Home > Uncategorized > Midweek Market 14 March 2019

Midweek Market 14 March 2019

Mar 14th, 2019

Executive summary

Global optimism is at a 30 month low, as reported by business conditions survey from IHS Markit. While the sentiment among developed nations globally continues to deteriorate, the US remains the most upbeat relative to the rest:
• In Europe sentiment has fallen to the lowest level since 2013, with the European manufacturing sector specifically the lowest since 2012;
• The UK has seen confidence drop to a record low, although mostly attributable to Brexit concerns;
• Japanese companies were the least confident globally as sentiment in the manufacturing sector fell to the lowest level since the survey began in 2009;
• In China, economic data released last week is drastically lower than forecast, and this contraction is likely to extend out into much of Asia, and nations participating in the Belt Road Initiative, over the next 3-6 months;
• In the US, the jobs report last Friday indicated 20 000 new jobs against a forecast 170 000. A year ago, Republicans in control of Congress suspended the cap on federal borrowing. The limit was automatically re-imposed on March 1st. Politicians now have a few months to hammer out legislation to raise the cap as the Treasury employs “extraordinary measures” to fend off default. The federal deficit is mushrooming once again. The 2017 tax cuts have taken a bite out of receipts at the IRS and economic growth has not met expectations. This year’s borrowing to fill the gap between government tax revenue and expenditures may reach a trillion dollars for the first time since 2012.

Notwithstanding, 2019 was going to be the year when the other big central banks joined the US Fed in “normalizing” interest rates in reversing the gigantic QE experiment of the last 10 years. Instead, they are all going back to aggressive easing, and the US Fed is following them. This is a seminal moment in the global financial and monetary system, because they are extending the life of a system that is failing.

Global economic growth and prosperity is not returning, and global sentiment is deteriorating:
• The EU has just announced a major policy reversal introducing a new stimulus package in the face of data which shows a sharp downturn in growth in the euro zone. This after it began tightening In September 2018;
• Japan pioneered QE and negative interest rates, but despite this, speculation began during 2018 that the Bank of Japan would start raising rates (to also start normalising). But it quelled that notion, last Thursday, stating it will continue its monetary easing measures;
• The US Fed, meanwhile, has been the only central bank actually tightening rather than just talking about it. And until very recently Jerome Powell saw the process continuing;
o During Oct 2018 he said he believed the US economy was a long way from neutral (rates neither advancing nor slowing economic growth). That was not well accepted and the stock market fell hard until late Jan 2019 when he took it all back by altering his view;
o But interest rates are only half the issue with money supply being the other half. Money printing is reflected in the Fed’s balance sheet as debt which has ballooned to $4.4 trillion, and unwinding this position from late 2016 at the rate of $50 billion a month has withdrawn substantial liquidity from the market. But it has only therefore shrunk by 10%, and now that is also changing;
o Because, in possibly Jerome Powell’s most significant statement to date, he said last week in a dovish tone that quantitative tightening would end sooner than expected, and that balance sheet shrinkage could be used as an active tool if the economy cries out for help;


What does all this mean? Several things, all of them alarming:
• 10 years into an expansion, with unemployment below 5% and officially reported inflation at the central bank target of 2%, the global economy is still too fragile to apply historically normal interest rates. The structural weakness implied by that is absolutely terrifying;
• If central banks can’t normalize monetary policy now, after 10 years of stimulation, they’ll never be able to. Just consider that for a moment. The old conception of monetary policy is over for the remaining life of the current global financial system;
• Since debt is soaring even in this late stage of the expansion with most people working and paying taxes, the financial headwinds that now prevent rate normalization will continue to strengthen. If 2% inflation is necessary to stave off collapse today, then 3% will be necessary shortly. Then 4% and so on, for the remaining life of this financial system;


How much time is left? Who knows. But it is now fairly safe to assume that this central bank course reversal has ushered in the final chapter.

US Dollar

The dollar index bounced down from resistance this week as it continues to move sideways within a bearish rising wedge formation, whilst the longer term trend towards weakness remains in place. This is still threatened by an Elliott Wave short term alternative option (rising to $100.00) which is, as yet, unconfirmed.

The Elliott Wave alternative count has it that the dollar is in a triangle pattern which could propel the dollar index towards $100.00, based on the completion of the (A)(B)(C) pattern. A decline below $95 will tilt the odds towards weakening and the formal count, whilst an increase above $97.20 will tilt the odds towards strengthening and the alternative count.

The 12 month chart illustrates the dollar bounce down from resistance, away from activation of the trigger for the stronger dollar count to $100.00. The negative divergence in still in place, and both oscillators are declining in support of further weakness.

The short term 3 month chart illustrates the strong bounce down from resistance to close at $96.51, but as long as the dollar remains above $95.824 potential for the stronger alternative to play out still exists.

The Cots data with continued dilation on the chart is supportive of dollar weakness.

Japanese Yen

The US$ / Yen currency pair dropped down from resistance, but still remains within the flag pattern. Both oscillators are declining which supports continued dollar weakness and Yen strength, and this will be accelerated by a downwards breakout from the flag.
Until that happens, the confines of the flag remain in place which means a stronger dollar plus the added threat of a sharply higher dollar, as previously described.

US Treasuries

The benchmark US 10 year Treasury yield is trending sideways to down for now as it becomes increasingly directionless. The US bond market yield bottomed in mid-2016 with increased yields since, but this has been corrupted since Nov 2018 in a pattern of lower yields. If yield increases from here then it will signal a continued collapse in bond prices. However, if yield continues to drift lower from here then it will signal a recovery in the bond market.

The Cots data for the US 10 year Treasury reflects on the chart as a bearish convergence which indicates lower prices and higher yields.

Gold

The 5 year gold chart illustrates the historic 6-month cycle lows, with the next cycle low in progress, despite the small rally over the past 2 weeks. it can also be seen that price movements since the start of 2018 have been accompanied by ever-lower volumes which does not auger well for price strength, and the gold price should now continue down to complete the current 6 month cycle low.

Gold is dropping down towards support, despite the small rally, and it should continue lower with both oscillators dropping in support of lower prices.
It is important to understand Gold’s fundamentals as it will help confirm the new bull market. Until now, Gold rallies have failed to make higher highs and higher lows because, although there has been improvement in fundamentals, the fundamentals have not turned bullish yet.
The technical trigger will be Gold and gold share outperformance of general equities which will likely lead to the fundamental catalyst of US Fed rate cuts. The start of rate cuts will indicate declining real interest rates which is the key driver of gold bull markets.

The 12 month chart illustrates gold dropping down into and back out of the 1st support zone, with both oscillators rising in support. Also, 200-Dema is at $1270 and this is providing additional support. Despite this, gold is still likely to drop down into the 2nd support zone as it completes the current 6 month cycle low.

The 3 month gold chart illustrates the short term counter rally as it bounces off support at $1276.

The gold Cots data is not clear cut, but the trend is bearish. The chart requires dilation for gold declines which is not quite apparent. However, the trend is in that direction with Large Specs (green) trending up (gold bearish) and Commercials (red) trending down (gold bearish). This adds credence to gold declines.

South African Rand

The South African Rand has broken up through the reducing wedge into weakness. In so doing, it is moving up into a new rising wedge pattern, which technically could be bullish eventually, as both oscillators begin turning down in support of Rand strength in due course.
Much depends on dollar movements which overrides everything. Also, political and economic fundamentals are not improving yet with South Africa and Eskom and much depends on Moody’s rating on 29 March.

HUI / Gold Ratio

The ratio has broken up to and turned down from resistance, creating a double top in the process. It is likely to drop lower to test support and both oscillators have increased to the top region of their range.

HUI Index

The HUI index itself is behaving in similar fashion, yet less positively. The rally closed below the previous high, having bounced up off support including 200-Dema, and both oscillators have not increased to the top region of their range. Nevertheless, it is likely to again decline to test support in the next period.

GDX US miners ETF

The GDX 12 month chart is similar to the HUI Index chart, and the commentary is identical.

DUST US Gold Miners Bear Index

The Dust chart and commentary is similar to the GDX chart, except in the opposite direction being a US miners bear index.

Silver

The 3 year chart continues to have a negative bias as silver drops down to and reverses up from support. It is likely to continue testing support as both oscillators continue declining. The confining parameters of the chart remain diagonal resistance and the multi-year base at $14, which hopefully will hold during the coming phase.

The 12 month chart illustrates silver increasing out of the 1st support zone during a short period of slightly outperforming gold as it moved back up above 200-Dema with both oscillators starting to increase. But it is still likely to drop back down to test both support zones if it penetrates below 200-Dema.

The 3 month silver chart illustrates the short term counter rally in penetrating back up above the MAs, together with both oscillators starting to turn up. But, further price declines are probable, as also indicated by the Gravestone Doji closing candle.

The silver Cots data, like, that of gold, is not clear cut. But the trend is also bearish. The chart requires dilation for silver declines which is not that apparent. However, the trend is in that direction with Large Specs (green) trending up (silver bearish) and Commercials (red) trending down (silver bearish). This adds credence to silver declines.

Gold : Silver Ratio

Silver outperformed gold this week with the ratio moving down to close at 84.71, because of the metals rally. Everything on the chart points to a further decline except for the Cots data which indicates the end of the metals rally, and a resultant increase in the ratio.

General Equities

The counter-trend rally in the US equity market is finally signalling a potential end, with a breakout in the bear flag. This is one of the first decline triggers (black circle), with the second decline trigger being penetration of the two earlier lows (red lines).

These triggers will soon provide confirmation of the Dow Jones in decline, as and when the Elliott Wave structure can be determined as 5 wave impulse declines and 3 wave corrective advances. We are nearly there.

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