rise of inflationary trends recently.The COVID-19 virus event created several disparities in the global markets. First, the disruption to the labor and supply-side markets began an almost immediate inflationary aspect for the global economy. Secondly, the US's stimulus and easy money policies have stimulated demand for products, technology, houses, autos, and other real assets. These two factors combined have increased inflationary pressures on the global markets.Rising consumer demand for real and virtual assets such as Cryptos, NFTs, and others has pushed the speculative investing cycle into a hyper-active rally phase. This was clearly witnessed in early 2021, with the Reddit/Meme rallies became the hottest trades, then quickly dissipated after July 2021. This speculative rally has pushed the post-COVID rally well beyond reasonable expectations over the past 16+ months.Excessive debt levels push a deflationary process to the forefront. Consumers are now starting to pull away from the excesses of the past 16+ months. The Fed's tough talk and recent deeper declines in various sectors over the past 12+ months show that inflationary trends are subsiding. Despite the supply-side issues being resolved, consumers continue to pull away from hyper-speculative activities. The markets will naturally revalue to support more realistic price levels, deflating excessive P/E ratios and recent extreme price peaks in assets.Possible Next Steps for the US FedMy interpretation of the global markets is that excess speculative trending and rising commodity prices, combined with excess debt levels and consumers who have suddenly become very aware of global market risks, are already acting as a deflationary process. Because of these underlying factors, which I believe are currently in play throughout the globe, the US Federal Reserve may be forced to wait things out a bit. The Fed may have to navigate these natural deflationary processes while attempting to provide monetary support for what I believe will be a downside/deflationary trend over the next 3+ years.Sign up for my free trading newsletter so you don’t miss the next opportunity! The US Federal Reserve may not have to take any aggressive action right now. Instead, it may decide to watch how the global markets contract as consumers pull away from inflated price levels and higher risks and attempt to navigate these natural deflationary price trends. If the Fed were to act aggressively right now and raise rates, they could push the global markets into a steeper collapse. This process would likely burst numerous asset bubbles very quickly and push many foreign nations into some type of debt default.This presents a new problem for the US Fed – going from inflationary concerns to global economic collapse concerns very quickly. So when I suggested the Fed is playing with fire – maybe I should have said “playing with the nuclear economic football”?Financial Sector ResilienceStill, I believe the US Financial sector is showing tremendous resilience near $37.50. I think it has a powerful opportunity to rally back above $42 to $44 if the Fed takes a more measured approach to let the global markets deflate a bit before taking any aggressive actions.The US Financial sector will likely continue to benefit from price volatility and consumer demand as these deflationary trends prompt consumers to engage in more normal economic activities. The Financial sector also has continued to stay under moderate pricing pressure since the 2008 highs. XLF is only 25.46% higher than the 2008 highs, whereas the NASDAQ is more than 575% above the 2008 market highs.The Financial Sector may be one of the strongest market sectors over the next few years. Deflationary trends push consumers and global markets away from excess debt levels and towards more traditional economic activities/trends.Want To Learn More About Financial Sector ETFs?Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.I invite you to learn more about how my three Technical Trading Strategies can help you protect and grow your wealth in any type of market condition by clicking the following link:   www.TheTechnicalTraders.com 
Estimating Future Stock Returns, March 2022 Update

Estimating Future Stock Returns, March 2022 Update

David Merkel David Merkel 14.06.2022 05:51
Image credit: All images belong to Aleph Blog Well, finally the bear market… at 3/31/2002 the S&P 500 was priced to return a trice less than zero in nominal terms. After the pasting the market received today, that figure is 3.57%/year nominal (not adjusted for inflation). You would likely be better off in an ETF of 10-year single-A rated bonds yielding 4.7% — both for safety and return. I will admit that my recent experiment buying TLT has been a flop. I added to the position today. My view is that the long end of the curve is getting resistant to the belly of the curve, and thus the curve is turning into the “cap” formation, where the middle of the curve is higher than the short and long ends. This is a rare situation. Usually, the long end rallies in situations like this. The only situation more rare than this is the “cup” formation where the middle of the curve is lower than the short and long ends. I will have to update my my old post of “Goes Down Double-Speed.” We’ve been through three cycles since then — bear, bull, and now bear again. People get surprised by the ferocity of bear markets, but they shouldn’t be. People get shocked at losing money on paper, and thus the selloffs happen more rapidly. Bull markets face skepticism, and so they are slow. What are the possibilities given where the market is now? When the market is expecting 3.57% nominal, give or take one percent, what tends to happen? Most of the time, growth at these levels for the S&P 500 is pretty poor. That said, market expectations of inflation over the next ten years are well below the 4.7% you can earn on an average 10-year single-A rated corporate bond. Those expectations may be wrong — they usually are, but you can’t tell which way they will be wrong. I am still a believer in deflation, so I think current estimates of inflation are too high. There is too much debt and so monetary policy will have more punch than previously. The FOMC will panic, tighten too much, and crater some area in the financial economy that they care about, and then they will give up again, regardless of how high inflation is. They care more about avoiding a depression than inflation. They will even resume QE with inflation running hot if they are worried about the financial sector. The Fed cares about things in this order: Preserve their own necksPreserve the banks, and things like themFight inflationFund the US GovernmentPromote nominal GDP growth, though they will call it reducing labor unemployment. The Fed really doesn’t care about labor unemployment, or inequality. They are a bourgeois institution that cares about themselves and their patrons — those who are rich. I know this post is “all over the map.” My apologies. That said, we in a very unusual situation featuring high debt, high current inflation (that won’t last), war, plague, and supply-chain issues. How this exactly works out is a mystery, especially to me — but I am giving you my best guess here, for whatever it is worth. It’s worth than double what you paid for it! Full disclosure: long TLT for clients and me
The First Half Of 2023 Looks Like It Will Be Fairly Disinflationary For The Global Economy

The First Half Of 2023 Looks Like It Will Be Fairly Disinflationary For The Global Economy

Franklin Templeton Franklin Templeton 04.02.2023 08:15
The Global Economic Profile How do all these factors play out for the global trends that drive markets? The world’s two largest economies appear to be on completely opposite cycles: one stimulating and gunning for growth; the other very restrictive and prepared to incur a recession for the sake of reducing inflation. Sequencing will be important. Most leading indicators predict a softening in U.S. economic trends well into the year, based on what the Fed has already done, and further if the Fed continues to tighten. If inflation falls as fast as we suspect, and the Fed pauses, the growth slowdown would be more shallow but still slower for most of the year. In China, signs indicate that the pandemic may have already peaked across a range of big cities. How people react is unknown, particularly with another wave expected in May/ June. After years of indoctrination about the hazards of this virus, it may take a while to regain confidence. The measures to stimulate the economy are only beginning, and the scale of support required to turn the property sector around will have to be substantial. Netting it out, the first half of 2023 looks like it will be fairly disinflationary for the global economy, with spending and growth looking quite weak over the first six months of the year. Markets may front run the trends discussed here, but actual traction in the real economy, particularly in China, may not develop much momentum before the second half of the year. Read next: Starbucks Revenues Are High Despite High Costs| FXMAG.COM Definitions Deflation refers to a persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money. Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term. Modern Monetary Theory (MMT), not widely accepted, has the following basic attributes: A government that prints and borrows in its own currency cannot be forced to default, since it can always create money to pay creditors. New money can also pay for government spending; tax revenues are unnecessary. Governments, furthermore, should use their budgets to manage demand and maintain full employment (tasks now assigned to monetary policy, set by central banks). The main constraint on government spending is not the mood of the bond market, but the availability of underused resources, like jobless workers. Author: Francis A. Scotland, Director of Global Macro Research This article is part of the report
Global Market Insights: PBoC's Stand Against Speculators, Chinese FDI Trends, and Indian Inflation

Fed's Hawkish Pause and Focus Shifts to ECB: Market Reactions and Outlook

Michael Hewson Michael Hewson 15.06.2023 08:48
As Fed delivers a "hawkish" pause, attention turns to the ECB  European markets closed the day higher yesterday, with the DAX making a new record high, ahead of last night's Fed decision, while US markets closed the session mixed after a choppy session, which saw the Fed deliver a hawkish pause to their rating hiking cycle.     Asia markets were mixed with the latest Chinese retail sales data for May coming in below expectations, rising by 12.7%, along with industrial production which gained 3.5%. The last few weeks have delivered plenty of evidence that headline inflation is slowing sharply, and while core prices are probably stickier than the Fed would like, the direction of travel with respect to PPI suggests that in a couple of months we could be looking at a very different outlook.   Having indicated that they would be looking to hike in July, after removing the line that signalled more rate hikes were coming at the May meeting, there was always a risk that this sort of pre-commitment might turn out to be problematic. So, it has proved, with many suggesting that they would be better off hiking today, and then playing a game of wait and see.   In any case with the Federal Reserve unwilling to step back from its commitment to a pause this month, and delivering on an expectation to keep rates unchanged, they compensated for that by raising their expectation this year for at least 2 more rate hikes, putting the terminal rate at 5.6%, with 12 Fed officials, projecting such a move.    This unexpected hawkish shift saw US 2-year yields spike sharply as the market priced out the prospect of rate cuts later this year, which was never likely anyway, however we also saw the US central bank change their forecasts for unemployment to rise to 4.1% by the end of this year, down from 4.6%, while tweaking its PCE forecast to 3.2% from 3.3%.     Unsurprisingly, the US dollar which had been in retreat, rebounded strongly and stock markets dropped back sharply, over concerns that the US central bank could be on the cusp of a policy mistake.  Once Powell started his press conference the initial moves started to unwind and markets attempted to absorb the message from last night's events, and whether the two more hikes guidance, was based on any type of empirical evidence, or merely a mechanism to steer market expectations, and keep last night's decision unanimous.   The tone of Powell's press conference suggests it was the latter While yesterday's post decision reaction shows that markets were caught the wrong side of last night's decision, the bigger test will be in the economic data. If inflation continues to slow and jobs growth remains steady, the question needs to be asked as to whether the Fed will really pull the trigger on more rate hikes? It seems unlikely.     Moving on from last night's decision, attention will now shift towards today's ECB rate decision.   There appears to be little doubt that we will probably see another 25bps rate hike from the European Central Bank at today's rate meeting.   Nonetheless this would be a notable shift from some of the recent narrative that has accompanied recent discussions about the likely rate path for the ECB. The change of emphasis appears to have come about because of recent sharp falls in the headline rate of CPI, as well as evidence that core prices may well have also seen a peak.   In the latest flash CPI numbers for May, headline inflation fell to 6.1%, a sharp fall from the 7% we saw in April, as well as the 9.2% we were seeing at the end of last year. The big concern in recent months has been core prices which hit a record high of 5.7% in March and fell to 5.3% in the most recent numbers released earlier this month. Based on these numbers alone one can understand the ECB's reluctance to stop hiking, however there are already risks emerging that might suggest the ECB could be close to its own pause moment.       These risks are sharp slowdowns in PPI, which tends to act as a leading indicator for future inflation trends with German PPI now in negative territory. The German economy is also in recession, along with the rest of the eurozone, and yet various ECB policymakers are still calling for several more rate rises, including the likes of Joachim Nagel head of the German Bundesbank, due to still high levels of CPI inflation.     This comes across as particularly risky at a time when we are starting to see increasing signs of deflation across the global economy. Whatever the ECB does today, and a hike is priced in, it is what comes next which is very much up for debate, where ECB President Christine Lagarde will need to tread carefully.     Will the hawks on the ECB maintain their hawkish narrative or will see those claws start to get reined in until we get a better idea of the cumulative effect that the current spate of rate hikes has had. Coming so soon after last nights Fed decision we get US retail sales for May and weekly jobless claims.   Retail sales for May are expected to decline by -0.2%, down from 0.4% in April, while weekly jobless claims which spiked up to 261k last week are expected to slip back to 245k.     The last time we spiked above 260k a few weeks ago it was revised away. Will the same thing happen today?   EUR/USD – pushed above the 1.0820/30 area yesterday and closing in on the 50-day SMA at 1.0880, with resistance now at 1.0920. We still have support back at the recent lows at 1.0635.     GBP/USD – broke above trend line resistance from the 2021 highs at 1.2630 and testing above 1.2680 with the next resistance at 1.2760, which is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.      EUR/GBP – still looking soft despite the key day reversal day earlier this week, but still above 0.8540 support. A break below 0.8530 targets a move towards 0.8350. Resistance at 0.8620.     USD/JPY – still trying to move through the 140.30 area with resistance behind that at the recent highs at 140.95.  Upside remains intact while above 138.30.      FTSE100 is expected to open 10 points lower at 7,592     DAX is expected to open 12 points lower at 16,298     CAC40 is expected to open 15 points lower at 7,313  
Market Highlights: US CPI, ECB Meeting, and Oil Prices

UK CPI Data Sets the Stage for Bank of England Rate Decision

Michael Hewson Michael Hewson 21.06.2023 08:32
UK CPI set to tee up tomorrow's Bank of England rate decision    We've seen a lacklustre start to the week for markets in Europe, as well as the US as disappointment over a weak China stimulus plan, gave investors the excuse to start taking some profits after the gains of recent weeks. Weakness in energy prices also reinforced doubts about the sustainability of the global economy as we head towards the second half of this year.   As we look towards today's European open the main focus is on the latest UK inflation numbers for May ahead of tomorrow's Bank of England rate decision.   Today's UK CPI numbers could make tomorrow's rate decision a much less complicated decision than it might be, especially if the numbers show a clear direction of travel when it comes to a slowing of price pressures. Nonetheless, whatever today's inflation numbers are, we still expect to see a 25bps rate hike tomorrow, however what we won't want to see is another upside surprise given recent volatility in short term gilt yields.   When the April inflation numbers were released, there was a widespread expectation that headline inflation would fall back sharply below 10% and to the lowest levels since March last year. That did indeed happen, although not by as much as markets had expected, falling to 8.7%.       It was also encouraging to see PPI input and output prices slow more than expected in April on an annual basis, to 3.9% and 5.4% respectively.   Unfortunately, this is where the good news ended as while we saw inflation fall back in April it wasn't as deep a fall as expected with many hoping that we'd see headline inflation slow to 8.2%. The month-on-month figure was much hotter than expected at 1.2% and core prices surged from 6.2% to 6.8%, and the highest level since 1990.   The areas where inflation is still looking hot is around grocery prices which saw an annual rise of 19.1%, only modestly lower than the 19.2% in March, while services inflation in hotels and restaurants slowed from 11.3% to 10.2%. Since then, food price inflation has slowed to levels of around 16.5%, still very high, while today's headline number is forecast to slow to 8.5%. More worryingly core prices aren't expected to change at all, remaining at 6.8%, however if we are to look for crumbs of comfort then we should be looking at PPI where in China and Germany we are in deflation.   Given that this tends to be more forward-looking we could find that by Q3 headline CPI could fall quite sharply. Both PPI input and output prices are expected to both decline on a month-on-month basis, while year on year input prices are expected to rise by 1.1%.   In the afternoon, market attention will shift to Washington DC and today's testimony by Fed chair Jerome Powell to US lawmakers in the wake of last week's decision to hold rates at their current levels, while issuing rather hawkish guidance that they expect to hike rates by another 50bps by year end.   This was a little surprising given that inflation appears to be a problem that could be subsiding. Powell is likely to also face further questions from his nemesis Democrat Senator Elizabeth Warren who is likely to further press the Federal Reserve Chairman on the costs that further rate hikes might have in terms of higher unemployment.   Her dislike for Powell is well documented calling him a "dangerous man", however despite these comments her fears of higher unemployment haven't materialised despite 500bps of rate hikes in the past 15 months.   We could also get further insights into last week's discussions with a raft of Fed speakers from the likes of Christopher Waller, Michelle Bowman, James Bullard and Loretta Mester this week.          EUR/USD – currently holding above the 50-day SMA at 1.0870/80 which should act as support. We still remain on course for a move towards the April highs at the 1.1095 area, while above 1.0850.     GBP/USD – slipped back from 1.2845/50 area sliding below 1.2750 with the next support at the 1.2680 area. Still on course for a move towards the 1.3000 area, while above the 50-day SMA currently at 1.2510.      EUR/GBP – found support at the 0.8515/20 area with resistance at the 0.8580 level. While below the 0.8620 area bias remains for a move toward the 0.8470/80 area.     USD/JPY – slipped back from just below the next resistance at 142.50 which is 61.8% retracement of the 151.95/127.20 down move. Above 142.50 targets the 145.00 area. Support now comes in at 140.20/30.      FTSE100 is expected to open 4 points higher at 7,573     DAX is expected to open 42 points higher at 16,153     CAC40 is expected to open 3 points higher at 7,297     By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Beyonce Bounce and Soaring UK Inflation: A Challenge for Bank of England

Beyonce Bounce and Soaring UK Inflation: A Challenge for Bank of England

Michael Hewson Michael Hewson 21.06.2023 13:33
Beyonce bounce keeps a floor under UK CPI Just when you think it can't get any worse, and we thought that UK inflation was on a downward track, UK core CPI goes and jumps to a new 30 year of 7.1%, while headline inflation remained steady at 8.7%. Today's numbers are a further headache for the beleaguered Bank of England monetary policy committee and yet another stick to beat them with.    For a central bank, whose inflation target is 2% and who for so long were insistent that inflation was transitory there is a real risk that anything the central bank does tomorrow will be ignored by financial markets. There is no doubt these numbers are bad news for households as well as the mortgage market, which is already showing signs of strain.   Today's ONS numbers did point to a rather large jump recreation and culture and specifically fees to live music events.   Last week Sweden blamed the "Beyonce" effect for a surprise rise in their own headline inflation rates, and the same thing appears to have happened here in the UK with tickets going on sale for live performances to see Taylor Swift and Beyonce, during the month of May.   Restaurants and hotels also saw a lift during May, and this could have been down to the Coronation and the two bank holidays which provided a lift to that sector.     Food price inflation slowed to 18.3%, however we already know from the latest Kantar survey that in June this slowed to 16.5%, however the process remains glacial, but should continue to slow. The biggest concern is the continued increase in core prices with services inflation remaining sticky, rising to 6.3% from 6% in April.   A lot of this increase in services price inflation will be down to the paying of higher wages to staff, but we can also blame the energy price cap, which has meant that consumers haven't seen sharp falls in the cost of their energy costs straightaway, forcing them to push for higher wages.   This is probably why UK inflation is stickier than its continental peers.   Natural gas prices are already back at levels 2 years ago, yet consumers haven't seen that in their energy bills yet, even as fuel pump prices have. The energy price cap will see a fall in July, and some energy providers are cutting the direct debt payments of their customers already, but it's all so slow.   Amidst all this gloom there is room for optimism if you look at the trends in PPI which tends to be an indicator of where we are heading.   In May input and output prices came in negative month on month to the tune of -1.5% and -0.5%, while China and Germany are also showing increased signs of deflation, which should bring inflation down in the second half of this year. These have been weak all year, however markets aren't looking at these yet, and perhaps they should be because it's likely we'll see inflation come in much lower.    UK gilt yields have jumped sharply on the back of these numbers, with 2-year yields back above 5% and their highest levels since 2008.   Today's numbers have also increased the prospect that we might get a 50bps rate hike, instead of 25bps from the Bank of England tomorrow, pushing bank rate to 5%, to try and get out in front of the narrative, and convince then markets of their determination to hit their 2% target.   Sadly, for the Bank of England that ship has sailed, as very few believe anything they have to say anymore, with financial markets pricing in the prospect of a 6% base rate by the end of this year. As for tomorrow's Bank of England rate decision we could well see the bank raise rates by 50bps instead of the 25bps which is expected.  If we do get 50bps it's quite possible, we may not need a rate hike in August, if the inflation data does start to show signs of easing.   In conclusion, while today's numbers are worrying it's also important not to implement a knee jerk response, when we know part of the reason inflation is sticky is due to the energy price cap. This will come down in July, and in all honesty should be consigned to the dustbin, as its not reactive enough when prices fall.     By Michael Hewson (Chief Market Analyst at CMC Markets UK)
USD/JPY Climbs Above 143 as Japan's Core CPI Remains Above 3%

USD/JPY Climbs Above 143 as Japan's Core CPI Remains Above 3%

Kenny Fisher Kenny Fisher 26.06.2023 08:34
USD/JPY climbs above 143 Japan’s core CPI remains above 3%   The Japanese yen has stabilized on Friday after falling close to 1% a day earlier.  In the European session, USD/JPY is trading at 143.05, down 0.04%. Earlier, USD/JPY touched a high of 143.45, the highest level since early November 2022. On the data calendar, the US releases ISM Services PMI later today. The consensus stands at 54.0 for June, following 54.9 in May. The services sector has posted four straight readings over the 50 level, which separates expansion from contraction.     Japan’s core inflation higher than expected Japan continues to grapple with high inflation and core CPI for May was higher than expected. With inflation around 3%, other central banks would love to trade places with the Bank of Japan, but Japan’s inflation remains above the 2% target and has become an issue for the central bank after decades of deflation.   Nationwide core CPI, which excludes fresh food but includes energy items, climbed 3.2% in May y/y, down from 3.4% in April but above the consensus of 3.1%. What was more worrying was the “core-core index”, which excludes fresh food and energy, jumped 4.3% in May, up from 4.1% in April. This was above expectations and marked the highest level since June 1981.     Core CPI has now remained above the BoJ’s inflation target of 2% for 14 consecutive months. This puts into question the BoJ’s stance that cost-driven inflation is temporary and therefore there is no need to tighten monetary policy. Inflation risks are tilted to the upside and the BoJ will find it more difficult to defend its ultra-loose policy if inflation pressures don’t ease.   The BoJ maintained its policy settings at last week’s meeting and has no plans to tighten interest rates anytime soon. This puts the BoJ at odds with other major central banks, which have been aggressively tightening rates in order to curb inflation. The US/Japan rate differential has been widening as the Fed raises rates while the BoJ stands pat. This has sent the yen sharply lower, raising concerns that the government could intervene in the currency markets in order to prop up the yen.   The Ministry of Finance stunned the global financial markets in September and October when it intervened, at a time when the yen had fallen below the 150 line. The yen hasn’t fallen quite that low, but I would expect to hear louder verbal intervention out of Tokyo if the yen falls below 145.     USD/JPY Technical USD/JPY tested support at 142.82 earlier. The next support level is 142.07 There is resistance at 143.83 and 144.27  
Turbulent Times Ahead: ECB's Tough Decision Amid Soaring Oil Prices

Inflation Numbers Take Center Stage as Quarter Comes to a Close

Michael Hewson Michael Hewson 30.06.2023 09:50
Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      
Housing Cracks and Central Bank Considerations: Analyzing Vulnerabilities and Implications

Housing Cracks and Central Bank Considerations: Analyzing Vulnerabilities and Implications

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.07.2023 08:22
Housing cracks...  Note that that's not the case elsewhere. The UK, Hong Kong and Commonwealth countries including Canada, Australia and New Zealand are the most vulnerable to the cracks in the housing market because the share of houses bought on mortgages on shorter-term fixed rates or variable rates are higher. In New Zealand, for example, house prices fell the most in 8 months in June and are down by more than 10% since a year earlier.     Interestingly, the US dollar index remains broadly unresponsive to the Fed's hawkishness, but against the greenback could perform better against the Aussie, Kiwi, sterling, and the Loonie in the second half, because the central banks of all the cited countries will have to sit down and think of broader economic implications of a full-blast housing crisis. History shows that, going back to the 1990s' Japan, where the Bank of Japan (BoJ) raised rates to halt the housing bubble, and which then triggered a real estate crisis, the implications were a long and dark tunnel of asset devaluation, reduced consumer spending, bankruptcies, a weakened banking sector, deflation, and long-term economic stagnation. That's certainly why Japan prefers letting inflation run hot, rather than hiking the rates and send the country to another, and a very sticky deflationary phase.    USDJPY capped near 145  And speaking of Japan, the rally in dollar-yen remains capped at 145 level. The only direction that the BoJ could take from here is the hawkish path, therefore turning long yen will, at some point, become a star trade. Yet getting the timing right is crucial and it all depends on a greenlight from the BoJ. 
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US crude surges above 50-DMA as Fed minutes reveal hawkish stance

Ipek Ozkardeskaya Ipek Ozkardeskaya 06.07.2023 08:18
US crude jumps above 50-DMA  Minutes from the Federal Reserve's (Fed) latest policy meeting were more hawkish than expected. The minutes revealed that some officials preferred another 25bp hike right away instead of a pause. Almost all of them said that additional hiking would likely be appropriate, and the forecasts showed that they also expect mild recession.     The minutes came to confirm how serious the Fed is in further tightening monetary conditions, and boosted the Fed hike expectations. The US 2-year yield came very close to 5%, the stocks fell, but very slightly. The S&P500 closed the session just 0.20% lower, while Nasdaq 100 gave back only 0.03%. The US dollar gained however, the EURUSD slipped below its 50-DMA, as the Eurozone services PMI fell short of expectations. The June number still hinted at expansion, but the composite PMI slipped into the contraction zone for the first time since January, hinting that activity in Eurozone is slowing because of tightening monetary conditions in the Eurozone as well. On the inflation front, the producer prices fell 1.5% y-o-y in May, the first ever deflation since February 2021. The expectation for the 12-month inflation in EZ fell to 3.9% in May. It's still twice the ECB's 2% policy target, but it's coming down slowly. And the trajectory is certainly more important than the number itself.     Moving forward, further opinion divergence will likely appear along with softening data, but the ECB will continue hiking the rates because officials will be too afraid to stop hiking too early. And as the economic picture worsens, the credit conditions become tighter, the cheap loans dry up and the post-pandemic positivity on peripheral countries fade, we will likely see the yield spread between the core and periphery widen. And the latter could have a negative impact on the single currency's positive trajectory against the US dollar.     Due today, the ADP report is expected to reveal that the US economy added around 228K new private jobs in June, while the JOLTS is expected to have slipped below 10 mio job openings in May.      By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
Hungary's Retail Sales Suffer, Industry Weakness Persists, and Household Purchasing Power Declines

Hungary's Retail Sales Suffer, Industry Weakness Persists, and Household Purchasing Power Declines

ING Economics ING Economics 06.07.2023 15:38
In contrast with the food segment, non-food retailing dropped on a monthly basis, displaying a 0.3% retreat in the volume of sales. As for the detailed shop-based breakdown, the story remains largely unchanged compared to the previous months.   Those sub-sectors that continue to perform very poorly typically sell the products on which households are most willing to save, i.e. clothing, furniture, computer equipment and manufactured goods. The remarkable 22.1% YoY fall in the latter’s volume highlights the lack of domestic demand that Hungarian industry has been suffering from.   Another aspect that also reflects the deterioration in household purchasing power comes from the data on fuel retailing. Fuel prices fell in May, as reflected in the May inflation print, where motor fuel prices fell by 6.6% on a monthly basis. However, this time households were inattentive to price elasticity (lower prices lead to increased demand), as fuel retailing dropped by 1.5% MoM. Over the past two decades, the last time such an event occurred, the economy either struggled with deflation (2015) or was in lockdown (2020). By event, we mean when fuel prices fell by more than 5% while the volume of fuel sales fell by at least 1% in the same month.   Retail sales volume in detail (2015 = 100%)   Judging by the latest retail and industrial data, we believe that the performance of these two sectors will be very weak in the second quarter and that there is little prospect of any meaningful improvement in these two areas in the coming months. The biggest challenge to a significant turnaround remains the continued erosion of household purchasing power, which has been falling steadily for eight months. Recently-introduced mandatory sales promotions may provide some stimulus to food sales, but no real impetus is expected for non-food and fuel retailing as non-essential spending continues to be cut back. As a result, we expect consumption to fall sharply in the second quarter and for the year as a whole. By contrast, agricultural production could be very positive, partly due to the favourable weather so far and partly due to last year's extremely low base. This could be just enough to pull the Hungarian economy out of a technical recession in the second quarter, offsetting the weak performance of industry and retail trade.
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Inflation Front and Centre: China Slips Towards Deflation, European Markets Face Declines

Michael Hewson Michael Hewson 10.07.2023 10:48
Inflation front and centre this week as China slips towards deflation By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a shocker of a week last week, posting their biggest declines since March, despite a modest rebound on Friday. With economic data continuing to look on the soft side and central banks showing little sign of easing up when it comes to interest rate rises there was little to cheer for markets in Europe, with concerns about weakness in the Chinese economy adding to the gloom.   US markets on the other hand, while still finishing the week lower, still managed to perform better after a slightly weaker than expected non-farm payrolls job report, which showed that the US economy added 209k jobs in June, down from 306k in May. There was also a 2-month net revision lower of -110k, taking some of the lustre off recent gains, and removing some of the euphoria around the ADP jobs number of 497k, the day before. The unemployment rate still fell to 3.6%, while average hourly earnings growth came in unchanged at 4.4%, which was at a slightly higher level than expected. One thing that we were able to take away from last week was that further rate rises from the Federal Reserve as well as the European Central Bank are almost certain when they both meet in 2 weeks' time, however there is now rising concern that we may see further rate increases after that in September as well.     The bond market is certainly reflecting the fact that rates are likely to stay higher for longer after the yield curve steepened as 10-year yields outperformed 2-year yields on a week-on-week basis.   With earnings season set to get underway in earnest over the next week or so, there is increasing nervousness that after such a good first half of the year, that the second half of the year is likely to be much more challenging.   What last week's economic data also tells us is that while the economy in Europe could well be set to contract for the third successive quarter in succession, the US economy appears to be holding up reasonably well There is a fear however that central banks are on the cusp of a serious policy mistake when it comes to their determination to drive inflation lower. We already know that inflation has been slowing sharply over the last few months, and we also know that PPI inflation in China and Europe is now in negative territory.       This morning we saw that inflation in China slowed even further in June with headline CPI coming in at 0%, and PPI slipping from -4.6% in May to -5.4% That alone suggests that the rate hikes that have already been implemented over the past 15 months have had an effect, however such is the nature of monetary policy, and the way interest rate markets have changed over the last 20 years, with many more fixed rate loans, there is no way of telling how much more tightening has yet to come through.     This should make central bankers much more cautious, however it seems to be having the opposite effect, causing frustration that inflation isn't coming down quickly enough, due to resilient consumption patterns. With US CPI for June set to be released on Wednesday, and PPI on Thursday we are likely to see further evidence of this disinflationary trend, even while wages growth remains resilient. These are the key macro items for investors to mull over this week ahead of the Federal Reserve later this month, while in the UK tomorrow we have the latest wages and unemployment numbers for the 3-months to May, which are expected to show strong wages growth against a backdrop of a tight labour market.           EUR/USD – broke higher last week after finding solid support around the 1.0830/40 area. We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – broke above resistance at the 1.2770/80 area putting it on course for a move towards the 1.3000 area, but needs to take the 1.2850 area and June highs first. Support comes in at the 1.2770/80 area, and below that at 1.2680.      EUR/GBP – continues to find support at the 0.8515/20 area and June lows. Also has resistance at the 0.8570/80 area. We also have resistance at the 50-day SMA which is now at 0.8635. Below 0.8500 targets 0.8460.     USD/JPY – fell below the 144.00 area triggering stops all the way to the 142.00 area, also falling below support at 142.50. Posted a weekly reversal suggesting the top is in and the risk of a return to the 139.80 area. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.       FTSE100 is expected to open 3 points lower at 7,254     DAX is expected to open unchanged at 15,603     CAC40 is expected to open 14 points lower at 7,098  
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US Inflation Data Awaited as Jobs Report Supports Another Fed Hike, Weak Chinese Demand Stalls Inflation

Craig Erlam Craig Erlam 11.07.2023 08:16
It’s been a relatively slow start to the week but there’s still plenty to look forward to, most notably the US inflation data on Wednesday. Friday’s jobs report did nothing to level the debate on whether to pause at the next Fed meeting in two weeks. In fact, it may have even cemented another 25 basis point hike despite the NFP number falling short of expectations and, to the relief of many, well short of the ADP release. Wage growth remains a concern and on that front, the report was hot. At 0.4%, the monthly increase was a little higher than anticipated, while the annual reading remained at 4.4% (after an upward revision to the May number) despite an expectation that it would drop to 4.2%. Markets now see another hike as being almost 90% likely which seems fair under the circumstances. Weak Chinese demand sees inflation flatline in June The data from China overnight paints quite the opposite picture. An economy struggling on the demand side, despite initially rebounding strongly following the abolishment of zero-Covid. Excess supply is causing deflation at the PPI level and even CPI is now flat on an annual basis. This is more pronounced in goods, a trend we’re seeing elsewhere as services remain where the demand is, but even here we’re seeing more weakness than expected. Stimulus feels inevitable but so far it hasn’t been forthcoming enough and when it does arrive it will likely continue to be very targeted.  
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UK Gilt Yields in Focus as Wages Data Awaited, European Markets Gain

Michael Hewson Michael Hewson 11.07.2023 08:32
UK gilt yields in focus, ahead of latest wages data By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets managed to procure a second successive day of gains yesterday, despite a slide in Asia markets, after Chinese inflation slipped further towards deflation. The FTSE100 also managed to eke out a daily gain for the first time this month bringing an end to a sequence of 5 successive daily losses.     US markets also underwent a cautious start to the week with attention focussed on this week's inflation numbers, which are due tomorrow and could go some way to indicating whether we see any more rate hikes beyond this month.   While last week's losses were largely predicated on concerns that central banks were gearing up for multiple rate rises in the coming months, the data out of China appears to suggest that the bigger danger in the coming months might be deflation. Today's final Germany inflation numbers are expected to confirm that June CPI rose to 6.8% from 6.3% in May, although most of that rise appears to have been attributed to one-off factors that won't be repeated in the coming months, after temporary reductions in rail fares were reversed.     The pound had a slightly softer tone yesterday after a private sector survey showed that wage growth is starting to slow along with the pace of hiring in June. There has been little evidence of this trend in any other recent data, although with the latest ONS numbers due today there is more of a lag.     Just over a month ago the April UK wages numbers reinforced the challenge facing the Bank of England, after wage growth surged to 7.2%, and a record high outside of the pandemic, prompting a surge in UK 2-year gilt yields which took them above their October peaks of last year in the wake of the ill-fated Kwarteng budget.     The surge in the last few months wages has served to highlight the abject policy failure of the Bank of England to act early enough, as workers already being squeezed on all sides agitate for bigger pay rises in order to close the real wages gap. Today's May wages data is unlikely to see much evidence of a weakening in these upward pressures with expectations of 7.1% for the 3-months to May.       Short term yields have continued to rise in anticipation of further rate rises in the coming months, although we have seen a pullback in the last couple of days, from 15-year highs in UK 2-year yields. If today's wage numbers continue to look sticky, the central bank may find it has no good options when it comes to getting prices under control.     The number of people in employment also rose to a record 76% as high food inflation forced people back into work, forcing the unemployment rate down to 3.8%, where it looks set to stay this month. It's also important to note that the wages numbers are average numbers which means in a lot of cases, pay rises are much higher in certain areas of the economy, trending at between 10% to 20%. This trend may slow in the coming months; however, it is unlikely to slow rapidly even as headline inflation starts to come down rapidly after July.     Later on, this morning, the July German ZEW survey is expected to show a further deterioration in expectations sentiment to -10.6 down from -8.5, with the current situation expected to fall to -62, from -56.5.               EUR/USD – We need to see a move above the June highs at 1.1010/15 to target a move towards 1.1100, and the highs this year. A break below the lows last week at 1.0830, opens the way for a potential move towards 1.0780.     GBP/USD – fell back to 1.2750 yesterday, before making new 14-month highs nudging above the June highs, as we continue to look for a move towards the 1.3000 area. Main support at 1.2680 area.       EUR/GBP – tested up to the 0.8570/80 area yesterday before slipping back. Still have support at the 0.8515/20 area and June lows. We also have resistance at the 50-day SMA which is now at 0.8630. Below 0.8500 targets 0.8460.     USD/JPY – continues to look soft falling below 142.00 with the risk of further losses towards the 139.80 area. Last weeks' weekly reversal suggests that a short-term top might be in. We need to see a move back above 142.80 to stabilise and argue for a return to 144.00.     FTSE100 is expected to open unchanged at 7,274     DAX is expected to open 45 points higher at 15,718     CAC40 is expected to open 18 points higher at 7,162
Portugal's Economic Outlook: Growth Forecast and Inflation Trends

Portugal's Economic Outlook: Growth Forecast and Inflation Trends

ING Economics ING Economics 13.07.2023 10:01
Looking ahead to 2024, we expect full-year growth of 1.1%. With this forecast, we differentiate ourselves from other institutions that have a higher growth forecast for the Portuguese economy. Our projection takes into account a more pronounced influence of monetary policy on economic growth. This effect will already be felt in the second half of 2023, which also gives us a smaller spillover effect into 2024. Moreover, the European Central Bank is expected to implement some additional interest rate hikes in July and September this year, the full impact of which will not be fully felt until 2024. More signs that core inflation will fall further Inflation has fallen significantly and is expected to remain on a downward path for the rest of the year. This decline can be attributed to the expected fall in energy and food prices, which gradually impact core inflation. Portugal's Producer Price Index (PPI), which measures the cost of inputs such as raw materials, intermediate goods and energy to businesses, is often considered an early indicator of inflationary pressures in the economy. The PPI in particular has fallen sharply: in May, producer prices fell 3.4% from a year earlier. These factors will contribute to further deflationary pressures on inflation. However, wage growth will be the main driver of inflation, countering the downward pressure from lower energy and input costs. As companies pass on higher wages to consumers through higher prices, inflation will fall more slowly. For the rest of the year, the favourable base effect of energy will also gradually dissipate, which could push up overall inflation again. Our projections assume an average inflation rate of 5% for 2023 and 2.5% for 2024.   Falling producer prices, but wages rise
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CZK's uncertain path amid deflationary pressures and market expectations

ING Economics ING Economics 19.07.2023 10:09
CZK: Lost in translation Today's calendar in the CEE region doesn't have much to offer. In the Czech Republic, PPI numbers will be released as the last interesting print before the August Czech National Bank (CNB) meeting. PPI has been in deflationary territory for some time, and the more interesting part of the print may be agricultural producer prices. These have been indicating a significant drop in food prices for some time, which should show up in the CPI in the near term as well. Next week, Thursday starts the blackout period and we can expect more active board members in the media these days. While the market is pricing in roughly 120bp of cuts in CNB rates this year, we believe the central bank wants to see much more before the first cut and will wait until November with the risk of delaying until the first quarter of next year to be sure inflation hits the 2% target. We therefore expect the governor to try to fight market expectations again at the August meeting. In the meantime, yesterday's comments for the budget committee in parliament on expectations of a weaker koruna pushed EUR/CZK from 23.750 to 23.850, with the end of the CNB's FX quasi-commitment in sight. We believe the meaning was lost in translation, but this is not good news for the koruna. Given favourable global conditions, we believe the weakening of the CZK was just yesterday's story, however further weakness could push the CNB to be more hawkish and delay rate cuts even further.
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Domestic Demand Collapse Spurs Disinflation Surge: Hungary Economic Update

ING Economics ING Economics 31.07.2023 15:59
The collapse in domestic demand strengthens disinflation Headline inflation eased to 20.1% YoY in June, mainly driven by the 0.4% MoM decline in food prices. Within this, the fall in processed food prices was the main driver, hence the sharp 2ppt deceleration in core inflation to 20.8% YoY. In our view, the rapid deterioration in firms' pricing power is evident, and will only accelerate going forward as competition among retail outlets for households' overall shrinking disposable income intensifies. Based on our high-frequency data collection, we expect disinflation to strengthen further going forward, driven mainly by food deflation. In this context, we expect average inflation to fall to single digits in the fourth quarter, while average inflation for the year as a whole is likely to be below, but close to 18%.    Inflation and policy rate   Rate cuts to continue in 100bp steps if market stability prevails At the July meeting, monetary policy normalisation continued as the National Bank of Hungary (NBH) lowered the effective interest rate by a further 100bp to 15%. The central bank emphasised cautiousness, graduality and predictability, so we expect same-sized cuts into the September merger of base and effective rates. After September, however, the NBH has several options to alter the interest rate complex. The central bank can either continue the easing cycle unabated in 100bp increments, setting the policy rate at 10% at the end of 2023. However, reducing the pace of cuts to 50bp seems to be another viable option, leaving the key rate at 11.5%. In our view, the NBH will cut both repo and deposit rates by 100bp in October, leaving room for market rates to adjust lower, but will only cut the base rate by 100bp in November and December. We, therefore, expect the policy rate to end the year at 11%.   Real rates (%)   VAT receipts hit hard by fall in domestic demand The Hungarian budget posted a deficit of HUF 132.7bn in June, bringing the year-to-date cash flow-based shortfall to 85% of the full-year target. The decline in domestic demand is weighing heavily on tax revenues. In this respect, VAT receipts in the first half of 2023 were only 2.2% higher than a year ago compared to the 24% average inflation during this period. Despite some ongoing adjustments (e.g. public investment cuts), we still see a slippage of 0.5-1% of GDP in this year's budget. A recent interview with the Finance Minister revealed that a revision could come as early as September, which in our view could lead to additional adjustments plus a minor increase in the 2023 EDP deficit target. From a cash-flow perspective, the fate of the EU funds remains a key issue, with the clock ticking (90 days) at the European Commission's table, as the government officially submitted the self-review on horizontal enabler (judiciary) reforms on 18 July.   Budget performance (year-to-date, HUFbn)   We still believe in a HUF turnaround Although we heard what we thought we would from the National Bank of Hungary – a cautious cut with a commitment to remain patient – market players were ignorant of the hawkish message. The NBH’s assurance that the cutting cycle will not be accelerated did not result in a turnaround in EUR/HUF as we expected. However, our market view remains unchanged. In case of further forint weakening, we expect the central bank to hit the wire and repeat some hawkish statements, trying to push against HUF underperformance versus Central and Eastern European peers. Moreover, we see some improvement in conditions at the global level, too. Last but not least, despite the whole EU fund issue being overly politicised, we still believe in a positive outcome before the year-end. Our ultimate argument would be that European politicians don’t want to bother with Hungarian issues when European Parliament elections are approaching (June 2024). On a local level, we think FX carry should continue to be the main positive driver for the HUF, supported by an improving current account, a record decline in gas prices, and despite cuts by a cautious central bank, overall pushing EUR/HUF closer to 370.   CEE FX performance vs EUR (30 December 2022 = 100%)   We continue to see further curve steepening In the rates space, we found the IRS curve a bit steeper again after the last NBH meeting and a steeper and lower curve remains our main view for the coming months. 2s10s spread has moved roughly 100bp since May, the first rate cut, and we still see room for further normalisation of the IRS curve, which remains by far the most inverted in the CEE universe. Market expectations for this year are more or less fair given that the September rate merge is a broad market consensus, however, NBH's next steps are unclear to the market, and we see the market underestimating further normalisation in the next year or two, opening the door for more curve steepening. On the other hand, the fall in core rates will slow the normalisation of the curve compared to previous months.   Hungarian sovereign yield curve   Hungarian government bonds (HGBs) eased in July and the rest of the region caught up with the swift rally. We therefore see current valuations of HGBs as more justifiable, which could attract new buyers. Despite the fiscal slippage risk, year-to-date issuance has reached 60% by our calculations, which we see as more than sufficient. Moreover, recent government measures supporting HGBs and the fastest disinflation in the region should be enough to sustain demand.
Eurozone Producer Prices Send Signals of Concern: Impact on Consumer Inflation and ECB's Vigilance - 03.08.2023

Bank of England Poised to Raise Rates to a 15-Year High Amid Economic Concerns

ING Economics ING Economics 03.08.2023 10:13
Bank of England set to raises rates to a new 15 year high European markets underwent another negative session yesterday, clobbered by concerns over weaker than expected economic activity, which in turn is raising concern for earnings growth heading into the second half of the year. Throw in a US credit rating downgrade from Fitch and the catalyst for further profit taking after recent record highs for the DAX completed the circle of negativity.     US markets also underwent a negative session, with the Nasdaq 100 undergoing its worst session since February, while the US dollar acted as a haven and the yield curve steepened. As a result of the continued sell-off in the US, and weakness in Asia markets, European markets look set to open lower later today, and while the Fitch downgrade doesn't tell us anything about the US political governance that we don't already know investors appear to be looking to test the extent of the downside in the market.     Earlier this week we saw some poor manufacturing PMI numbers which showed that the European economy was very much in recession, with disinflation very much front and centre. This has raised questions as to whether the services sector will eventually succumb to similar weakness. There has been some evidence of that in recent readings but by and large services activity has been reasonably robust. In Spain services activity is expected to remain steady at 53.4, along with Italy at 52.2. The recent flash numbers from France saw further weakness to 47.4, while in Germany we can expect to see a resilient 52, down from 54.1.         EU PPI for June is expected to slip further into deflation to -3.2% year on year. In the UK services activity is expected to slow to 51.5 from 53.7. With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure on the Bank of England to hike by another 50bps has eased somewhat, especially since the Fed and the ECB both hiked by 25bps last week.     Having seen core CPI slow by more than expected to 6.9% forward rate expectations have eased quite markedly in the past few weeks. Forward market expectations of where the terminal rate is likely to be, have slipped from 6.5%, to below 6%. It's also likely that inflation for July will slow even more markedly as the effects of the energy price cap get adjusted lower which might suggest there is an argument that we might be close to the end of the current rate hiking cycle.     The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the MPC to err towards the hawkish side of monetary policy and raise rates by 50bps, with a view to suggesting that this could signal a pause over the coming weeks as the central bank gets set to consider how quickly inflation falls back over the course of Q3. Such an aggressive move would be a mistake given that a lot of the pass-through effects of previous rate increases haven't fully filtered down with some suggesting that the Bank of England should pause. In the current environment this seems unlikely given a 25bps is priced in already.       In a nutshell we can expect to see a hawkish 25bps as a bare minimum, and we could also see a split with some pushing for 50bps. We could also get an insight into how new MPC member Megan Greene views the current situation when it comes to casting her vote. One thing seems certain, she is unlikely to be dovish as Tenreyro whom she replaced on the MPC.     We'll also get a further insight into the US labour market after another bumper ADP payrolls report yesterday which saw another 324k jobs added in July. Weekly jobless claims are expected to come in at 225k, while we'll also get an insight into the services sector with the ISM services index for July which is expected to come in at 53. The employment component will be of particular interest, coming in at 53.1 in June, having jumped from 49.2 in May.       EUR/USD – managed to hold above the 50-day SMA for the time being, with a break below targeting further losses towards 1.0830. Resistance currently at last week's high at 1.1150.     GBP/USD – also flirting with the 50-day SMA with a clean break targeting a move towards the 1.2600 area.  Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to edge higher drifting up to the 0.8630 level before slipping back, although it is now finding some support at the 0.8580 area. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to look well supported above the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 10 points lower at 7,551     DAX is expected to open 22 points lower at 15,998     CAC40 is expected to open 15 points lower at 7,297   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
"Global Steel Output Rises as Chinese Production Surges, Copper Market Remains in Deficit

China's Sustainable Growth: No 1990s Japan-like Stagnation

ING Economics ING Economics 03.08.2023 10:22
China is no 1990s Japan - but it could have been Talk of deflation for China is well wide of the mark, and obsessing over historical growth rates misses the point that 5% growth is sustainable and about the right pace of growth for an economy of China's stage of development.   5% growth from China - get used to it China will probably grow by about 5% this year. And for those for whom GDP growth is the only goal worth pursuing (it really isn’t) this sounds nothing short of disastrous. There have even been some media articles questioning whether China is entering a phase of stagnation similar to that experienced by Japan in the 1990s after its bubble burst. This has been spurred by Chinese CPI inflation figures that are hovering at around zero. The D-word (deflation) is being brushed off.  But let us be very clear, China is not on the brink of deflation, and the situation between Japan in 1990 and China today is very different. Indeed, there is a strong argument to support a slower, less debt-fuelled and in all senses more sustainable rate of Chinese economic growth over the coming years, than to provide an artificial jolt of stimulus, after which, will come the inevitable question…”What do we do when that stimulus runs out?” Japan’s answer was to do it again, only larger, and then again, and again. And that is why today, they have a government debt-to-GDP ratio of around 263%. For all the talk of stimulus plans that fills the newswires each week, there is nothing wrong with China sticking to its current path.    Recap of Japan's bubble and subsequent burst Let’s start with a recap of the Japan bubble. The received wisdom today is that this followed a period of over-accommodative monetary policy by the Bank of Japan (BoJ) following the Plaza Accord, after which the yen rallied, prompting the BoJ to keep rates much lower than they would otherwise have done, and which in turn, fed an aggressive property boom and then eventual bust.   Tokyo land prices 1980-2000
Continued Disinflation Trend in Hungary: July Inflation Figures and Prospects

Continued Disinflation Trend in Hungary: July Inflation Figures and Prospects

ING Economics ING Economics 08.08.2023 12:00
Hungarian disinflation continued in July While food deflation was weaker than expected, price pressures in other items showed a more marked easing. The July inflation figure does not change the big picture as we anticipate that disinflation will continue.   Wide range of items shows slowdown in price increases The disinflationary process continued in July, as expected, with headline inflation dropping to 17.6% year-on-year. In addition to base effects, this was the result of a 0.3% month-on-month increase in price pressure. While at first sight this says that monthly repricing is still relatively strong, we have some positive developments as well. The pace of monthly repricing in July 2023 was the same as we have seen every July since the 2000s on average, meaning that the current monthly inflation was no stronger than the historical data. However, many analysts, including ourselves, had forecast a much lower rate of month-on-month inflation, expecting prices to fall on a monthly basis. It seems that the deflation in food prices derived from the government’s online Price Monitoring System does not correspond to reality, or more precisely to the official inflation figure based on the Hungarian Central Statistical Office's methodology. Focusing on the positives, however, there are several elements behind disinflation and while food is the key driver, abating price pressures are more widespread than anticipated. This is a welcome outcome and explains why core inflation posted a more marked deceleration than the headline reading.   Main drivers of the change in headline CPI (%)   The details Food inflation continued to moderate for the seventh consecutive month, as the annualised index retreated to 23.1% YoY. The monthly reading is likewise promising, as food prices fell by 0.9% between June and July, reflecting price changes in both unprocessed and processed food items, but mainly in the former. The collapse in retail sales is therefore clearly helping to contain inflation. Competition between retailers for households' overall shrinking disposable income is intensifying. The global disinflationary trend, retreating shipping costs and a stronger forint (versus the second half of 2022) helped to lower the price of consumer durable goods. Though dropping consumption might be also a force here and the same can be said about clothing items. While the drop in domestic demand was reflected in disinflation and the other goods segment (household goods, pharma products, goods for recreation and education), there was one important exclusion in this group: fuel prices moved higher by 1.1% MoM, reflecting higher oil prices. The continued rise in services inflation to 14.6% YoY was roughly in line with expectations, while the single most important upside surprise stems from household energy. We saw an increase in prices, mainly on gas. Those who have paid a flat rate received the final balance at the end of the heating season, which showed a payment shortfall, so the bill may have been higher than usual.   The composition of headline inflation (ppt)     Underlying price pressure eases at a fast pace As upward pressure in inflation mainly came from fuel and energy items in July, and disinflation was more widespread than expected, this explains why we see a stronger deceleration in core inflation than in the headline print. The core reading moved lower by 3.3ppt to 17.5% YoY in July and with that, core inflation is now lower than the headline print for the first time since February 2023. Other underlying indicators, like the sticky price inflation calculated by the National Bank of Hungary, are showing further promises as well, implying that there is a continued turnaround in price pressure in the deeper levels of the economy. Hungary is slowly but surely coming out of the woods.   Headline and underlying inflation measures (% YoY)   ingle-digit inflation by November In light of today's data, a single-digit inflation rate at the end of the year looks certain. In fact, if there is no further price shock, we could see a sub-10% rate as early as November. As for average annual inflation, we have not changed this forecast either, and we are looking for an inflation rate close to but below 18% in 2023 as a whole. Looking ahead to next year, we expect average inflation to be around 4.5-5.0%, with upside risks. This signals that the risk of a persistently high inflation environment has not yet been averted. The very dynamic wage outflows could translate into positive real wage growth even as early as September. A combination of the companies’ typically retrospective pricing behaviour in Hungary (carrying out price increases based on past inflation data) and the rise in real wages could trigger further repricing. On the other hand, we might get away with this if households focus on replenishing their depleted savings accounts rather than start consuming again.   We see no change in monetary strategy In our view, the July inflation indicator is unlikely to have a significant impact on monetary policy. Given that the central bank still distinguishes between market and price stability, and that the current easing cycle is essentially a reflection of market stability, the more important question is to what extent the weakening of the forint will rewrite the central bank's view. Primary, post-data market reactions also suggest that investors are dismissive of the possibility that the central bank will cut rates more aggressively in response to the disinflation it has seen. Perhaps this is why we have seen the forint begin to strengthen again. Although, the surprisingly wide trade surplus in June might be a factor as well. If this strengthening continues, we see no significant obstacle to another 100bp rate cut in August and September as well. With that, the merger of the base rate and the effective rate will be done in September.
China's Deflationary Descent: Implications for Global Markets

China's Deflationary Descent: Implications for Global Markets

Michael Hewson Michael Hewson 10.08.2023 08:36
China slips into deflation   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   A disappointing set of China trade numbers for July saw European and US markets selloff sharply yesterday, reinforcing concerns that the Chinese economy is struggling, undermining hopes that the slowdown in Q2, was simply a one-off. If anything, the signs of a slowdown have been there for months for China, given that PPI inflation has been negative all this year, with headline CPI following it at a distance.  This morning headline CPI inflation in China followed the PPI measure into outright deflation for the first time in 28 months, increasing fears that for all the promises of further stimulus measures, Chinese authorities may be facing limitations in the type of stimulus they can implement when it comes to kick starting domestic demand.     CPI inflation fell from 0.2% in June to -0.3% in July, while PPI came in at -4.4%, the 10th month in a row that prices have been negative. Chinese deflation has been the proverbial elephant in the room when it comes to recent tightening measures from the Federal Reserve, the ECB, and Bank of England. How many more rate hikes can we expect in the coming months when there is a clear deflationary impulse coming from Asia, and where is the tipping point when it comes to the risk of overtightening. With recent rebounds in oil prices prompting a rebound in gasoline/petrol prices, along with the clear lags when it comes to the effects of previous rate hikes, does the risk of overtightening outweigh the risks of signalling a pause, and waiting to see the effects of previous rate hikes on consumers as fixed rates roll off.     Tomorrow's US CPI, and Friday's PPI numbers could go some way to answering this question, however it is becoming clearer that central banks are leaning more towards pausing in September, which means we could well have seen the end of the rate hiking cycle for all three, the Federal Reserve, ECB, and Bank of England. Tighter credit conditions for banks were also behind yesterday's sell-off after Italy unexpectedly slapped its banking sector with a 40% windfall tax on its profits for this year. This raised concerns that other European countries like Germany, France and Spain may follow suit.     UK banks also fell back although the prospect of a UK tax is lower given that the banking sector here already pays a higher rate due to the 3% banking levy, on top of the 25% corporation tax rate, although there have been some misguided calls for the UK government to follow suit in a similar fashion to the energy profits levy on energy companies. That would be unwise given it could prompt banks to cut back on lending, and in turn become more risk averse which in turn could impact profits growth, as well as cutting credit into the real economy.       EUR/USD – having failed to consolidate its move above 1.1000 the euro has slipped back with the lows last week just above 1.0900, a key support. We currently have resistance at the 1.1050 area which we need to break to have any chance of revisiting the July peaks at 1.1150.     GBP/USD – gave up its Monday gains having failed to move above the 1.2800 area, however while above the lows last week at 1.2620 area the bias remains higher. We need to see a move back above the 1.2800 area to ensure this rally has legs. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to struggle near the 0.8650 area but we need to see a move below the 0.8580 area to signal a short-term top might be in and see a return to the 0.8530 area. Also have resistance at the 100-day SMA at 0.8680.     USD/JPY – looks set for a retest of the 144.00 area having rebounded from the 141.50 area. While below the 144.00 area the risk is for a move towards the 140.70 area. Main resistance remains at the previous peaks at 145.00.     FTSE100 is expected to open 32 points higher at 7,559     DAX is expected to open 88 points higher at 15,863     CAC40 is expected to open 63 points higher at 7,322  
Portugal's Growing Reliance on Retail Debt as a Funding Source and Upcoming Market Events"

UK Q2 GDP Forecast: Potential Stall Amid Economic Outlook Uncertainty - Analysis by Michael Hewson

Michael Hewson Michael Hewson 11.08.2023 08:07
UK economy expected to stall in Q2. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets enjoyed their second successive day of gains yesterday, boosted by the announcement by China to end its ban on overseas travel groups to other countries has also helped boost travel, leisure, and the luxury sector. The gains were also helped by a lower-than-expected rise in US CPI of 3.2%, with core prices slipping back to 4.7%, which increased expectations that we could well have seen the last of the Fed rate hiking cycle, which in turn helped to push the S&P500 to its highest levels this week and on course to post its biggest daily gain since July.     Unfortunately, San Francisco Fed President Mary Daly had other ideas, commenting that the central bank has more work to do when it comes to further rate hikes, which pulled US yields off their lows of the day, pulling stock markets back to break even.   This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though Daly isn't a voting member on the FOMC this year, and she's hardly likely to say anything else. Certainty hasn't been helped this week by data out of China which shows the economy there is in deflation, despite recent upward pressure on energy prices.     It also means that we can expect to see a lower open for markets in Europe with the main focus today being on the latest UK Q2 GDP numbers, as well as US PPI for July. Having eked out 0.1% growth in Q1 of this year, today's UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth. That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.     Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy. PMIs have held up well throughout the quarter even as they have weakened into the summer. Retail sales have been positive every month during Q2, rising by 0.5%, 0.1% and 0.7% respectively. Consumer spending has also been helped by lower fuel pump prices, and with unemployment levels still at relatively low levels and wage growth currently above 7%, today's Q2 GDP numbers could be as good as it gets for a while.     Despite the resilience shown by the consumer, expectations for today's Q2 are for a 0% growth which seems rather stingy when we saw 0.1% in Q1. This comes across as surprising given that Q2 has felt better from an economic point of view than the start of the year, with lower petrol prices helping to put more money in people's pockets despite higher bills in April. This raises the prospect of an upside surprise, however that might come with subsequent revisions.       Nonetheless, even as we look back at Q2, the outlook for Q3 is likely to become more challenging even with the benefit of a lower energy price cap, helping to offset interest rates now at their highest levels for over 15 years. With more and more fixed rate mortgages set to get refinanced in the coming months the second half of the year for the UK economy could well be a lot more challenging than the first half.     Yesterday US CPI came in slightly softer than expected even as July CPI edged up to 3.2% from 3% in June. Today's PPI numbers might show a similar story due to higher energy prices, but even here we've seen sharp falls in the last 12 months. A year ago, US PPI was at 11.3%, falling to 0.1% in June, with the move lower being very much one way. We could see a modest rebound to 0.7% in July. Core prices have been stickier, but they are still expected to soften further to 2.3% from 2.4%. 12 months ago, core PPI was at 8.2% and peaked in March last year at 9.6%.       EUR/USD – squeezed above the 1.1050 area yesterday, before failing again, and sliding back below the 1.1000 area. Despite the failure to break higher we are still finding support just above the 50-day SMA. Below 1.0900 targets the 1.0830 area.     GBP/USD – popped above the 1.2800 area yesterday and then slipped back. We need to see a sustained move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – pushed up to the 100-day SMA with resistance now at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – closing in on the June highs at the 145.00 area. This is the key barrier for a move back towards 147.50, on a break above the 145.20 level. Support now comes in at the 143.80 area.     FTSE100 is expected to open 42 points lower at 7,576     DAX is expected to open 70 points lower at 15,926     CAC40 is expected to open 30 points lower at 7,403
Romania's Economic Growth Slows in Q2, Leading to Lower 2023 Forecasts

Assessing the Risk of Prolonged Economic Stagnation in China - Insights by Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank

Ipek Ozkardeskaya Ipek Ozkardeskaya 11.08.2023 08:09
Is China on path for longer economic stagnation?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Released yesterday, the latest CPI data showed that the headline inflation in the US ticked higher from 3 to 3.2%. That was slightly lower than the 3.3% penciled in by analysts, core inflation eased to 4.7% in July from 4.8% expected by analysts and printed a month earlier.   But the rising energy and crop prices threaten to heat things up in the coming months and inflation's downward trajectory could rapidly be spoiled. That's certainly why an increasing number of investors and the Federal Reserve's (Fed) Mary Daly warned that this was 'not a data point that says victory is ours'.   And indeed, looking into details, the fact that the 20% fall in gasoline prices is what explains the decline in headline number is concerning. The barrel of US crude bounced lower yesterday after a 27% rally since the end of June, and the latest OPEC data indicated that we would see a sharp supply deficit of more than 2mbpd this quarter as Saudi cuts output to push prices higher. And this gap could further widen as global demand continues growing and shift to alternative energy sources is nowhere fast enough to reverse that upside pressure.   On the other hand, we also know that the rising energy prices fuel inflation expectations and further rate hikes expectations around the world. And that means that oil bears are certainly waiting in ambush to start trading the recession narrative and sell the top. The $85pb could be the level that could trigger that downside correction despite the evidence of tightening supply and increasing gap between rising demand and falling supply.   Today, eyes will be on the July PPI figures before the weekly closing bell, where core PPI is seen further easing, but headline PPI may have ticked higher to 0.7% on monthly basis, probably on higher energy, crop and food prices.     In the market  Yesterday's slightly softer-than-expected inflation numbers and the initial jobless claims which printed almost 250K new applications last week - the highest in a month - sent the probability of a September pause to above 90%, though the US 2-year yield advanced past the 4.85% level, and the longer-terms yields rose with a weak 30-year bond action, which saw the highest yield since 2011.   Major stock indices stagnated. The S&P500 was up by only 0.03% yesterday while Nasdaq 100 closed 0.18% higher, as Walt Disney rallied as much as 5% even though Disney+ missed subscription estimates and said that it will increase the price of the streaming service. Disney is considering a crackdown on password sharing, which, combined with higher prices could lead to a Netflix-like profit jump further down the road.     In the FX  The USD index consolidates above the 50 and 100-DMAs and just below a long-term ascending channel base. The EURUSD sees support at the 50-DMA, near the 1.0960 level, and could benefit from further weakness in the US dollar to attempt another rise above the 1.10 mark.   European nat gas futures fell 7% yesterday after a 28% spiked on Wednesday on concerns that strikes at major export facilities in Australia could lead to a 10% decline in global LNG exports. Yet, the European inventories are about 88% full on average and the industrial demand remains weak due to tightening financial conditions imposed by the European Central Bank (ECB) hikes. Therefore this week's massive move seems to be mostly overdone, and we shall see some more downside correction.     Chinese property market is boiling  The property crisis in China is being fueled by a potential default of Country Garden, which is one of the biggest property companies in China and which recently announced that it may have lost up to $7.6bn in the first half of the year as home sales slumped and the government stimulus measures didn't bring buyers back to the market. Equities in China slumped further today, as property crisis is not benign. In fact, China's local governments have plenty of debt, and their major source of income is... land and property sales. Consequently, the property crisis explodes local governments' debt to income ratios- And the debt burden prevents China from rolling out stimulus measures that they would've otherwise, because the government doesn't want to further blast the debt levels.   Shattered investor and consumer confidence, shrinking demographics, property crisis and deflation hints that the Chinese economy could be on path for a longer period of economic stagnation. We could therefore see rapid pullback in investor optimism regarding stimulus measures and their effectiveness. Hang Seng's tech index fell to the lowest levels in two weeks yesterday, as all members fell except for Alibaba which jumped after beating revenue estimates last quarter.   
Australian Dollar's Decline Persists Amid Evergrande Concerns and Economic Data

Australian Dollar's Decline Persists Amid Evergrande Concerns and Economic Data

Kenny Fisher Kenny Fisher 21.08.2023 12:33
The Australian dollar’s slide continues Evergrande bankruptcy raises contagion fears It has been all red for the Australian dollar, as AUD/USD has closed lower for eight straight days and declined 230 basis points during that time. The downswing has continued on Friday, as AUD/USD is trading at 0.6390 in the European session, down 0.20%. There are no Australian or US releases today, so I expect a calm day for AUD/USD.   Evergrande collapse raises contagion fears Chinese economic releases have looked weak in recent weeks, with exports and imports in decline, a slump in domestic demand, and soft services and manufacturing data. The news from Evergrande, one of the country’s largest property developers, is one more headache that the Chinese economy could do without. Evergrande filed for bankruptcy in New York on Thursday. The company defaulted on its massive debt in 2021, which triggered a massive property crisis in China and damaged the country’s financial system. The bankruptcy has raised fears that China’s property sector problems could spread to the rest of the economy, which is experiencing deflation and is suffering from weak growth. There are growing concerns about the stability of the Chinese economy and the Evergrande bankruptcy has raised contagion fears, similar to when the company defaulted on its debt. Australia is particularly sensitive to economic developments in China, which is Australia’s largest trading partner. A slowdown in China has meant less demand for Australian exports, and that has contributed to the Australian dollar’s sharp slide, with the currency plunging a massive 4.93% in August.   In the US, there was unexpected good news from the manufacturing sector on Thursday. Manufacturing has been in the doldrums worldwide, as high inflation and weak demand have taken a heavy toll. The US is no exception, but Philly Fed Manufacturing sparkled in August with a reading of +12, up sharply from -13.5 in July and blowing past the consensus estimate of -10 points.   AUD/USD Technical AUD/USD is testing support at 0.6402. This is followed by support at 0.6319 0.6449 and 0.6532 are the next resistance lines    
Assessing Global Markets: From Chinese Stimulus to US Jobs Data

AUD/USD Holds Near 9-Month Lows as China's Economic Woes Persist

Kenny Fisher Kenny Fisher 21.08.2023 13:07
AUD/USD close to 9-month lows China fails to cut 5-year LPR   The Australian dollar is steady at the start of the new trading week. In the European session, AUD/USD is unchanged at 0.6404. It’s a very quiet week for Australian releases, with no tier-1 releases. On Wednesday, Australia releases services and manufacturing PMIs for August. Services and manufacturing both contracted in July, with readings below the 50.0 level. The Aussie has hit a rough patch and has reeled off five straight losing weeks against the US dollar, sliding over 400 basis points in that period. The economic picture in China continues to deteriorate, and this has been a major reason for the Australian dollar’s sharp deterioration. China is Australia’s number one trading partner, and when China sneezes there’s a good chance Australia will catch a cold. China’s economic data has been pointing downward and the world’s second-largest economy is experiencing deflation. Last week, Evergrande, a huge Chinese property developer, filed for bankruptcy in New York, raising fears of contagion to other parts of the economy. The People’s Bank of China (PBOC) responded to the economic slowdown with a surprise cut to the one-year medium-term lending rate. The central bank was expected to follow up with cuts to the one-year and five-year loan prime rates (LPR). On Monday, the PBOC trimmed its one-year LPR from 3.55% to 3.45%, but surprisingly, did not lower the 5-year LPR, a key lending rate that affects mortgages. Lower lending rates are intended to boost credit demand, but the central bank’s lukewarm move is unlikely to provide much of a boost to China’s ailing economy. That does not bode well for the struggling Australian dollar, and if China’s economy continues to show signs of weakening, I would expect the Australian dollar to continue losing ground.   AUD/USD Technical AUD/USD is putting pressure on resistance at 0.6431. Next, there is resistance at 0.6496 There is support at 0.6339 and 0.6274  
Supply Trends Resurface: Analyzing the Impact on Market Dynamics

Sharp Decline in Poland's Industrial Production and Producer Prices in July

ING Economics ING Economics 21.08.2023 14:26
Poland's industrial production and producer prices fall sharply in July July industrial production fell by 2.7% year-on-year, well below the consensus forecast of 0.6%. There were yearly declines in all four major commodity groups, double-digit drops in mining and quarrying of 10.2%, and in manufacturing by 2.4%. Producer price deflation was deeper than expected, with July PPI falling 1.7% YoY against a consensus of -1.2%.   Poland's industry saw a surprisingly weak start to the third quarter, although this coincided with dismal industrial PMI readings in Poland (43.5pts in July) and Germany (below 40pts in July). Year-on-year declines in industrial production in July were recorded in 24 of 34 industrial production divisions, the deepest in coal and lignite mining (by 27.7%), chemical products (9.6%), wood products (15.5%), paper (11.5%), metals (10.4%), and other non-metallic products (8.8%). The 10 divisions that saw an increase in production were led by machinery and equipment repair (up 20.7%), motor vehicles (15.0%), other transport equipment (8.1%) and machinery and equipment (4.9%). Production’s positive growth was driven by pro-export sectors. The deep fall in PPI producer prices was largely due to the statistical base effect and clearly lower energy prices than a year ago, but also reflected weakness in demand. A similar picture emerged from Germany's July PPI reading. On a monthly basis, Polish manufacturing prices have been falling since November, and we expect PPI deflation to continue at least until the end of the year, which should facilitate further CPI disinflation. Available leading indicators (PMIs, new orders data) do not suggest a rapid recovery in manufacturing, although the most acute phase of inventory reduction by Polish companies seems to have passed. This week the preliminary August PMIs for the eurozone and Germany will be published; our forecasts do not assume a significant improvement compared to July. The economy of Poland’s largest trading partner is balancing between stagnation and recession. We expect that industrial production in Poland will remain low in the third quarter and experience a more visible rebound in the fourth quarter.   Poland's industrial production, YoY changes, in %
USD/JPY Breaks Above 146 Line: Bank of Japan's Core CPI in Focus

USD/JPY Breaks Above 146 Line: Bank of Japan's Core CPI in Focus

Kenny Fisher Kenny Fisher 22.08.2023 09:05
The Japanese yen faced considerable losses on Monday as USD/JPY surged to 146.23 during the North American session, marking a 0.57% increase for the day. The US dollar's strength has propelled it dangerously close to pushing the yen below the critical 146 line, a scenario witnessed last week when the robust US dollar drove the struggling yen to a nine-month low. Once synonymous with deflation, the Japanese economy has undergone a significant transformation in the era of high global inflation. With Japan's inflation hovering slightly above 3%, a level that many major central banks would eagerly welcome, the landscape has shifted. Notably, inflation remains relatively high by Japanese standards, as both headline and core inflation have consistently outpaced the Bank of Japan's (BoJ) 2% target. Japan's inflation data is closely scrutinized as the prospect of elevated inflation sparks speculations that the BoJ might need to tighten its lenient policy stance. Although the central bank has maintained that the high inflation is transitory, it's worth remembering that other central banks have made similar claims only to backtrack later. The Federal Reserve (Fed) and the European Central Bank (ECB) come to mind as examples. In the previous week, July's Consumer Price Index (CPI) remained steady at 3.3% year-on-year, while Core CPI experienced a slight dip to 3.1% year-on-year from the previous 3.3%. Looking ahead, Tuesday brings the release of BoJ Core CPI, the central bank's favored inflation metric, which is projected to decrease to 2.7% for July, down from June's 3.0%.   USD/JPY pushes above 146 line Bank of Japan’s Core CPI is expected to ease to 2.7% The Japanese yen has posted significant losses on Monday. USD/JPY is trading at 146.23 in the North American session, up 0.57% on the day. The US dollar has looked sharp and is within a whisker of pushing the yen below the 146 line, as was the case last week when the strong US dollar pushed the ailing yen to a nine-month low. The Japanese economy was once synonymous with deflation, but that has changed in the era of high global inflation. Japan’s inflation is slightly above 3%, a level that other major central banks would take in a heartbeat. Still, inflation is relatively high by Japanese standards and both headline and core inflation have persistently been above the Bank of Japan’s 2% target. Japan’s inflation reports are carefully monitored as higher inflation has raised speculation that the BoJ will have to tighten its loose policy. The central bank has insisted that high inflation is transient, but the BoJ wouldn’t be the first bank to make that claim and then backtrack with its tail between its legs. Remember the Fed and the ECB? Last week, July’s CPI remained unchanged at 3.3% y/y. Core CPI dropped to 3.1% y/y, down from 3.3%. On Tuesday, Japan releases BoJ Core CPI, the central bank’s preferred inflation gauge, which is expected to dip to 2.7% in July, down from 3.0% in June. China’s economic troubles have sent the Chinese yuan sharply lower, with the Chinese currency falling about 5% this year against the US dollar. A weak yuan makes Chinese exports more attractive, but this is at the expense of other exporters including Japan. As a result, there is pressure in Japan to lower the value of the yen in order to compete with Chinese exports.   USD/JPY Technical USD/JPY pushed above resistance at 145.54 earlier today. The next resistance line is 146.41 There is support at 144.51 and 143.64    
German Ifo Index Continues to Decline in September, Confirming Economic Stagnation

NZD/USD Gains Amidst Concerns Over New Zealand Retail Sales and China's Economy

Kenny Fisher Kenny Fisher 23.08.2023 10:36
NZD/USD posts strong gains on Tuesday New Zealand retail sales are expected to decline by 2.6%   The New Zealand dollar has posted strong gains on Tuesday. In the European session, NZD/USD is trading at 0.5959, up 0.55%. On the data calendar, New Zealand retail sales are expected to decline by 2.6% q/q in the second quarter, compared to -1.4% in Q1. The New Zealand dollar has gone on a dreadful slide since mid-July, falling as much as 500 basis points during that spell. The current downswing has been driven by weak global demand and jitters over China’s economy, which is showing alarming signs of deterioration. Chinese releases have been pointing downward recently. Exports and imports have fallen, manufacturing activity is weak and the world’s second-largest economy is experiencing deflation. Last week, Evergrande, a huge Chinese property developer, filed for bankruptcy in the United States, raising fears of contagion to other parts of the economy. It wasn’t long ago that the Chinese ‘miracle’ was being touted as an economic powerhouse on the global stage, but now the world’s second-largest economy is in deep trouble and is dragging down global growth. An interesting silver lining is that deflation in China could help lower inflation worldwide, which would be good news for the Fed, ECB and other central banks that are battling to push inflation lower. The People’s Bank of China (PBOC) has responded in recent days to the economic slowdown with some cuts to lending rates, but surprisingly, has not trimmed the five-year loan prime rate, which has a major impact on mortgages. The PBOC’s lukewarm move to the economic crisis could mean China’s economy will continue to sputter, and that is bad news for the New Zealand dollar, as China is by far New Zealand’s largest trading partner. If Chinese releases continue to head lower, we can expect the New Zealand dollar to continue losing ground.   NZD/USD Technical NZD/USD has pushed above resistance at 0.5941 and is putting pressure on resistance at 0.5978. There is support at 0.5885 and close by at 0.5848  
The Japanese Yen Retreats as USD/JPY Gains Momentum

The Japanese Yen Retreats as USD/JPY Gains Momentum

Kenny Fisher Kenny Fisher 30.08.2023 10:02
The Japanese yen continues to lose ground on Tuesday. In the North American session, USD/JPY is trading at 147.26, up 0.50%. The yen broke above the 147 level for the first time since November 2022.   Tokyo says battle with inflation has reached turning point Just a few days after Bank of Japan Governor Kazuo Ueda’s speech at the Jackson Hole summit, the Japanese government released a potentially significant white paper. To say that the two events were contradictory might be a stretch, but they appeared to present a very different stance towards inflation. At Jackson Hole, Ueda stuck to the BoJ’s well-worn script that underlying inflation remains lower than the BoJ’s target of 2%. As a result, the BoJ has insisted it will stick with the current ultra-easy policy until there is evidence that inflation remains sustainably above target. The white paper sounded a different tone, noting that “Japan has seen price and wage rises broaden since the spring of 2022. Such changes suggest the economy is reaching a turning point in its 25-year battle with deflation” and “a window of opportunity may be opening to exit deflation.” Could this be a turning point that leads to a tightening in policy? The government hasn’t acknowledged that deflation is over, despite the fact that core inflation has remained above the 2% target for 16 successive months. Wages are also on the rise after companies significantly bumped up employee wages earlier in the year. The white paper spoke of the need to “eradicate the sticky deflationary mindset besetting households and companies”, but I wonder if the BoJ also suffers from the same mindset, even with inflation remaining above target month after month. Investors should remain on guard for a shift in central bank policy, especially if the yen continues to head towards the key 150 level.     USD/JPY Technical There is resistance at 147.19 and 147.95 146.30 and 145.10 are providing support        
Assessing China's Economic Challenges: A Closer Look Beyond the Japanification Hypothesis"

Assessing China's Economic Challenges: A Closer Look Beyond the Japanification Hypothesis"

ING Economics ING Economics 01.09.2023 09:43
China’s latest activity data worsened across nearly every component. Markets have given up looking for fiscal stimulus, and have started making comparisons with 1990s Japan. We don’t agree with the Japanification hypothesis, but clearly a substantial adjustment is underway, and we have trimmed our growth forecasts accordingly.   Deflation is very different to this A couple of weeks ago, we wrote a piece debunking an argument that was doing the rounds which argued that China had slipped into deflation and was turning into a modern-day equivalent of 1990s Japan. Being old enough to remember that period quite well (unlike I imagine most of the proponents of the idea), it was clear to us that there was no merit to this view. Firstly, deflation is not negative consumer price inflation. Deflation is a much broader collapse in the general price level, which, in addition to consumer prices includes falls in real and financial asset prices, as well as money wages. And though we have seen some renewed falls in house prices, stocks are not looking very robust, and there is indeed some year-on-year decline in consumer prices, however, money wages are still positive. Moreover, the single defining feature of 1990s Japan was that it was the result of a monetary-induced bubble and subsequent bust. There was a property element to Japan's problems, but much more besides. Japan's response was a massive fiscal expansion, which failed to do much more than saddle the economy with a mountain of debt, and the rest is largely history. China’s issues also concern the property market, but it is the existence of large-scale local government debt that is the main constraint on the recovery. There is little evidence of any financial or property bubble. As a result, the government responses, of which there have already been a great many, have almost entirely focused on supply-side measures, which are only having a very marginal effect on activity.     Local government financing vehicles swell government debt    
Weak Economic Outlook for China: Challenges in Debt Restructuring and Growth Prospects

Weak Economic Outlook for China: Challenges in Debt Restructuring and Growth Prospects

ING Economics ING Economics 01.09.2023 09:44
The outlook is for further weakness in economic activity China now looks set to endure a period of sub-trend growth while it restructures this debt and alleviates some of the debt-service cost strains that are apparently weighing on some local government financing vehicles. Much of this off-balance sheet debt will need to be brought back on the balance sheet. Clarity over the scale of the existing problem will help determine the central government’s response, as at this stage, we suspect that even they don’t know. But lower interest rates for official debt and longer payment schedules seem very likely to dominate proceedings. Bucketloads of new debt, however, will not. We think that China's longer-term potential growth rate is around the 5% mark. But in the near term, even this may present a challenge for policymakers to achieve. We have downgraded our GDP forecast for 2023 to 4.5% as the previous main engine of growth – consumer spending – is faltering. Estimating how long this balance sheet adjustment will weigh on the economy is pure guesswork at this stage, but a wet-finger estimate of two years seems a reasonable starting point. We are not looking for 5% growth to be achieved again until 2025.   Chinese inflation is just unwinding earlier food price spikes   Inflation is low, but will recover Such weakness is likely to keep inflation very subdued in the meantime. Much of the recent decline in overall inflation is due to falls in food price inflation, which spiked up to more than 10% in July last year on the back of swine fever-affected pork prices. This is yet another reason for dismissing deflation claims. Indeed, if you create a conventional CPI index from China’s year-on-year inflation series, then it looks like the price level rose by about 0.3% month-on-month in each of the last two months. So temporary base effects are doing most of the damage to inflation currently, and by November these will have passed. In the meantime, though, further negative year-on-year CPI inflation figures are likely to keep the 'deflation' argument alive for a while longer.      
Sterling Slides as Market Anticipates Possible Final BOE Rate Hike Amidst Weakening Consumer and Housing Market Concerns

China Trade and CPI Data: Assessing the Economic Prospects

Michael Hewson Michael Hewson 04.09.2023 10:32
By Michael Hewson (Chief Market Analyst at CMC Markets UK)   China Trade and CPI (Aug) – 07/09 and 09/09 – over the past few weeks China has taken several measures to help boost the economic prospects for its economy and has continued to do so on a piecemeal basis. From easing overseas travel restrictions to modest cuts to lending rates, concern has increased about the prospects for the Chinese economy. In July, the economy slipped into deflation after headline CPI fell from 0.2% in June to -0.3%. PPI, which has been in deflation since the end of last year improved slightly but still declined by -4.4%. This didn't come across as a surprise given how poor the July trade numbers were. Markets had been expecting some poor numbers so expectations were low, however we still managed to see a surprise in that they were even worse than expected. The last 2 months of Q2 saw sharp declines in exports, with a -12.4% fall in June. There was little let-up in the July numbers with a bigger than expected decline of -14.5%, the worst performance since February 2020, with global demand remaining weak. Imports have been little better, with negative numbers every month this year, and July was no different with a decline of -12.4%, an even worse performance from June's -6.8%, with all sectors of the economy showing weakness. As we look toward the August numbers, expectations are already low given the relatively low levels of support put forward by Chinese policymakers this past month and the concerns over the real estate sector. Expectations are for exports to decline by -7.8% and imports to decline by -8.8%.        
Oil Price Surges Above $91 as Double Bottom Support Holds

Lower Open Expected as European Markets Decline for the Fourth Consecutive Day, China Trade Shows Modest Improvement

Michael Hewson Michael Hewson 08.09.2023 10:22
Lower open expected, China trade sees modest improvement   By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets declined for the 4th day in a row yesterday with both the DAX and FTSE100 falling to one-week lows on concerns over slowing economic activity, against a backdrop of rapidly rising oil prices which could act as a long-term headwind for central banks. The initial catalyst was a truly dreadful German factory orders number for July which saw output plunge by -11.7%, the biggest fall since April 2020. When combined with the recent manufacturing and services PMI numbers, which showed further deterioration.     The weakness in European markets also weighed on US markets, which came under additional pressure for an entirely different reason after the latest ISM services report saw economic activity rise to its highest level since February, while prices paid jumped to their highest levels since April, pushing both the US dollar and yields higher, on expectations that even if the Fed pauses this month, we could still see another rate hike in November. Last night's Beige Book showed the US economy grew at a modest rate through July and August, with consumer spending stronger than expected, while today's weekly jobless claims are set to remain steady at 230k.     Earlier this morning we got another snapshot of the Chinese economy, with the latest trade numbers for August. Over the past few weeks China has taken several measures to help boost the prospects for its economy and has continued to do so on a piecemeal basis. From easing overseas travel restrictions to modest cuts to lending rates, recent PMIs have shown that these have had limited success. In July, the economy slipped into deflation after headline CPI fell from 0.2% in June to -0.3%. PPI, which has been in deflation since the end of last year improved slightly but still declined by -4.4%, with the latest inflation numbers for August due this weekend.     This morning's trade numbers for August did show an improvement on the July figures but given how poor these were it was a low bar. Imports declined by -8.8%, an improvement on the -12.4% decline in July, while exports fell -7.3%, which was a significant improvement on the -14.5% seen in July. While this is encouraging, demand for Chinese goods was still weak from an international, as well as domestic perspective. The pound was the worst performer yesterday after Bank of England governor Andrew Bailey gave every indication that the Bank of England might have concerns over further tightening measures, given worries about transmission lags. With Deputy Governor Ben Broadbent and Chief economist Huw Pill also indicating that they think monetary policy is already restrictive enough, the markets could be being lined up for a pause later this month.     With Asia markets also slipping back, European markets look set to open lower, with German industrial production data for July set to show similar weakness as factory orders yesterday, albeit with a more modest decline of -0.4%.      EUR/USD – this week's slide below the August lows has seen the euro slip lower with the May lows at 1.0635 the next target. Resistance now comes in at the 1.0780 area, and behind that at the 1.0945/50.     GBP/USD – remains under pressure with the 200-day SMA the next target at the 1.2400 area. Only a move back above the 1.2630/40 area, and behind that the highs last week at 1.2750/60.         EUR/GBP – squeezed back to the 50-day SMA having found a short-term base at 0.8520 area. We have resistance at the 0.8570/80 area, as well as the 0.8620/30 area.     USD/JPY – remains on course for the 150.00 area, despite a brief sell-off to 147.00 yesterday. Only a move below last week's low at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 18 points lower at 7,408     DAX is expected to open 45 points lower at 15,696     CAC40 is expected to open 19 points lower at 7,175
European Markets Anticipate Lower Open Amid Rate Hike Concerns

Economic Highlights and Key Events for the Week Ahead: US Inflation, ECB Meeting, UK Labor Market, and More

Ed Moya Ed Moya 11.09.2023 11:32
US This week is all about the US CPI report and retail sales data. If the US demand for goods didn’t weaken that much and if inflation heated up, rate hike expectations for the November meeting might become the consensus.  The inflation report might not be as clear as headline inflation will obviously rise given the surge in gasoline prices, but core might deliver another subdued reading.  Moderation with consumer spending will be the theme as Americans deal with higher energy prices, rising debt levels, and as confidence softens.   Investors will also pay close attention to the University of Michigan’s inflation expectations on Friday. The 1-year outlook for prices may drop from the 3.5% August reading.  Fed speak will be nonexistent as the blackout period begins for the September 20th policy meeting.   Eurozone The European Central Bank meets next week and it’s not clear at this stage what decision they will come to. Refinitiv is pricing in around a 65% chance of a hold, which may signal the end of the tightening cycle – not that the ECB would in any way suggest that at this stage – but expectations do differ. There’s every chance the committee will push through one more, at which point the data is expected to improve regardless making a Fed-style exit all the more difficult. Ultimately, it will likely come down to the projections which will be released alongside the decision. ZEW surveys aside, on Tuesday, the rest of the week is made up of tier-three data. UK  Potentially a big week for the UK ahead of the next monetary policy meeting on 21 September. Andrew Bailey and his colleagues this past week hinted that the decision is in the balance and not the foregone conclusion many expect. Markets are pricing in a more than 70% chance of a hike and more than 50% of another after that by February. If what they said is true, then the labor market report on Tuesday could be hugely significant as further slack could give those on the fence the reassurances they need that past measures, among other things, are working and more may not be needed. Huw Pill also speaks on Monday while Catherine Mann will make an appearance in Canada on Tuesday. GDP on Wednesday could also be interesting, with the rest of the week made up of less influential releases. Russia The CBR is expected to leave the key rate unchanged at 12% on Friday. It hiked very aggressively at the last meeting – from 8.5% – so there is scope for another surprise, with inflation having risen again last month to 5.1%. The rouble has also been in steady decline after rebounding following the last announcement, to trade not far from its recent lows against the dollar.  South Africa A relatively quiet week ahead, with manufacturing figures due on Monday and retail sales on Wednesday. Turkey The CBRT is desperately trying to get inflation under control again with successive large interest rate hikes. In response the currency has stopped making new lows but it has drifted lower again over the last couple of weeks since the surprisingly large last hike. It’s sitting not far from the pre-meeting lows now and inflation data this past week won’t have helped, rising to 58.94% annually. More rate hikes are likely on the way. Next week the focus is on unemployment and industrial production figures on Monday. Switzerland A very quiet week to come, with PPI inflation the only economic release. We’ve been seeing some deflation in recent months in the PPI data which will be giving the SNB some comfort that price pressures are back under control. Another rate hike is no longer viewed as guaranteed, with markets slightly favoring a hold over the coming meetings but it is tight.  China The much sought-after consumer and producers’ price inflation data for August will be released this Saturday where market participants will have a better gauge of the current deflationary conditions in China. After a slight improvement in the two sub-components of August’s NBS Manufacturing PM where new orders and production rose to their highest level since March at 50.2 and 51.9 respectively coupled with an improvement in export growth for August that shrunk to a lesser magnitude of -8.8% y/y from -14.5% y/y in July, there are some signs of optimism that the recent eight months of deflationary pressures may have started to abate. The August CPI is expected to inch back up to 0.2% y/y from -0.3% y/y in July and the PPI is forecast to shrink at a lesser magnitude of -3% y/y in August versus -4.4% in July. If the PPI turns out as expected, it will be the second consecutive month of improvement from a persistent loop of deflationary pressure in factory gate prices since November 2022. Other key data to focus on will be new yuan loans and M2 money supply for August which will be released on Monday. It will provide a sense of whether China’s economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers. Lastly, the housing price index, industrial production, retail sales, and the unemployment rate for August will be released on Friday with both retail sales and industrial production expected to show slight improvement; 2.8% y/y for retail sales over 2.5% y/y recorded in July, 4% y/y for industrial production versus 3.7% in July. Market participants will be keeping a close eye on youth unemployment for August after July’s figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for the suspension. The youth joblessness data in China is of key concern after the youth unemployment rate skyrocketed to a record high of 21.3% in June, around four times more than the national unemployment rate of 5.3%. Lastly, China’s central bank, the PBoC, will announce its decision on a key benchmark interest rate, the 1-year medium-term lending facility rate on Friday and the expectation is no change at 2.50% after a prior cut of 15 basis points.  India Inflation and balance of trade for August will be the focus for the coming week. Inflation data is released on Tuesday and is expected to dip slightly to 7% y/y from 7.44% in July, the highest since April 2022. Balance of trade will be released on Friday and the expectation is for the deficit to widen slightly to -$21 billion from -$20.67 billion in July.   Australia On Monday, the Westpac consumer confidence change for September is expected to improve to 0.6% m/m from a reading of -0.4% m/m in August, following three consecutive interest rate pauses from RBA. The key employment change data for August will be released on Thursday with 24,300 jobs expected to be created, an improvement on the 14,600 reduction in July. Meanwhile, the unemployment rate is expected to slip to 3.6% from 3.7% in July. New Zealand Electronic retail card spending for August is due on Tuesday and is forecast to dip to 1.4% y/y from 2.2% in July. That would represent a declining trend in growth in the past five months. Next up, food inflation for August will be released on Wednesday; its growth rate is expected to slow to 7.8% y/y from 9.6% in July. That would be the slowest growth in food inflation since June 2022. Japan A couple of key data points to note for the coming week. Firstly, the Reuters Tankan Index on manufacturers’ sentiment on Wednesday; after a big jump to +12 in August – its highest level recorded so far this year – sentiment is expected to taper off slightly to +10 for September. Producers’ price index for August will be released on Wednesday and a slight dip is expected to 3.2% y/y from 3.6% in July. Lastly, on Thursday, we will have data on machinery orders from July with the consensus expecting a further decline of 10.7% y/y from -5.8% in June. Singapore One key data to focus on is the balance of trade for August which will be out on Friday. The trade surplus is being expected to increase slightly to $7 billion from $6.49 billion in July. That would be the fourth consecutive month of expansion in the trade surplus.  
European Markets Anticipate Lower Open Amid Rate Hike Concerns

Economic Highlights and Key Events for the Week Ahead: US Inflation, ECB Meeting, UK Labor Market, and More - 11.09.2023

Ed Moya Ed Moya 11.09.2023 11:32
US This week is all about the US CPI report and retail sales data. If the US demand for goods didn’t weaken that much and if inflation heated up, rate hike expectations for the November meeting might become the consensus.  The inflation report might not be as clear as headline inflation will obviously rise given the surge in gasoline prices, but core might deliver another subdued reading.  Moderation with consumer spending will be the theme as Americans deal with higher energy prices, rising debt levels, and as confidence softens.   Investors will also pay close attention to the University of Michigan’s inflation expectations on Friday. The 1-year outlook for prices may drop from the 3.5% August reading.  Fed speak will be nonexistent as the blackout period begins for the September 20th policy meeting.   Eurozone The European Central Bank meets next week and it’s not clear at this stage what decision they will come to. Refinitiv is pricing in around a 65% chance of a hold, which may signal the end of the tightening cycle – not that the ECB would in any way suggest that at this stage – but expectations do differ. There’s every chance the committee will push through one more, at which point the data is expected to improve regardless making a Fed-style exit all the more difficult. Ultimately, it will likely come down to the projections which will be released alongside the decision. ZEW surveys aside, on Tuesday, the rest of the week is made up of tier-three data. UK  Potentially a big week for the UK ahead of the next monetary policy meeting on 21 September. Andrew Bailey and his colleagues this past week hinted that the decision is in the balance and not the foregone conclusion many expect. Markets are pricing in a more than 70% chance of a hike and more than 50% of another after that by February. If what they said is true, then the labor market report on Tuesday could be hugely significant as further slack could give those on the fence the reassurances they need that past measures, among other things, are working and more may not be needed. Huw Pill also speaks on Monday while Catherine Mann will make an appearance in Canada on Tuesday. GDP on Wednesday could also be interesting, with the rest of the week made up of less influential releases. Russia The CBR is expected to leave the key rate unchanged at 12% on Friday. It hiked very aggressively at the last meeting – from 8.5% – so there is scope for another surprise, with inflation having risen again last month to 5.1%. The rouble has also been in steady decline after rebounding following the last announcement, to trade not far from its recent lows against the dollar.  South Africa A relatively quiet week ahead, with manufacturing figures due on Monday and retail sales on Wednesday. Turkey The CBRT is desperately trying to get inflation under control again with successive large interest rate hikes. In response the currency has stopped making new lows but it has drifted lower again over the last couple of weeks since the surprisingly large last hike. It’s sitting not far from the pre-meeting lows now and inflation data this past week won’t have helped, rising to 58.94% annually. More rate hikes are likely on the way. Next week the focus is on unemployment and industrial production figures on Monday. Switzerland A very quiet week to come, with PPI inflation the only economic release. We’ve been seeing some deflation in recent months in the PPI data which will be giving the SNB some comfort that price pressures are back under control. Another rate hike is no longer viewed as guaranteed, with markets slightly favoring a hold over the coming meetings but it is tight.  China The much sought-after consumer and producers’ price inflation data for August will be released this Saturday where market participants will have a better gauge of the current deflationary conditions in China. After a slight improvement in the two sub-components of August’s NBS Manufacturing PM where new orders and production rose to their highest level since March at 50.2 and 51.9 respectively coupled with an improvement in export growth for August that shrunk to a lesser magnitude of -8.8% y/y from -14.5% y/y in July, there are some signs of optimism that the recent eight months of deflationary pressures may have started to abate. The August CPI is expected to inch back up to 0.2% y/y from -0.3% y/y in July and the PPI is forecast to shrink at a lesser magnitude of -3% y/y in August versus -4.4% in July. If the PPI turns out as expected, it will be the second consecutive month of improvement from a persistent loop of deflationary pressure in factory gate prices since November 2022. Other key data to focus on will be new yuan loans and M2 money supply for August which will be released on Monday. It will provide a sense of whether China’s economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers. Lastly, the housing price index, industrial production, retail sales, and the unemployment rate for August will be released on Friday with both retail sales and industrial production expected to show slight improvement; 2.8% y/y for retail sales over 2.5% y/y recorded in July, 4% y/y for industrial production versus 3.7% in July. Market participants will be keeping a close eye on youth unemployment for August after July’s figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for the suspension. The youth joblessness data in China is of key concern after the youth unemployment rate skyrocketed to a record high of 21.3% in June, around four times more than the national unemployment rate of 5.3%. Lastly, China’s central bank, the PBoC, will announce its decision on a key benchmark interest rate, the 1-year medium-term lending facility rate on Friday and the expectation is no change at 2.50% after a prior cut of 15 basis points.  India Inflation and balance of trade for August will be the focus for the coming week. Inflation data is released on Tuesday and is expected to dip slightly to 7% y/y from 7.44% in July, the highest since April 2022. Balance of trade will be released on Friday and the expectation is for the deficit to widen slightly to -$21 billion from -$20.67 billion in July.   Australia On Monday, the Westpac consumer confidence change for September is expected to improve to 0.6% m/m from a reading of -0.4% m/m in August, following three consecutive interest rate pauses from RBA. The key employment change data for August will be released on Thursday with 24,300 jobs expected to be created, an improvement on the 14,600 reduction in July. Meanwhile, the unemployment rate is expected to slip to 3.6% from 3.7% in July. New Zealand Electronic retail card spending for August is due on Tuesday and is forecast to dip to 1.4% y/y from 2.2% in July. That would represent a declining trend in growth in the past five months. Next up, food inflation for August will be released on Wednesday; its growth rate is expected to slow to 7.8% y/y from 9.6% in July. That would be the slowest growth in food inflation since June 2022. Japan A couple of key data points to note for the coming week. Firstly, the Reuters Tankan Index on manufacturers’ sentiment on Wednesday; after a big jump to +12 in August – its highest level recorded so far this year – sentiment is expected to taper off slightly to +10 for September. Producers’ price index for August will be released on Wednesday and a slight dip is expected to 3.2% y/y from 3.6% in July. Lastly, on Thursday, we will have data on machinery orders from July with the consensus expecting a further decline of 10.7% y/y from -5.8% in June. Singapore One key data to focus on is the balance of trade for August which will be out on Friday. The trade surplus is being expected to increase slightly to $7 billion from $6.49 billion in July. That would be the fourth consecutive month of expansion in the trade surplus.  
FX Market Update: Calm Before the Central Bank Storm

Seizing Opportunities in Income Markets as Central Banks Tighten Policy

Saxo Bank Saxo Bank 12.09.2023 11:39
An alluring entry point for income seekers Income-seeking investors should prepare to identify entry points as central banks’ policy tightening peaks. As we are entering into a volatile environment, balancing duration and credit risk will be pivotal. Moreover, as uncertainty keeps volatility in bond markets elevated, our preference is to keep duration at a minimum. Short duration markets, which are the most sensitive to central banks’ policies, offer above-average income opportunities. Even if rates rise further in the near future, the yield offered by high-grade bonds is enticing for buy-and-hold-investors. The spread offered by investment-grade corporates with maturity between one to three years over the US Treasuries is 62bps, paying an average yield of 5.04%. According to the Bloomberg US Aggregate Bond Index, that’s the highest yield paid by high-grade bonds with such short maturity since 2007. More strikingly, IG corporate bonds with one to three years’ maturity offered an average yield of 1.8% from 2007 to today. Similarly, high-grade euro corporates with one to three years of maturity pay 4.43%, the highest yield since the 2011 European sovereign crisis, paying 280bps over the past fifteen years’ average. The yield offered by corporate bonds in the UK is much higher than in the United States and Europe. Although for buy-and-hold investors further BOE rate hikes might not represent a threat, it’s important to note that credit risk in the UK is higher than anywhere in developed economies due to uncertainty surrounding inflation and future monetary policies agenda. Thus, cherry picking in this space is even more critical.     Not only corporate bonds offer enticing returns Recent government bond issuance shows that risk-free alternatives to the corporate bond market or even stocks offer good opportunities. In June, the UK debt management office (DMO) sold five-year notes with a coupon of 4.5% and a yield of 4.932% (GB00BMF9LG83). That’s the highest coupon offered on five-year notes since 2012, and the highest yield since 2008. Similarly, the US Treasury issued two-year notes in June with a coupon of 4.25% (US91282CHD65). Also, the German Bund sold in April (DE000BU3Z005) pays a coupon of 2.3%. That’s quite staggering if we think that a few years ago, it would have paid a coupon of 0%, providing a negative yield to investors.     Artificial Intelligence and the bond market: the great deflation In an AI economy, increased productivity and job displacement will exacerbate income inequality. It translates into bigger fiscal deficits as governments initiate education initiatives and social safety nets. As unemployment rises and inflation drops, monetary policies will become more accommodative, with the possibility of negative rates becoming the norm. Yet, the new regime will come with increased inflation volatility. To avoid that, policy makers will be incentivised to regulate AI and use it selectively in order not to destroy the real economy, producing milder economic effects.
Japan's Economic Outlook: BoJ Policy and Scenarios

Japan's Economic Outlook: BoJ Policy and Scenarios

FXMAG Team FXMAG Team 14.09.2023 08:38
At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior”. In order to pull Japan completely out of deflation, the BoJ seems ready to be one policy cycle behind key central banks in starting the normalisation process. We expect the government to maintain its commitment to the current accommodative fiscal/monetary policy framework even after the PM Fumio Kishida reshuffles the cabinet and LDP leadership. The government will likely maintain its accommodative fiscal policy stance under the banner of “new capitalism” to further stimulate investments and in turn economic growth. With the government maintaining a strong commitment to the Abenomics policy framework, the BoJ will likely remain cautious of any major policy changes in order to not repeat past mistakes of premature policy tightening. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in 2024 under the assumption that the global economy will continue to remain strong.   At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior”. In order to pull Japan completely out of deflation, the BoJ seems ready to be one policy cycle behind key central banks in starting the normalisation process. As long as markets are pricing in a Fed rate cut sometime next year, the BoJ will likely continue with the current monetary easing policies. We continue to expect the BoJ will likely start the normalisation process by exiting from the YCC framework in 2025, once the global economy enters the next cyclical recovery. Meanwhile, we expect the government to maintain its commitment to the current accommodative fiscal/monetary policy framework even after the PM Fumio Kishida reshuffles the cabinet and LDP leadership. The government will likely maintain its accommodative fiscal policy stance under the banner of “new capitalism” to further stimulate investments and in turn economic growth. With many key ministers having experienced posts within METI, the government’s fiscal policy stance will likely focus on stimulating the economy rather than balancing the budget. With the government maintaining a strong commitment to the Abenomics policy framework, the BoJ will likely remain cautious of any major policy changes in order to not repeat past mistakes of premature policy tightening. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in 2024 under the assumption that the global economy will continue to remain strong.   The main scenario is that the central bank policy tightening cycle is approaching its end and the global economy will show stronger signs of slowing down as the cumulative effects of policy rate hikes so far suppress demand and dampen inflationary pressures. An economic slowdown and expectations for interest rate cuts by key central banks including the Fed will likely strengthen downward pressure on global bond yields and give the BoJ room to reduce its JGB purchases while maintaining the current YCC framework.   Based on the latest US financial accounts, the household savings rate (net asset change as percentage of GDP) seems to have bottomed out at around 2.2% of GDP in Q422, and has increased since then to 4.4% as of Q223. The household savings rate rising again combined with economic data showing signs of weakness and weaker inflationary pressures is likely the basis in which many market participants continue to see a soft-landing scenario as their main scenario.   The upside risk scenario is that the global economy remains resilient and inflationary pressures remain. Under such a scenario, central banks will be forced to continue tightening monetary policy and market expectations of a policy rate cut in 2024 would disappear. In such a scenario, upward pressure on JGB yields would strengthen and the JPY would weaken further. The BoJ will likely be forced to adjust or abandon YCC in such a scenario. However, to finance the continued increase of consumption activities, households will be forced to sell assets which will likely lead to a peak in asset prices. Combined with higher policy rates, the economy could face strong headwinds in such a scenario and an upside risk scenario could be followed by a hard landing scenario   The downside risk scenario is that the effect of cumulative rate hikes by central banks so far appears much stronger than anticipated. Under such a scenario, businesses will likely strengthen their cautious attitudes and lead to a much stronger-than-expected deleveraging move. Central banks will likely be forced to respond by cutting policy rates at a much faster pace than anticipated. In such a world, the JPY would likely appreciate significantly and the risk that Japan falls back into deflation will likely strengthen. The BoJ will likely be forced to respond by implementing additional easing measures, such as further cuts to its negative interest rate policy, while implementing measures to alleviate the side effects of further easing policies simultaneously. Under such a scenario, the global economy could fall back into a deflationary state but we believe the likelihood of such a scenario materialising at this juncture remains small        
BoJ's Normalization Process: Factors and Timing Considerations

BoJ's Normalization Process: Factors and Timing Considerations

FXMAG Team FXMAG Team 14.09.2023 08:53
The timing of the BoJ’s start to the normalisation process will likely depend on whether the Bank of Japan moves quickly or slowly to normalise its monetary policy and on the expectation of whether the Fed will move to cut rates next year. The main scenario for the US is that the central bank policy tightening cycle is approaching its end and the global economy will show stronger signs of slowing down as slows the cumulative effects of policy rate hikes so far to suppress demand and dampen inflationary pressures. An economic slowdown and expectations for interest rate cuts will likely strengthen downward pressure on global bond yields and give the BoJ room to reduce its JGB purchases while maintaining the current YCC framework. Based on the latest US financial accounts, the household savings rate (net asset change as a percentage of GDP) seems to have bottomed out at around 2.2% of GDP in Q422, and it has increased since then to 4.4% as of Q223. The household savings rate rising again combined with economic data showing signs of weakness and weaker inflationary pressures is likely the basis for many market participants continuing to see a soft-landing scenario as their main scenario. As long as markets are pricing in a Fed rate cut sometime next year, the BoJ will likely continue with its current monetary easing policies. We continue to expect the BoJ to likely start the normalisation process by exiting from the YCC framework in CY25, once the global economy enters the next cyclical recovery.   At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan’s economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms’ wage- and price-setting behavior”.   The BoJ will likely remain cautious of any major policy changes as long as the central bank holds such views, so as to not repeat past mistakes of premature policy tightening, especially as the government is maintaining a strong commitment to the Abenomics policy framework to pull Japan completely out of deflation. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in CY24 under the judgement that the global economy will remain strong  
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Signs of Hope: Polish Manufacturing Sees a Turnaround as Producer Prices Stabilize

ING Economics ING Economics 19.10.2023 14:28
Polish manufacturing bottoming out and producer prices starting to stabilise Industrial production fell 3.1% YoY in September, but there are early positive signs as seasonally adjusted data points to a turnaround. Producer prices (PPI) also started stabilising, but deflation in YoY terms is there to stay for some time   Industrial production fell by 3.1% YoY in September (ING: -3.8%; consensus: -3.0%) with a further deepening of the decline in manufacturing (-3.7% YoY vs. -2.0% in August), though it is worth remembering that September this year had one working day less than in September 2022, what deducted ca 3pp from production in YoY terms. There are, however, some encouraging signs as seasonally adjusted data points to a 0.9%MoM increase in output. It was the second consecutive month of rising activity growth in seasonally adjusted terms.   Industrial ouput bottoming out Industrial production, 2015=100, SA Large annual declines in production were recorded in export-oriented industries: metals (-15.7% YoY), electrical equipment (-15.0% YoY), and electronic and optical products (-10.4% YoY). At the same time, increases were recorded in areas related to investment and energy. Production in the “repair and installation of machinery and equipment” increased by 7.3% YoY. Growth was also observed in the “electricity, gas, steam and air conditioning supply” (+3.7% YoY). This suggests that we should see continued expansion of investment and further deepening of the decline in exports in the composition of 3Q23 GDP.     Economy reached a bottom and should slowly recover Although the headline production indicator on an annual base still looks dismal, the seasonally adjusted data suggests that industry has most likely found the bottom and has started to rebound. Business surveys suggest that the decline in orders is slowing down, which should support a gradual stabilisation and then a bounce back in activity in the coming months.   Producer prices stabilise but the recent decline is yet to pass to consumer prices Producer prices (PPI) fell by 2.8% YoY in September (ING: -3.4%; consensus: -2.7%), following a 2.9% YoY decline in August (data revised). On an annual basis, we still have deflation, but the price level is beginning to stabilise. The MoM decline in prices over the past two months has stalled. Despite strong reductions in wholesale fuel prices, the magnitude of the price decline in the 'coke and refined petroleum products production' category turned out shallower than expected   PPI deflation continues, but price level ceased to decline PPI inflation, %YoY  
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Slowing Inflation Signals Potential Rate Cuts Next Year: Insights by Michael Hewson (Chief Market Analyst at CMC Markets UK)

Michael Hewson Michael Hewson 16.11.2023 11:48
Slowing inflation points to rate cuts next year. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   Back in June when the Bank of England unexpectedly raised rates by 50bps to 5% on the back of much more hawkish commentary from the likes of the Federal Reserve, as well as the ECB market pricing for UK rates rose to 6.25%, in a move that looked clearly overpriced.   UK 2-year gilt yields spiked up to 5.56% and their highest levels since 2008 as markets grew concerned that further aggressive moves on rates would be needed to contain the inflation genie, which in the UK was proving to be much stickier than expected.   At the time I suggested that these concerns were overstated given the direction of travel on headline inflation in the US, as well as in Europe, which was already slowing sharply, not to mention what we were also seeing in China where we were seeing clear evidence of deflation. Other warning signs of sharply slowing inflation were evident in the PPI numbers which in Europe have been negative for over a year now, and which in the UK have been negative, or close to negative since July.   Yesterday US CPI for October also confirmed that inflation was heading lower, slowing from 3.7% to 3.2%, while core prices slipped from 4.2% to 4.1% in a sign that price pressures were continuing to slow.   More importantly super core inflation which the Fed monitors closely also slowed as well, and with the risk of a US government shutdown this weekend postponed until January next year, the economic risks to the US economy appear to have diminished further.   Bond markets are already reflecting this narrative even as central bankers continue to push the higher for longer narrative, with US 10-year yields falling to their lowest levels since September, below 4.5%, having risen as high as 5.01% in October.   Today UK headline inflation showed another sharp slowdown, dropping form 6.7% in September to 4.6% in October as the effects of the energy price cap fell out of the headline number for the second time this year.
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Turbulent Markets: Central Banks Grapple with Inflation as China Enters Deflation

Michael Hewson Michael Hewson 12.12.2023 14:28
Big week for central banks as China falls into deflation By Michael Hewson (Chief Market Analyst at CMC Markets UK)   Markets in Europe finished higher again last week with the DAX up for the 6th week in a row, while the FTSE100 returned to levels last seen on the 19th October, after the latest US jobs report came in better than expected, and unemployment unexpectedly fell to 3.7%.   US markets also finished the week strongly with the S&P500 pushing above its summer highs to close at its highest level this year, with the Nasdaq 100 not too far behind, with the tech sector, once again instrumental in achieving the bulk of this year's outperformance.   The catalyst for the strong finish was a solid US jobs report which showed 199k jobs were added in November, while the unemployment rate slipped to 3.7%. With the participation rate returning to 62.8% and wages remaining at 4%, the idea that the Federal Reserve will be compelled to cut rates aggressively underwent a bit of a setback with yields moving sharply higher, as 2024 rate cut expectations got pared back.   The apparent resilience of the US economy against a backdrop of a sharp fall in inflation expectations from the latest University of Michigan confidence survey has helped craft a narrative that despite the sharp rise in interest rates delivered over the past 18 months, the US economy will be able to avoid a severe recession.   This scenario does present some problems for the Federal Reserve when it comes to managing market expectations of when rate cuts are likely to come, with the recent sharp fall in yields globally speaking to a widespread expectation that rates may well be cut sharply as we head into 2024.   As far as the US economy is concerned aggressive rate cuts at this stage look a little less likely than they do elsewhere where we've seen sharp CPI slowdowns in the pace of inflationary pressure. Earlier this month the latest EU inflation numbers showed headline CPI slow to 2.4% in November, while German CPI was confirmed at 2.3% as month-on-month prices declined by 0.7%, the second month in a row, CPI went negative.   Germany isn't unique in this either given that PPI inflation had already given plenty of indication of the direction of travel when it came to price deflation.   In China over the weekend headline CPI also went negative in November, only in this case it was on the annualised number to the tune of -0.5%, for the second month in a row and for the 3rd month in the last 5. PPI inflation also remained in negative territory to the tune of -3%, the 14th month in succession as the world's 2nd biggest economy grapples with deflation, and slowing domestic demand.   This deflationary impulse appears to be already making itself felt in Europe, and truth be told has been doing so for some time, the only surprise being how blind to it certain parts of the European Central Bank have been to it.   These concerns over deflation while slowly starting to be acknowledged don't appear to be being taken seriously at the moment, although in a welcome shift we did hear Germany ECB governing council member Isabel Schabel admit that they had been surprised at how quickly prices had slowed over the past few months, even as economic activity stumbled sharply.     Consequently, this week's central bank meetings of the Federal Reserve, European Central Bank and the Bank of England are likely to be crucial in managing expectations when it comes to the timing and pace of when markets can expect to see rate cuts begin now, we know the peak is in.   Of all the central banks the Fed probably has the easiest job in that they have more time to assess how the US economy is reacting to the tightening seen over the past few months.   The ECB has no such luxury given that the two biggest economies of Germany and France could well be in recession already, and where prices could slide further as we head into 2024.   The fear for central banks is that a lot of the slowdown in inflation has been driven by the recent slumps in crude oil and natural gas prices and could well be transitory in nature, and with wage inflation still elevated will be reluctant to signal the "all clear" too soon.   The Bank of England has a similar problem although the UK economy isn't showing the same levels of weakness as those of France and Germany, and furthermore inflation in the UK is almost double that of Europe, with wage costs and services inflation even higher.   As we look towards a new trading week, and probably the most consequential one this month, European markets look set to open slightly higher as investors look back at the inflation numbers from the weekend and extrapolate that 2024 may well be the year that rates start to come down, with the main risk being in overestimating by how far they fall.      EUR/USD – slid down towards the 200-day SMA on Friday, stopping just short at 1.0724, with a break below 1.0700 targeting the prospect of further losses toward the November lows at 1.0520. We need to see a move back through 1.0830 to stabilise.   GBP/USD – slid to the 1.2500 area but remains above the 200-day SMA for now, with only a break below 1.2460 signalling a broader test of the 1.2350 area. Resistance currently at 1.2620 area.    EUR/GBP – still range trading between the 0.8590 area and the lows last week at 0.8550. While below the 0.8615/20 area the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490. USD/JPY – finding a level of support at the 200-day SMA at 142.50 after last week's steep fall. We need to see a daily close below the 200-day SMA to open a test of 140.00 and then on towards 135.00. Resistance back at 146.20.   FTSE100 is expected to open 7 points higher at 7,561   DAX is expected to open 25 points higher at 16,784   CAC40 is expected to open 11 points higher at 7,537
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US Dollar Retreats as Chicago PMI Faces Deceleration; Eyes on China's PMIs for New Zealand Dollar Direction

Kenny Fisher Kenny Fisher 02.01.2024 13:15
Chicago PMI expected to decelerate China releases PMIs on Saturday The New Zealand dollar is in negative territory on Friday. In the European session, NZD/USD is trading at 0.6308, down 0.37%. The US dollar has hit a rough patch lately and retreated against most of the majors. The New Zealand dollar has been full marks, climbing some 400 basis points over the past five weeks. The Federal Reserve meeting earlier this month has boosted risk appetite, as Fed Chair Powell jumped on the rate-cut bandwagon, signalling that the Fed is finally done raising interest rates. Powell pencilled in three rate cuts next year while the markets have priced in double that. Fed members have urged caution, but the markets remain exuberant and have priced in an initial rate cut in March. Inflation is getting closer to the 2% target and with the labour market in good shape, it looks like the Fed could guide the US economy to a soft landing and avoid a recession. Chinese PMIs next New Zealand doesn’t release any tier-1 events until mid-January, but Chinese PMIs, which will be released on Saturday, could have an impact on the direction of the New Zealand dollar. China is New Zealand’s largest export market and the PMIs will provide a report card on the health of China’s service and manufacturing sectors. China’s recovery has been patchy and the slowdown has resulted in deflation in the world’s number two economy. The manufacturing sector has been stuck in contraction for most of this year and non-manufacturing expansion has been steadily falling and has stagnated over the past two months. The Manufacturing PMI is expected at 49.5 and the Services PMI at 50.3.   The US releases Chicago PMI, an important business barometer, later today. The PMI shocked in November with a reading of 55.8, which marked the first expansion after fourteen straight months of contraction. The upward spike may have been a one-time occurrence due to the end of the United Auto Workers strike as activity rose in the auto manufacturing industry. The consensus estimate for December stands at 51.0, which would point to weak expansion. . NZD/USD Technical NZD/USD tested resistance at 0.6345 in the Asian session but has reversed directions. Below, there is support at 0.6031 There is resistance at 0.6150 and 0.6195
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Hungarian Inflation: Downside Surprise Signals Economic Uncertainties Ahead

ING Economics ING Economics 12.01.2024 14:55
Hungarian inflation ends 2023 with a downside surprise Rapid disinflation continued in December, with the fuel component stealing the show. Despite favourable domestic developments, external risks are rising, so we expect the central bank to maintain the previous 75bp pace of easing.   Base effects combined with falling fuel prices stole the show Inflation in Hungary continued to fall in December, with the Hungarian Central Statistical Office (HCSO) reporting better-than-expected data. Compared with November, headline inflation fell by 2.4ppt to 5.5%, which was the result of two factors: a high base from last year, combined with a decline in general price pressures. Although the year ended on a more positive note, 2023 will be remembered for extreme inflation, with the annual average reaching 17.6%. Similar to last month, the decoupling of headline and core readings has continued on a monthly basis. While headline inflation fell by 0.3% month-on-month, core inflation in fact increased by 0.2% MoM, signalling that the strong deceleration in the headline rate is mainly due to items which are not incorporated into the core basket. At the component level, we can highlight two main drivers: food and fuel prices, which were the main contributors to the slowdown from November to December   Main drivers of the change in headline CPI (%)   The details In line with regional developments, food prices decreased by 0.1% MoM, which together with last year’s high base brought the annual food inflation rate below 5%. Compared to November, the decrease in prices of processed food was stronger than the decrease in prices of unprocessed food. Fuel prices dropped by 5% MoM, in line with falling global oil prices. This, combined with large base effects, pulled inflation down significantly. The story is that a year earlier the fuel price cap was lifted, which led to huge price increases. However, a year later, the unit price of fuel was already lower than the market price in December 2022. Deflation in durable goods inflation continued, with prices for durable goods down 1% year-on-year in December, helped by yet another negative monthly reading. This can be explained by the relative strength in the forint, which has appreciated significantly since the turmoil of last year. Plus, the easing of external inflation helps, too. Services prices rose by 0.6% MoM, which is the highest monthly reading since July. It is likely that a significant proportion of service providers have responded by raising prices to the 10-15% minimum wage increase (which was brought forward by one month to December) and other impending cost increases (e.g. excise duty hike on fuel prices, rising road tolls). Disinflation was broad-based, mainly driven by non-core elements This time in December, the main factors behind the slowdown were non-core items, like fuel and unprocessed food prices, while the decrease in processed food prices also contributed. However, with services prices up 0.6% MoM and the annual rate still above 12%, the picture for core inflation is a little less rosy. We suspect that the impending cost increases were the main reason for the higher-than-usual monthly repricing. Nevertheless, we will have more information on the dynamics of services prices in light of the January inflation report, which will be crucial in assessing whether or not there has been a second round of price increases (due to the minimum wage increase). The latest retail price expectations suggest that underlying dynamics of repricing could continue at a relatively strong pace in early 2024.   The correlation between retail price expectations and core inflation Source: Eurostat, HCSO, ING     On a positive note, core inflation decelerated to 7.6% YoY in December, while short-term dynamics are encouraging, as core inflation on a three-month on three-month basis was below 3%. At the same time, the National Bank of Hungary's measure of inflation for sticky prices also decreased, displaying a reading of less than 8.7% YoY.   Headline and underlying inflation measures (% YoY)   Inflation could fall within the central bank's tolerance band in January Based on the latest data, we conclude that inflation could slow further in early 2024, and ING's latest forecast suggests that it could fall below the upper band of the central bank's 4% inflation target tolerance band as early as January. But this will be more a result of base effects than the lack of underlying price dynamics. However, it would be premature to declare victory as positive base effects will soon run out. As a result, we expect inflation to rise again in the second half of this year. While inflation could average a tad below 4% in the first half of the year, it could be around 5% in the second half of 2024 and around 6% at the end of this year.   We expect the central bank to remain cautious as external risks rise Although favourable domestic developments via lower-than-expected inflation readings could pave the way for the central bank to cut interest rates at a faster pace, new inflation risks have emerged in the form of rising shipping costs. Several shipping companies have already suspended shipments on the Red Sea routes due to the ongoing Houthi attacks.   Container freight benchmark rate per 40 foot box (USD)   The result of trade diversion is reduced transport capacity, longer transit times by sea and a dramatic increase in shipping costs. In this regard, we have already seen shipping costs increase by up to 120% on average in the main routes in late December and early January. The Shanghai-Rotterdam route has been hit the hardest (276%), posing serious risks to supply chains and the inflation outlook, especially in Europe. This could soon be reflected in producer prices and, of course, in consumer prices as well. The impact of the Red Sea conflict on supply chains is already being felt in Europe, with Tesla announcing that it is suspending most car production at its Berlin factory. In addition, a conflict in Taiwan cannot be ruled out, which could pose an additional inflation risk. Moreover, the coordinated US and UK airstrikes against the Houthis in Yemen overnight have once again pushed up global oil prices. Adding to the tension is the fact that Iran has also seized an oil tanker in the Gulf of Oman. In our view, all these global developments have increased external risks and therefore warrant caution, which is why we expect the National Bank of Hungary to maintain the previous pace of 75bp of easing at the January meeting.
Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

ECB Maintains Rates and Communication, Labels Discussion of Rate Cuts as Premature; Lagarde Stresses Importance of Wage Developments

ING Economics ING Economics 25.01.2024 16:40
ECB keeps rates and communication unchanged, discussion of rate cuts premature European Central Bank President Christine Lagarde stressed during the press conference that any discussion on rate cuts was still premature.   At today’s meeting, the European Central Bank kept everything unchanged: both policy rates and communication. The press release with the policy announcements is almost a verbatim copy of the December statement. The ECB only dropped two phrases that could be interpreted as opening the door to rate cuts very softly: the December comments on domestic price pressure being elevated, and the temporary pick-up in inflation. The fact that these two phrases were dropped, however, could also simply be linked to the fact that there are no new forecasts. And during the press conference, ECB President Lagarde mentioned that observers shouldn’t pay too much attention to subtle changes in the text. Admittedly, we don’t know what to do with this comment, bearing in mind that central bankers are normally known for weighing every single word and comma in their communication. Also during the press conference, Lagarde stressed that the Governing Council had concluded that any discussion on rate cuts was currently premature. She repeated the importance of wage developments in the coming months for the next ECB steps, pointing to some indicators that already show some slowing in wage growth. While this could be seen as a very tentative shift towards more dovishness, Lagarde also emphasised the need for inflation to be on a sustainable downward trend. Asked whether she would repeat her statement from last week in Davos that rate cuts by the summer were likely, Lagarde replied that she always stood by what she had said. Even though we today learned that we shouldn’t pay too much attention to every single word, we do remember that Lagarde said in November last year that the ECB wouldn’t cut rates in the next couple of quarters. Combining these two comments would imply that a first rate cut could not come in June but only in July at the earliest. However, past experience has shown that the ECB president is not necessarily the best ECB forecaster.   We stick to our call of a June cut Looking ahead, today’s meeting once again stressed that the ECB is in no position to start cutting rates soon. In any case, even if actual growth continues to turn out weaker than the ECB had expected every single quarter, as long as the eurozone remains in de facto stagnation mode and doesn’t slide into a more severe recession, and as long as the ECB continues to predict a return to potential growth rates one or two quarters later, there is no reason for the ECB to react to more sluggish growth with imminent rate cuts. Also, the job of bringing inflation back to target is not done yet. In the coming months, inflation developments will be determined by two opposing trends: more disinflation and potentially even deflation as a result of weaker demand, but also new inflationary pressures due to less favourable base effects, new inflationary pressure as a result of the tensions in the Suez Canal as well as government interventions in some countries, above all Germany. As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue to believe that a first rate cut will not come before June.

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