PM Daily Market Commentary - 6/27/2017

davefairtex
By davefairtex on Wed, Jun 28, 2017 - 4:08am

 

Gold rose +2.20 [+0.18%] to 1247.50 on moderately heavy volume, while silver rose +0.05 [+0.33%] to 16.68 on very heavy volume. While both metals moved higher, the buck was crushed, falling -1.02 [-1.05%] to 96.09. This means that, in Euro terms, both gold and silver fell.

The Euro rally was the big news of the day, driven by ECB Chair Draghi's hints that the ECB would act soon to further taper the ECB money printing exercise. This caused the Euro to scream higher, up +1.36%, breaking out to levels not seen since August 2016. This is what crushed the dollar. Draghi's statement also hammered bond prices: German 10Y: +11bp, France +13bp, Italy +17bp, Spain +13bp, Portugal +15bp. US 10 year bond yields rose +7bps. (Bond yields rise = bond prices drop). If the Big Dog ECB decides he's not hungry anymore, price of dog food will plunge, and that's what happened today. Run, don't walk, from that Euro-denominated debt. Starting a QE program is easy. Everyone loves you. Ending one – less easy. And the kicker?

All those bonds that the ECB has on its balance sheet just lost value. If they bought them above par, which they almost certainly did, even if they hold them to maturity they will end up taking a loss. And if the market's taper tantrum becomes more extensive, the losses could get fairly dramatic. At first, this will just reduce the payments sent to the member nations. Eventually, it will result in a bill. Germans will love that.

When viewed in USD, gold did all right, trading in a fairly wide trading range but ending the day mostly unchanged. Candle print was a spinning top, which did not form any notable pattern. The forecaster ticked slightly lower, pulling gold just a few points into bear territory. This doesn't seem so bad.

However if you go across to Europe and see the chart there, you (might) gasp in horror when you see how gold broke support today. Gold chart in Euros looks terrible. The assault yesterday, just before the European trading hours started, makes a bit more sense now. It could be that someone wanted to start a more serious break through support. Perhaps they knew a day early what Draghi was going to say. FWIW, I ran a forecast on gold-in-Euros: it was relatively bearish, with a rating of -0.31.

Open interest at COMEX for GC rose +6,288 contracts. Commercials loading up short, I think.

Rate rise chances (Dec 2017) jumped to 47%.

Silver did a bit better than gold, but like gold it was unable to rally more than the drop in the buck might have suggested. Candle print was an opening white marubozu, but it made no new high or low so the candle code had no opinion on direction. The forecaster actually thought it was a bullish outcome, rising +0.23 and moving silver deeper into bullish forecast territory. Silver closed right at its 9 EMA.

Open interest at COMEX for SI rose +2,826 contracts. Commercials still seem to be leaning short.

The gold/silver ratio fell -0.12 to 74.79. That's bullish.

Miners gapped up at the open on gold's intraday rally, but then spent the day selling off fairly hard. GDX dropped -1.33% on moderately heavy volume, and GDXJ fell -0.74% on very light volume. Candle code saw a big closing black marubozu for both ETFs, and felt both were more bearish than bullish, although not by as much of a margin as I would have expected. Forecasters for both GDX and GDXJ remain bullish, although GDX is now approaching a bearish crossover.

The GDXJ:GDX ratio rose, which is bullish, but the GDX:$GOLD ratio plunged, and that's bearish. Junior miners continue to do well – substantially better than the seniors.

Platinum rose +0.32%, palladium dropped -1.07%, and copper rose +0.78%. Both palladium and platinum are in a “no-mans land” trying to determine direction, while copper is in a distinct short term uptrend.

As mentioned, the buck was crushed, dropping -1.02 to 96.09, making a new closing low for this year. The move was dramatic, and driven by the ECB's hints that a QE taper is in the offing. Capital flows out of bonds – both US and European – were fairly dramatic. It appears that traders are (as usual) preparing to front-run the central banks. The USD forecaster dropped deeply into bearish territory. Full points to the forecaster for picking up yesterday an increasingly bearish tone even though price actually rose. Yesterday I didn't know why it did that; I guess something in the pattern or the correlations with other asset classes and currencies caused it to point lower.

Crude rallied again – moving up sharply during the trading day, but then selling off after market close after a bearish-looking API report came out that had a 851k barrel inventory build, which caused crude to plunge about 50 cents. The day ended with crude up +0.23 [+0.53%] to 43.72. Candle print was a shooting star, but somewhat shockingly, the candle code did not find this to be bearish. My code surprises me all the time. The forecaster, which also knows about candles, wasn't worried about the shooting star either, and moved solidly into bullish territory. Crude remains below its 9 EMA. We await the EIA report tomorrow at 10:30. If we get a bearish report, and crude manages to hang on, that will be the buy signal. When markets stop selling off on bad news, that's when you buy.  We will see tomorrow if the forecaster's enthusiasm is warranted.

An article from oilprice.com helps with the bearish sentiment – it talks about energy company junk debt and how oil in the 30s would potentially cause a great deal of trouble: http://oilprice.com/Energy/Energy-General/30-Oil-Could-Spark-Contagion-In-Energy-Markets.html

As an example junk-debt trade, there is a Noble Corp (offshore drilling company) 10Y bond with a 7.75% coupon trading at 77 right now. That's a 10% effective yield. The bond has plunged 20 points in the past few months, as the oil price has plummeted. If you think oil will rebound before NE goes bankrupt, you stand to gain 30% on your bond's face value. In the meantime you are paid 10% per year for the next 9 years.  Assuming they don't go bankrupt.  [I have a small position. Definitely not advice!]. Of course if oil keeps dropping, so will the price of this bond.

SPX was hit hard today, falling -19.69 to 2419.38. Candle print: a swing high, with a 50% chance of marking a top. The 3-day forecaster is now solidly bearish, and even the 10-day forecaster (which doesn't signal all that often) is now in bearish territory. So far all the bearish signals have been headfakes, but with central bankers set to reduce liquidity, its entirely possible that “this one is for real.”

Tech did worst (XLK:-1.64%) along with utilities (XLU:-1.12) while financials were the sole sector in the green (XLF:+0.50%). DB did especially well, up +3.73%. Banks in Europe really don't like negative yields, and the prospect of the ECB providing them less-negative yields makes them happy. Still, the selling in tech is concerning. They are typically market leaders, and if they start to drop (and they have been sharply underperforming recently), it could become meaningful. This is risk off.

VIX jumped +1.16 to 11.06. That's still really cheap, given the brisk sell-off today.

TLT had a bad day, dropping -1.07% and printing a two-candle swing high that the code assigns a 77% chance of marking the top. The bond rally may be over. TLT's forecaster plunged a massive -0.95 points and is now quite bearish. TLT is now below its 9 EMA. This might be an over-reaction from Draghi's statement; we'll have to see how things go tomorrow.  I think this is mostly about foreign money fleeing US assets.  Same thing with the drop in utilities.

JNK fell -0.24%, plunging even though oil moved higher during the day. That suggests to me that this is foreign money selling US junk – possibly too JNK debt is worried at the equity market selling off also. JNK is saying risk off.

CRB rose +0.86%, climbing for the third day in a row. 4 of 5 groups rallied, with energy in the lead. Industrial metals did well also – they have been on a minor tear, up 6 of the last 8 days, and the best performing commodity sub-index. Is this a low or just a dead cat bounce for CRB?  Today's move is probably just about currency - since commodities are priced in USD.

I don't think the market is concerned right now about war.  We are at a low for volatility expectations; everything is muted right now, the bots are taking care of the trading, while the traders just watch.  That's my sense.  Every geopolitical bet has not paid off for quite a while now, so traders have stopped making them.  When something works, the market keeps doing it - right up until it stops working.

We have a potential rebound in crude, and silver looks good, but gold has plunged through support over in Europe, and the (senior) miners are back to looking weak once again. Even though the buck is now dropping hard, gold does not seem to be much of a beneficiary.

Now yesterday's big gold smash makes a bit more sense, when I look at it from the Euro perspective. My thought: the plan was to drive gold through support to prepare the ground, and/or position the bankers to be more heavily net short in advance of Draghi's taper-statement. Less money printing from the ECB would seem to be gold-negative. The build-up of open interest in the days before the smash also might tie in with this overall theme.

If the buck continues to move lower, this may continue to be mildly gold positive in USD terms, but it might be tough for the miners to gain traction with half of the world deciding they aren't the place to be. And if gold continues to sell off in Euros, it means gold's upside in USD will probably be limited.

On the other hand, if the falling prospects for liquidity pull equity prices lower, gold could attract that safe haven bid right back again.

So I'm on the fence.  It might all depend on equities and where they go next.  Is Draghi's statement the pin that pops the bubble - and finally brings back some volatility?  Puts are cheap...

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10 Comments

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 380
Reverse

Gold, silver, the dollar, the euro, and equity futures just reversed on a dime.  Why?

vadim_75's picture
vadim_75
Status: Bronze Member (Offline)
Joined: Oct 18 2015
Posts: 48
Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 380
Thanks Vadim

Lol so the markets "misjudged" Draghi's comments and sold some stuff.  So they come out and jawbone it back the other way.  Wonder when this is going to stop working?  Anyway, too funny!

vadim_75's picture
vadim_75
Status: Bronze Member (Offline)
Joined: Oct 18 2015
Posts: 48
"the plan was to drive gold

"the plan was to drive gold through support to prepare the ground, and/or position the bankers to be more heavily net short in advance of Draghi's taper-statement"

Dave, don't you think it's much easier and more profitable just to be long euro in this case? 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1469
Cold Rain wrote: Gold,
Cold Rain wrote:

Gold, silver, the dollar, the euro, and equity futures just reversed on a dime.  Why?

HFT computers scanning web financial fake news.

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 380
Miners are the tell

We're about to get another famous Dave "run don't walk" call, I'm afraid.  Miners are sucking wind, looking like another nice leg lower is likely very soon.

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5969
Classic

Here's my headline for the day, if I were to write one

Central bankers flap gums, stocks up, gold down.  ""investors"" display renewed faith in central planning, awesome god-like powers of money printers.

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5683
driving gold

Vadim-

Dave, don't you think it's much easier and more profitable just to be long euro in this case?

From a technical standpoint, I'm guessing its easier to skim money from a smaller market you can control vs the larger market with a lot more players that you cannot.

I mean, this is something I don't know for certain, but from what I've seen, commodities markets have very different market dynamics vs forex, bond, and equity markets.  Anyone seen any big sharp spikes in the forex markets?  In the bond markets?  Equities?  No.  Not unless there is some massive announcement.

If this happened in equities, it would hurt confidence in a "good" market, and that's a no-no.  Gold isn't a "good" market, its a safe haven, and so hurting confidence there is in some sense helpful to the "risk on" cause they are supporting.  I mean, I saw what they did after BRExit.  They absolutely unloaded short.  That's what the numbers said.

Not like 4am on Monday when a "fat fingered" trade blew through support, and along with it all the long stops one day before Draghi starts talking about tapering, and three days before first notice day.

Also, the massive short interest in silver dwarfs anything in any other market that I watch.  I don't think they are doing that for health.  It nets them something, but I'm not sure what the cash-in mechanism is.

I was amused that they walked the Draghi speech back.  He tried a trial balloon, and it got shot full of holes by the markets.  "Stupid traders, they really don't want to own all those sovereign bonds without us as the primary buyer.  Who would have thought?"

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5683
EIA report

Looks like a mildly bearish EIA report today: +0.1M barrel crude build, -0.9M barrel gasoline draw.  Since a more bullish report sent the oil market selling off in a frenzy last week, and this week we get a rally, I must conclude that the bulk of the selling pressure is now past.  At least for now anyways.

Forecaster wins!  Victory lap time!

 

Cold Rain's picture
Cold Rain
Status: Gold Member (Offline)
Joined: Jul 26 2016
Posts: 380
Forecaster did a good job

Congrats!  DXY with a 95 handle.  Interesting to see gold and silver move down hard when the dollar rises a few pennies, but when it's down like a percent or half of a percent, gold and silver rise slightly.  Actually, I'm impressed with both metals today finishing green, although gold's showing was pretty pathetic.  And the miners didn't crater either.  Guess they're setting us up for a lower high here so they can slam the metals back down in the next few days.

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