Home > Currency, Equity, Gold > The Aftermath of the US Election

The Aftermath of the US Election

Nov 17th, 2016

Background

Investment markets will not be buoyant much longer as many regard the Trump plan as flawed with expectations now dwindling with respect to a quick re-energised US economy.

Donald Trump won the 2016 US election mostly because US wage growth has been negative since 1973 for workers while the richest Americans enjoy indescribably huge gains. This of course is largely due to big business prepared to sacrifice US jobs for cheap foreign labour. More specifically though, some suggest it is because people reject being overtaxed, and the ‘Affordable Care Act’ (Obamacare) is one of the biggest tax increases in American history. Ordinary people feel abandoned and left behind, and Populism continues to grow with many more surprises anticipated worldwide.

The Trump factor jolted markets and the promises made have been heard by middle America who now await delivery on the promises. This is all actually business unfriendly although the stock market has initially seen this as positive. It will be fascinating to observe how delivery is actually made because there is no magic wand to rapidly spur growth.

  • Interest rates are starting to increase and increased mortgage rates are not positive for the middle class psyche;
  • The anticipated Trump spending program is inflationary and bond market unfriendly, which in turn is stock market unfriendly;
  • There has been a rout in the 3 decade long bond market bubble worldwide which started to turn down in Jul / Aug this year;
  • We have now just moved beyond a secular low point in bond yields and inflation with the concomitant future for the consumer about to turn negative;

This is not positive for increasing consumer spending, neither is it positive for the investment markets.

Currency values

The US$ has been very strong since Apr 2016 and after the election result catapulted up to the level of 100 to form a triple top stretching back to Mar 2015. This is certainly a key level which if penetrated on the upside will extend gains significantly. The upwards thrust is supported by the likelihood of the US Fed deciding to hike rates in Dec, plus decided weakness from the other currencies in the index – notably Pound Sterling, the Euro, and the Yen.

usindexsmall

General consensus is close to 100% that a rate hike will happen despite the fact that it is overdue, and given the actual state of the US economy and Trump’s preference, should perhaps now not happen. It may of course extend Gold’s retreat and extend the downwards correction. It is well to also remember that it was the last rate hike in Dec 2015 that coincided with the start of the Gold bull market.

The Japanese Yen has weakened since Aug this year to now complete a cycle low and penetrate the 50 week exponential moving average, which gold bulls have been waiting for to potentially confirm the end of the gold correction and resumption of gold’s upward trajectory.

usjapyensmall

The Bond Market

Bonds have enjoyed a 30 year bull market to the point where some yields have even gone negative in what many describe as a massive bubble. This was driven by:

  • Historic low interest rates;
  • Central bank inflation policies;
  • Unsustainable debt levels;
  • Unwinnable international wars;

Consider the US 20 year Bond yield since the start of 2011 (indicative of all treasuries)

bondust20ysmall

Yields have jolted up since Jul 2016 and bond values have plummeted worldwide. We are now at the crossroads of:

  • Interest rates beginning to rise;
  • The bond market beginning to collapse;
  • The share market holding its breath before turning down under the pressure of bond sales;
  • The US$ continuing its upward path with all the negative impacts on US trade and the anti-inflationary spur towards deflation, etc.;

There is no doubt the Trump administration will want all the impacts on middle America to be kind, and one can imagine his mandate to Janet Yellen will be for easing and printing more money.

The Equity Market

Equities remain vulnerable worldwide with huge top patterns on the charts stretching back a number of years. Ultra low interest rates and high liquidity remain the driving force to keep prices up, while the opposite will cause prices to drop. This is precisely what the falling bond market is now causing with the added impetus of bond sales bleeding across to the share market. The increase in bond yields is driving interest rate increases which is likely to tip the scales in favour of the US Federal Reserve hiking the rate in Dec 2016.

Many believe that, despite general consensus, the US Fed still cannot afford to hike rates and that this moment will again just fizzle out.

The Gold Market

The Gold market bottomed at $1045 in Dec 2015 at the start of the new bull market which peaked at $1375 in Jul 2016 and is currently in a major correction with the price at $1228. The cycle low in Dec 2015 was actually  one year too soon and that the 8 year cycle low should really be now at the end of 2016. There are a number of impacting factors which support this view and a number which do not.

Supporting view that the 8 year cycle low is now (end of 2016)

  • If the US$ index breaks up substantially above the triple top new high at 100.5 this will cause the gold price to break down below the support base at $1200;
  • Cycle low usually coincides with the US presidential election;
  • The Japanese Nikkei 225 is inversely correlated to the gold price and the index has just broken up through the resistance trendline;
  • The Trump victory has created a paradigm shift and a new consolidated low may have to be created for gold;

Non-supporting view that the 8 year cycle low was end of 2015

  • If the US$ index fails to break up substantially above the triple top new high at 100.5 this will assist the gold price in holding above the support base at $1200;
  • The Japanese Yen has a direct correlation to the gold price and has now weakened to a new cycle low penetrating the 50Wema which it needs to do for the gold price to have potentially completed its correction phase;
  • The Trump prosperity plan is quickly recognised by the market as being somewhat flawed and definitely inflationary and good for gold;
Categories: Currency, Equity, Gold Tags:
Comments are closed.