Market Comment
S&P futures closed lower on a wide spread down bar yesterday on increased volume, which confirms the “no demand” bar from Monday. We also note the volume was declining over the previous few sessions as the price traded higher and then it rose on the sell off yesterday. This signals stronger volume was to the downside and opens for more weakness near term. Key support at 1056 and key resistance is 1128 for now. The main factor that triggered the sell off was the terribly weak US Consumer Confidence index, falling 10.5 points from prior month’s reading. Expectations index fell even more, with a 13.5 points. Of course a reading below 50 is not good news, but another strange thing here is that the other economic data reports such as US payrolls and Michigan confidence reports does not match at all the weak number out from the Consumer Confidence index. This do looks pretty strange. Was this Consumer Confidence data a one month drop or will the other data reports follow in a weaker tone?
The German IFO came out lower than expected yesterday, which saw the risk appetite swing around after the release. An interesting comment to be added to the IFO reading is that exceptional cold weather probably had a negative effect on the reading and we expect the weakness to be more temporarily. So the reading should rebound next month according to that theory and we will monitor it closely.
Mr. Bernanke will testify in front of the House today (16:00 CET) and we expect him to signal the rates will stay low for a extended amount of time and that they hike in the discount rate was normalization move, which should have very limited effect on the economy. Fed’s Bullard out last night saying the Fed may not raise rates during 2010. This supports our view that interest rates will stay low for an extended period of time
In currencies the JPY has been performing strongly over the last 24 hours and it now looks like the USDJPY failed up at the falling resistance (92.05) from the April 08 high Friday. We expect the risk on and risk off themes to continue to drive the markets going forward, but seems like the moves in FX markets are a bit bigger than the moves seen in S&P. Especially to the downside as the JPY have seen big gains over the last 24 hours based on actually fairly minor swings in the S&P. We still look for weaker JPY in the medium term as the weak Japanese fundamentals should limited the attractiveness of investing in Japan. AUD taking a beating as well on reduced risk appetite yesterday and basically most economists now expect RBA to hold rates steady in March and a rate hike should see AUD fly higher.
Potential false break above 1130 in Gold Monday was followed up with a drive lower yesterday. That points to a test of the 1094 support level near term. Technically still bullish potential above this 1094 level in our opinion. Crude fell a bit yesterday after the strong rally over the last week, we see key resistance up at 84.35, which is the upper end of the recent 6 month range. Contango is wider again this morning. Of course there still lots of carry trades in Crude that are stored in tankers that will have to come back to market at some point, so not so sure a break higher will have any strong legs. DOE inventory report out today and we note that the API data (Crude fell 3,1 million barrels) out last night was slightly bullish in our opinion. We also note that the volume has dried up over the last few sessions, which is bad news for the bulls as a breakout above a key resistance level is very difficult if the approach towards the level happens on declining volume. We should see increasing volume instead. As we have mentioned many times of the previous weeks, it remains in the wider range since 6 months and it doesn’t appear to be any real driver near term to take out this range with support at 67.87 and resistance at 84.33.
EURJPY vs. S&P 500 futures, see how the correlation has been totally off the last few months, but returned last week or so. Looking at the EURJPY vs. S&P 500 chart is looks like every time there has been a longer time of very low correlation it has been followed by a longer directional move
Global Market Review
Global market risk imploded after the U.S. Weekly Jobless numbers printed at 496K, and sent the 4 and 10 week averages higher, which is against the recent outlook that economic expansion is underway. That will create a conundrum when valuing Usd long-term positions, as the dollar gets bought in the move out of equities and into Treasuries.
Global commodities are lower, and by default are also empowering the long side of the greenback; however the 4 Hour chart trend and momentum reads are still very mixed. The calendar is ridiculously busy with Mr. Bernanke Testimony, Mr Geithner meeting, and President Obama health-care reform meetings. All of this comes in the face of weaker-than-expected economic reports from the U.S. and Euro-zone.
Usd/Cad just hit Resistance 3 areas at 1.0670, and may now reverse tack if Wall Street cash trade can temper the selling and oil holds 77.50. Gbp/Usd looks weak, although now oversold. Usd/Jpy is now hitting areas around 89.00 that generated a heavy long reversal
The red flag is seen in Usd/Chf; it is just not moving in-line with the major pairs, and that tells us that the Usd may be tapped out in the near-term if equity markets hold support
The calendar was busy on Thursday ahead of Fed Chairman Mr Bernanke delivering a testimony to Congress at 9am EST that will allows market participants the chance to weigh the next FOMC move
Any hints that an interest rate hike will come earlier than expected will allow the Usd to find buyers. Any downbeat talk about the economy could strengthen major pairs.
Global market 4 Hour trends have very mixed reads, and are very oversold in the near-term. Risk aversion is allowing Usd buying to consolidate the Asian session panic reaction to rating agency threats from S/P and Moodys to downgrade Greek sovereign debt again.
Looking for S/P to hold 1085 and minimize Usd buying, (or not, as the case may be).
12-month Forex correlations: Eur 90% Oil. Gbp -89% VIX. Aud 96% Oil and S/P. Cad 95% Oil and S/P. Chf 93% Oil and S/P. Jpy -69% Gold.
Thursday, March 11, 2010
Futures Technical’s
S&P 500 Futures: Strong rally off the lows yesterday, and the volume into the close was strong to the upside. Still the weakness in the background that we outlined Wednesday, so it has to get through this 1105 to 1115 resistance zone to really avoid weakness in the near term. A daily close below 1092 would open for a correction lower towards 1056 support next. Next key resistance level is 1128 that we expect to see some sellers towards that level as this was the break down level for the drop to 1040. Key support and the 23,60% Fibonacci retracement of the March 09 to January 2010 coming in at 1031.
Dow Jones Futures: Weak bar on Monday was confirmed with a wide down bar Tuesday on increasing volume, signaling selling pressure. However the rally off the close was rather impressive yesterday on strong volume into the close. It needs to break the 10434 resistance level to open for a stronger rally, with yesterday’s low now as support (10172).
DAX Futures: Rallying towards the +2 Sigma level at 5770 is possible if last reaction high at 5740 is taken out, but we expect some selling ahead of this 5740 level, so watch the volume on any approach towards this level. Need to see a good volume approach to have a strong break out. Broke the 5626 support yesterday, which signals more weakness ahead. We prefer shorts below 5626 level until a clear reversal signal appears.
“In the bigger picture, crude is trading inside a sideways channel with support at 67.87 and resistance at 84.33. Over supply in the Crude market mixed with tension and increased risk appetite have been some of the major drivers last 6 months, but none of these have been significantly strong to get any decent trend going in either direction.
Nat Gas Futures: Seen a 4.42 to 6.10 range for most the last 3 months, looks heavy towards 6.10 with interim falling resistance at 5.48 today. Nat Gas seems to be driven more by supply and demand in the local market than risk appetite and as winter is coming to an end the demand should drop and that is weighing on prices lately. Trading below 5 level this morning targets a test of 4.42 level (3 months range low).
Corn Futures: Have seen a volume expansion breakout above 368 level and it looks like a true break out so far with next key resistance being the 380 former support now resistance.
Soybeans Futures: The recent up move almost hit out 985 target, but we see a weak bar Tuesday that is a bit like an up trust, then followed by a weak bar yesterday that is kind of a no demand bar. We expect lower prices near term based on this weakness.
Gold Futures: Monday’s bar showed weakness and suggests that the break above 1128 resistance likely was false break and a daily close below 1098 would confirm this outlook. We note that the chart could be building another lower high and in the process of setting up another down leg to print a lower low? Last low was 1044.
10 Year Treasury Futures : Break below 116.30 was a false one with a strong rally off that base off 116.28. Now targets the 118.30 high from 5th of February and the volume looks strong so far to the upside and would not be surprised to see a break higher.
Dow Jones Futures: Weak bar on Monday was confirmed with a wide down bar Tuesday on increasing volume, signaling selling pressure. However the rally off the close was rather impressive yesterday on strong volume into the close. It needs to break the 10434 resistance level to open for a stronger rally, with yesterday’s low now as support (10172).
DAX Futures: Rallying towards the +2 Sigma level at 5770 is possible if last reaction high at 5740 is taken out, but we expect some selling ahead of this 5740 level, so watch the volume on any approach towards this level. Need to see a good volume approach to have a strong break out. Broke the 5626 support yesterday, which signals more weakness ahead. We prefer shorts below 5626 level until a clear reversal signal appears.
“In the bigger picture, crude is trading inside a sideways channel with support at 67.87 and resistance at 84.33. Over supply in the Crude market mixed with tension and increased risk appetite have been some of the major drivers last 6 months, but none of these have been significantly strong to get any decent trend going in either direction.
Nat Gas Futures: Seen a 4.42 to 6.10 range for most the last 3 months, looks heavy towards 6.10 with interim falling resistance at 5.48 today. Nat Gas seems to be driven more by supply and demand in the local market than risk appetite and as winter is coming to an end the demand should drop and that is weighing on prices lately. Trading below 5 level this morning targets a test of 4.42 level (3 months range low).
Corn Futures: Have seen a volume expansion breakout above 368 level and it looks like a true break out so far with next key resistance being the 380 former support now resistance.
Soybeans Futures: The recent up move almost hit out 985 target, but we see a weak bar Tuesday that is a bit like an up trust, then followed by a weak bar yesterday that is kind of a no demand bar. We expect lower prices near term based on this weakness.
Gold Futures: Monday’s bar showed weakness and suggests that the break above 1128 resistance likely was false break and a daily close below 1098 would confirm this outlook. We note that the chart could be building another lower high and in the process of setting up another down leg to print a lower low? Last low was 1044.
10 Year Treasury Futures : Break below 116.30 was a false one with a strong rally off that base off 116.28. Now targets the 118.30 high from 5th of February and the volume looks strong so far to the upside and would not be surprised to see a break higher.
FX Trading – A “Long” Car Ride with a Gold Bug
About two weeks ago, I unfortunately had to attend a funeral for my wife’s uncle. He was really a great person—fun, intelligent, and a man with real integrity and deep religious conviction. I admired him greatly. My father-in-law gold bug (MFL)—another of my real life heroes – drove with me on the trip to the funeral and back. So I quizzed him along the way about his deep convictions about gold.
The primary reason MFL still likes holding gold is based on a concern we all have—incredible amounts of US debt. He asked me: At what point do people stop buying US bonds with such mounting debt? Of course I had no good answer. MFL believes the probability of a buyers strike for US debt is rising and wants to have gold for insurance if it happens. Can’t argue that one—agreed! The only comment I could muster gets back to the relativity thing: The US ain’t looking so hot, but it does look better when we consider the much greater potential of sovereign default across Europe. (For the record, it does get stale saying things are a bit “less worse” here as an argument.)
His second concern is one many also have—inflation. Being an active investor in the ‘70s, MFL knows all too well the driving force inflation can have on real assets and negative impact on stocks during an inflationary event. MFL’s inflation view is linked tightly to his view on debt. Given the huge debt burden, governments likely only have one way out—inflate it away. Inflation in the end is really the decline in the purchasing power of the currency. The flip-side to that is an appreciation in the price of gold. But one of the problems with the “inflate” their way out argument is the fact that an increasing share of US debt is inflation-linked bonds -- higher inflation doesn’t help there.
I read yesterday a very interesting piece on this topic, written by Gerard Minack of Morgan Stanley, titled, “Default or Inflate or...”. Mr. Minack doesn’t believe it will be as easy to inflate away the problem as it has been in the past. Instead, he believes the government may force banks and institutions to hold more sovereign debt as a way to relieve some of this huge burden; excerpt below:
As we've noted before, inflation doesn't solve a debt problem, unanticipated inflation does: Think of it this way: If a borrower's debt is tied to inflation (along the lines of TIPS), then it's not possible to inflate away the debt. From a macro view, a sovereign can inflate away the debt if the average interest rate on the debt falls below the growth in nominal GDP. (It doesn't matter whether it's volume growth or inflation driving GDP.) This is how the public sector deleveraging after World War II was accomplished. The average interest rate on public debt in the US was below the nominal GDP growth rate.
The key question now is: Can governments get the nominal growth rate above the average interest rate? We're not persuaded that targeting higher inflation will do the trick. In part that's for obvious reasons: it would require a wholesale abrogation of many of the institutional arrangements put in place over the past few decades - such as independent central banks and inflation targets - and the hard-won gains achieved through the disinflation period starting from the early 1980s.
In part we're skeptical because markets are seemingly awake to the risk: Most countries with high debt are already paying interest rates above expected nominal GDP growth. And markets demand a higher premium as debt increases
In the US there is a clear link between nominal GDP growth and the bond yield (and, with a lag, the average actual rate paid on the stock of public debt). As an additional complication, Dick Berner notes that in the US nearly half of budget outlays are now effectively indexed to inflation.
How to push interest rates below nominal growth? Interest rates were below nominal growth rates in the years after World War II, which was also when the public sector accomplished most of its deleveraging. This was largely due to financial regulation. The Federal Reserve, which was not at that stage independent, acted to cap long-end rates at 2.5%. This arrangement ended with the Treasury accord of 19
Regulation may be the answer: Here's our key point: If the way to covertly default is to pay an interest rate below the nominal growth rate, we think it's possible that policymakers will aim to lower the interest rate rather than lift the inflation rate. In a sense, central banks buying government debt are already a small step down that path. A medium-term approach, however, could be to compel private financial institutions to purchase government debt. Such holdings were often mandated (as prudential measures) prior to the deregulation of financial systems in the 1980s.51
In the US, for example, commercial bank holdings of Treasury paper have fallen significantly, both as a percentage of bank assets and as a percentage of the stock of Treasuries on issue. Commercial banks now have a balance sheet of around US$8 trillion. Requiring them to hold 20% of their assets in Treasuries would imply demand for over US$1.5 trillion of Treasury paper. All else equal, this would obviously squeeze the provision of credit elsewhere in the system, unless regulators allowed banks to increase their leverage (which would be justified on the basis that so much of their asset base is in ‘safe assets'). We are not recommending this. But it seems to us that high sovereign debt may be resolved not by a deliberate shift to higher inflation, but by re-regulation that compels buyers to accept uneconomic yields.
My concern is the massive supply we have in the market, in terms of the ability to produce cheap final goods, while there is tepid final demand. Couple that with the continued write-off of private sector debt, and it seems a recipe for deflation -- not inflation. (Whether gold can perform well in deflation is an argument we won’t get into today.)
Another of MFL’s concerns is the stock market. He sees gold as a hedge in case we have a real break in stocks. The problem with that argument, I think, is the fact that gold has correlated tightly with stocks during the last cycle, suggesting it has been part of the liquidity-driven asset continuum that has included all types of risk asset classes. That said, gold did act very well during the worst days of the credit crunch and even appreciated along with the dollar for a while. So, the argument has legs. And it has legs now I think especially because of what is going on in Europe. If you have capital invested in Europe and you don’t like the dollar, gold seems one of the only other real alternatives.
Interestingly, as we were driving, about 18-hours roundtrip, we were listening to the various talk-radio programs. Both of us being conservative—he on the neo-con Kool-aide side (sorry, couldn’t resist), I on the old school paleo-conservative, Russell Kirk side—we enjoyed the various shows; I don’t listen to them at all during the week as the trading screens are more critical. Not to get into the politics of it, what was most interesting is how many darn advertisements there were for gold. It seemed every 10-mintues another “buy gold” commercial aired. Radio talk show hosts better hope gold never falls out of favor or they will lose a big source of ad revenue, was my first thought. My second thought, which I threw out at MFL: Aren’t you concerned when you hear so much advertising to the average investor suggesting now they should buy gold? I’m not sure if he ever answered me on that—other than to laugh
So far, his arguments were very good and solid reasons to own gold. But my last question was this: Is there any economic environment that you can point to that would suggest it’s time to sell gold? MFL gave me the look (the “how did I ever agree to you marrying my daughter” look; I don’t have an answer to that either, but glad he did agree) and a “not really” comment. But then again if MFL had to sell gold, imagine how much work that would be for him, tearing down all the drywall to find it. LOL (For new readers, MFL has used his walls as a hiding place for buckets of precious metals in the past…true story. He wants me also to tell everyone he doesn’t do that anymore, but is beefing up security in case you don’t believe him.)
I understand the arguments for gold. And most of them make great sense. In a world where it seems every government can’t create enough debt or rush to debase its currency fast enough to beggar-thy’s-neighbor on trade, gold is the answer. But, though not perfectly analogous, I remember that in the midst of the Nasdaq-cum E-company boom, it didn’t look as though it would ever end. Analyst after analyst justified the environment as far as the eye could see. If you didn’t own tech stocks you were a moron. This environment was so darn persuasive it led Julian Roberts and George Soros, arguably two of the best hedge fund managers ever, to capitulate right near the top of the Nasdaq boom. They took some major hits.
I guess the lesson to me, and why I am concerned by gold here is this: When you cannot define any environment that would make gold go down, it probably represents some type of sentiment extreme. And we know what Mr. Market likes to do when he sees that—slam!
Have a great weekend. And thanks Dad for a making it a fun and interesting trip Jdespite the event. You’re the best even if you do like gold!
The primary reason MFL still likes holding gold is based on a concern we all have—incredible amounts of US debt. He asked me: At what point do people stop buying US bonds with such mounting debt? Of course I had no good answer. MFL believes the probability of a buyers strike for US debt is rising and wants to have gold for insurance if it happens. Can’t argue that one—agreed! The only comment I could muster gets back to the relativity thing: The US ain’t looking so hot, but it does look better when we consider the much greater potential of sovereign default across Europe. (For the record, it does get stale saying things are a bit “less worse” here as an argument.)
His second concern is one many also have—inflation. Being an active investor in the ‘70s, MFL knows all too well the driving force inflation can have on real assets and negative impact on stocks during an inflationary event. MFL’s inflation view is linked tightly to his view on debt. Given the huge debt burden, governments likely only have one way out—inflate it away. Inflation in the end is really the decline in the purchasing power of the currency. The flip-side to that is an appreciation in the price of gold. But one of the problems with the “inflate” their way out argument is the fact that an increasing share of US debt is inflation-linked bonds -- higher inflation doesn’t help there.
I read yesterday a very interesting piece on this topic, written by Gerard Minack of Morgan Stanley, titled, “Default or Inflate or...”. Mr. Minack doesn’t believe it will be as easy to inflate away the problem as it has been in the past. Instead, he believes the government may force banks and institutions to hold more sovereign debt as a way to relieve some of this huge burden; excerpt below:
As we've noted before, inflation doesn't solve a debt problem, unanticipated inflation does: Think of it this way: If a borrower's debt is tied to inflation (along the lines of TIPS), then it's not possible to inflate away the debt. From a macro view, a sovereign can inflate away the debt if the average interest rate on the debt falls below the growth in nominal GDP. (It doesn't matter whether it's volume growth or inflation driving GDP.) This is how the public sector deleveraging after World War II was accomplished. The average interest rate on public debt in the US was below the nominal GDP growth rate.
The key question now is: Can governments get the nominal growth rate above the average interest rate? We're not persuaded that targeting higher inflation will do the trick. In part that's for obvious reasons: it would require a wholesale abrogation of many of the institutional arrangements put in place over the past few decades - such as independent central banks and inflation targets - and the hard-won gains achieved through the disinflation period starting from the early 1980s.
In part we're skeptical because markets are seemingly awake to the risk: Most countries with high debt are already paying interest rates above expected nominal GDP growth. And markets demand a higher premium as debt increases
In the US there is a clear link between nominal GDP growth and the bond yield (and, with a lag, the average actual rate paid on the stock of public debt). As an additional complication, Dick Berner notes that in the US nearly half of budget outlays are now effectively indexed to inflation.
How to push interest rates below nominal growth? Interest rates were below nominal growth rates in the years after World War II, which was also when the public sector accomplished most of its deleveraging. This was largely due to financial regulation. The Federal Reserve, which was not at that stage independent, acted to cap long-end rates at 2.5%. This arrangement ended with the Treasury accord of 19
Regulation may be the answer: Here's our key point: If the way to covertly default is to pay an interest rate below the nominal growth rate, we think it's possible that policymakers will aim to lower the interest rate rather than lift the inflation rate. In a sense, central banks buying government debt are already a small step down that path. A medium-term approach, however, could be to compel private financial institutions to purchase government debt. Such holdings were often mandated (as prudential measures) prior to the deregulation of financial systems in the 1980s.51
In the US, for example, commercial bank holdings of Treasury paper have fallen significantly, both as a percentage of bank assets and as a percentage of the stock of Treasuries on issue. Commercial banks now have a balance sheet of around US$8 trillion. Requiring them to hold 20% of their assets in Treasuries would imply demand for over US$1.5 trillion of Treasury paper. All else equal, this would obviously squeeze the provision of credit elsewhere in the system, unless regulators allowed banks to increase their leverage (which would be justified on the basis that so much of their asset base is in ‘safe assets'). We are not recommending this. But it seems to us that high sovereign debt may be resolved not by a deliberate shift to higher inflation, but by re-regulation that compels buyers to accept uneconomic yields.
My concern is the massive supply we have in the market, in terms of the ability to produce cheap final goods, while there is tepid final demand. Couple that with the continued write-off of private sector debt, and it seems a recipe for deflation -- not inflation. (Whether gold can perform well in deflation is an argument we won’t get into today.)
Another of MFL’s concerns is the stock market. He sees gold as a hedge in case we have a real break in stocks. The problem with that argument, I think, is the fact that gold has correlated tightly with stocks during the last cycle, suggesting it has been part of the liquidity-driven asset continuum that has included all types of risk asset classes. That said, gold did act very well during the worst days of the credit crunch and even appreciated along with the dollar for a while. So, the argument has legs. And it has legs now I think especially because of what is going on in Europe. If you have capital invested in Europe and you don’t like the dollar, gold seems one of the only other real alternatives.
Interestingly, as we were driving, about 18-hours roundtrip, we were listening to the various talk-radio programs. Both of us being conservative—he on the neo-con Kool-aide side (sorry, couldn’t resist), I on the old school paleo-conservative, Russell Kirk side—we enjoyed the various shows; I don’t listen to them at all during the week as the trading screens are more critical. Not to get into the politics of it, what was most interesting is how many darn advertisements there were for gold. It seemed every 10-mintues another “buy gold” commercial aired. Radio talk show hosts better hope gold never falls out of favor or they will lose a big source of ad revenue, was my first thought. My second thought, which I threw out at MFL: Aren’t you concerned when you hear so much advertising to the average investor suggesting now they should buy gold? I’m not sure if he ever answered me on that—other than to laugh
So far, his arguments were very good and solid reasons to own gold. But my last question was this: Is there any economic environment that you can point to that would suggest it’s time to sell gold? MFL gave me the look (the “how did I ever agree to you marrying my daughter” look; I don’t have an answer to that either, but glad he did agree) and a “not really” comment. But then again if MFL had to sell gold, imagine how much work that would be for him, tearing down all the drywall to find it. LOL (For new readers, MFL has used his walls as a hiding place for buckets of precious metals in the past…true story. He wants me also to tell everyone he doesn’t do that anymore, but is beefing up security in case you don’t believe him.)
I understand the arguments for gold. And most of them make great sense. In a world where it seems every government can’t create enough debt or rush to debase its currency fast enough to beggar-thy’s-neighbor on trade, gold is the answer. But, though not perfectly analogous, I remember that in the midst of the Nasdaq-cum E-company boom, it didn’t look as though it would ever end. Analyst after analyst justified the environment as far as the eye could see. If you didn’t own tech stocks you were a moron. This environment was so darn persuasive it led Julian Roberts and George Soros, arguably two of the best hedge fund managers ever, to capitulate right near the top of the Nasdaq boom. They took some major hits.
I guess the lesson to me, and why I am concerned by gold here is this: When you cannot define any environment that would make gold go down, it probably represents some type of sentiment extreme. And we know what Mr. Market likes to do when he sees that—slam!
Have a great weekend. And thanks Dad for a making it a fun and interesting trip Jdespite the event. You’re the best even if you do like gold!