PM Daily Market Commentary - 2/28/2018

davefairtex
By davefairtex on Thu, Mar 1, 2018 - 2:36am

Today, gold rose +0.20 [+0.02%] to 1319.40 on moderate volume, while silver lost -0.01 [-0.06%] to 16.42 on light volume. The dollar continued moving higher, up +0.28% to 90.24.

Today was month end, and so I figured I'd show some of my monthly charts.  Some of them haven't updated fully yet (they take as inputs metadata from various sectors that update only later) but it should give you a sense as to where the longer term trends are.

The trading range for gold today was quite narrow; the doji candle print was a bearish continuation. Forecaster rose +0.17 to -0.33. That's an improvement, possibly because gold managed not to collapse while the dollar moved higher.  Monthly chart shows gold in an ascending triangle pattern, with resistance at the previous high of 1377.50.  The monthly forecaster looks as though it is just about to reverse into a downtrend.

COMEX GC open interest fell -3,212 contracts today.

Rate rise chances (March 2018) fell to 85%.

Silver also had a narrow trading range today, printing an inside-day (neutral) doji candle. SI forecaster jumped higher, up +0.20 to -0.03. That's almost a buy signal for silver.  The monthly chart is quite bearish, showing a descending triangle pattern; last month's almost-breakout has reversed, and silver is now moving strongly lower.  Will the old 15.75 support level hold - it is an important question, especially if the dollar starts to take off more vigorously.  You can see why the gold/silver ratio is so high - silver's chart pattern looks bearish, while gold's pattern is bullish.

COMEX SI open interest fell -1,225 contracts today.

The gold/silver ratio rose 0.06 to 80.35 That's neutral.

Miners tried to rally but failed, with GDX off -0.65% on moderately light volume, and GDXJ down -0.44% on very light volume. Trading range for the miners was narrow as well, with both ETFs printing short black candles. XAU forecaster moved up +0.06 to -0.29; that's still a downtrend. Still no real buyers for mining shares.  The monthly chart shows that XAU followed through to the downside off last month's sell signal.  We can also see that the forecaster spent most of 2017 in a downtrend.  This suggests to me that momentum for the mining shares remains down.  A break below the lower uptrend line could lead to a lot of selling, and would probably happen if the dollar starts to rally more strongly.

Today, the GDXJ:GDX ratio rose, while GDX:$GOLD ratio fell. That's bearish.

Platinum rose +0.03%, palladium moved up +0.55%, while copper plunged -1.68%. Copper is back to looking weak, and that doesn't bode well for the metals group overall. It was a big drop today in copper. I'm a bit surprised silver was hit harder, since it sometimes will follow copper.

The buck rose up to the double bottom confirmation line, poking briefly above it, and closing +0.25 [+0.28%] to 90.24. It seems likely that a confluence of factors will conspire to drive the buck through 90.29 – including Powell's apparent support for 4 rate hikes this year, political issues in Europe, and Draghi's insistence that he will continue his bond-buying program.  On the monthly chart, you can see the dollar's fairly dramatic decline from the highs at 103 down to the current 90 level, where it looks as though it may be preparing to reverse higher.  The 13% drop in the buck more or less caused the 18% rally in gold during 2017.  If the buck reverses significantly, I'd expect gold to decline, unless we see a crack in confidence.

Armstrong suggests that the bond-buying campaign in Europe has less to do with the official reason of "causing inflation", and much more to do with monetizing the debts of the Eurozone nations that otherwise would probably end up entering a sovereign debt crisis:

https://www.armstrongeconomics.com/international-news/europes-current-economy/draghi-admits-he-cannot-stop-buying-govt-debt/

Draghi realizes that he is subsidizing the European governments. He is not stimulating the economy, he simply has them on life-support. Stopping the bond program will lead to a major crisis when there is NO BID for government bonds. Not only will Draghi keep buying government debt, he will be repurchasing debt that has expired. He will not reduce the balance sheet as the Federal Reserve is doing.

Armstrong suggests that Draghi cannot stop his money printing operation. He believes that the money printing operation is just a cover. What happens when the market figures this out?  That's dollar-positive for sure.  Armstrong is a great resource to keep us from focusing too exclusively on troubles in the US.

Crude followed through off yesterday's swing high/forecaster sell signal, dropping -1.29 [-2.05%] to 61.55. The bearish-looking EIA report didn't help [crude +3m, gasoline +2.5m, distillates -1m].   Although the daily forecaster is in a downtrend, when we look at the monthly chart, we see that crude bottomed out in early 2016, and pretty much hasn't looked back.  It does appear to be encountering some selling pressure above 60, but the forecaster still sees the longer term trend as up.

SPX fell -30.45 [-1.11%] to 2713.83. The big move resulted in a swing high candle print, and caused forecaster to drop -0.20 to +0.19. It also took SPX through both the 9 and 50 MA lines. That all sounds pretty unpleasant. Sector map reveals energy led lower (XLE:-2.30%) along with materials (XLB:-1.78%) while cyclicals did “best” (XLY:-0.45%).

While the daily remains in an uptrend, at least for now, the monthly chart shows a relatively rare sell signal; while the rebound off the lows was significant, creating a large lower shadow, it wasn't enough to convince the forecaster to remain in an uptrend.

VIX rose +1.26 to 19.25.

TLT did well today, rising +0.64% - the highest close for TLT in 8 trading days. This is a swing low for TLT. Forecaster issued a buy signal several days ago. TY isn't doing quite as well, up +0.20%, but it did manage to rise back above its 9 MA, which is a positive sign. TY forecaster remains in a downtrend, although it appears to be trying to recover.  Still, if bonds are putting in a low, they sure are taking their time about it.  The monthly chart tells us why - bonds have continued dropping after the breakdown in January, with no sign of a rebound.

If I look at the recent correlations for TY, positive correlations include: silver, utilities, gold, and platinum. Negative correlations include: junk bond rates, 1-year rates, the gold/silver ratio, SPX, lumber, and AUD. SPX isn't the strongest influence – that's reserved for junk bond rates (BAA), with the 1-year yield (GS1) next on the list. These are available from FRED if you want to track them yourself, and are updated daily.

https://fred.stlouisfed.org/series/DBAA

https://fred.stlouisfed.org/series/DGS1

JNK fell -0.08%, stopping right at the 9 MA. JNK forecaster fell -0.25 to +0.06, but remains just barely in an uptrend. JNK is doing surprisingly well given the sell-off in equities and crude oil.

CRB fell -0.74%, with 4 of 5 sectors falling, led lower by energy (-2.45%). PM was actually one of the better performers on the day, down just -0.06%. Industrial metals, livestock, and energy all look as though they are entering downtrends, with livestock looking weakest. Agriculture is the sole source of good news.

It looks as though the buck has figured out where it is going – and that's up. While PM managed to avoid disaster today, the miners are hinting that this is not likely to continue if the buck continues to rally. I read various pundits who say “the Fed can't possibly raise rates” but my sense is, they are going to continue doing just that. And we may get 4 rate increases rather than just 3.

Over the long haul (i.e. since 1984), rising 1-year and 10-year rates are modestly positive for the buck. Rising commodity prices are a negative influence on the dollar, with rising gold prices being the worst.

Currently there appears to be a concern about an oversupply of bonds driving USD bondholders to sell, putting pressure on USD. Once that selling pressure abates, rising rates should pull people back into the currency, especially when they compare it to what they can earn holding Euros, which is the competition for the buck - at least for big money.

Shorter term, there are the Italian elections, as well as the SPD vote in Germany this weekend. I expect the buck will continue to move higher ahead of events this weekend.

That's probably not great for gold, unless the safe haven thing starts to happen.

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2 Comments

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 6 2009
Posts: 601
own hard assets

In a striking interview with Goldman's Allison Nathan, legendary trader Paul Tudor Jones argues that US inflation is set to accelerate sharply, making bonds a very poor investment, and that the Fed must act swiftly to tackle financial bubbles created by prolonged monetary easing.

Joining such luminaries as Bill Gross and Ray Dalio, who have both claimed the bull market in bonds is over, PTJ joins the choir and warns that "markets disciplined Greece for its budget transgressions; it’s just a matter of time before they discipline us" and as a result he sees the 10-year yields rising to 3.75 percent by year-end as a “conservative” target amid the now traditional and widely discussed bogeymen: supply outweighing demand, economic momentum outpacing the monetary policy response, and "glaring" bond valuations. Oh, and central banks ending the party, of course:

Beginning next September, when the ECB concludes its asset purchases, the aggregate balance sheet of the main central banks will start contracting after nearly a decade of expansion. That will be a major data break, making it a horrible time to own bonds.

PTJ also pours cold water on the repeated suggestion that higher yields will lead to more buying from pension funds: "Bond pension buying, for example, is very pro-cyclical. When stock prices rise, pensions reallocate their capital gains from stocks into bonds. As we’ve seen, this depresses the term premium and fuels more gains in the stock market. If and when the Fed raises rates enough to stop and reverse the stock market rise, that virtuous circle predicated on increasing capital gains will reverse, and bonds and stocks will decline together like they did in the 1970s."

The biggest factor, however, which is preventing PTJ from owning any risk assets is today's unnaturally low rates: "with rates so low, you can’t trust asset prices today. And if you can’t tell by now, I would steer very clear of bonds."

There is another reason PTJ is not deploying capital: last month's vol shock was just the beginning:

In my view, higher volatility is inevitable. Volatility collapsed after the crisis because of central bank manipulation. That game’s over. With inflation pressures now building, we will look back on this low-volatility period as a five standard- deviation event that won’t be repeated.

When would Tudor buy stocks? "When would I want to buy stocks? When the deficit is 2%, not 5%, and when real short-term rates are 100bp, not negative"... in other words not for a while.

 

Something strange is going on in the financial system. And according to The Wall Street Journal, it’s causing some investors to move massive amounts of money out of the banking system.

So what is he buying: "I want to own commodities, hard assets, and cash... The S&P GSCI index is up more than 65% from its trough two years ago. In fact, relative to financial assets, the GSCI is at one of its lowest points in history. That has historically been resolved by commodities putting on a stunner of a show, stoking inflation. I wouldn’t be surprised if that happened again."

In other words, PTJ and Gundlach agree on two things: stay away from bonds, and buy commodities.

But the most notable part of the interview, and where PTJ's most apocalyptic sentiment shines through, is his description of where he sees Fed Chair Powell right now: as General Custer before the Battle of Little Big Horn, a battle which - at least in the history books - was lost.

Let me describe to you where I think Jerome Powell is right now as he takes the reins at the Fed. I would liken Powell to General George Custer before the Battle of the Little Bighorn, looking down at an array of menacing warriors. On the left side of the battlefield are the Stocks—the S&P 500s, the Russells, and the NASDAQs—which have grown, relative to the economy, to their largest point not just in US history, but in world history. They have generally been held at bay and well-behaved, but they are just spoiling to show their true color: two-way volatility. They gave you a taste of that in early February. Look to the middle and there waits the army of Corporate Credit, which is also larger than ever relative to the economy, as ultra-low rates have encouraged it to gain in size, stature, and strength. This army is a little more docile right now, but we know its history, and it can be deadly when stressed. And then on the right are the Foreign Currency Fighters, along with the Crypto Tribe, an alternative store of value that only exists because of the games central banks are playing; the opportunity cost of Crypto is so low, why not own some? The Foreign Currency Fighters have strengthened by 10% over the past year. Compounding the problem, they have a powerful, ascending leader, the renminbi, to challenge the US dollar’s hegemony as the reserve currency. All of these forces have been drawn to the battlefield because of our policy experiment with sustained negative real rates.

So Powell looks behind him to retreat. But standing there is none other than Inflation Nation, led by the fiercest warmongers of them all: the Commodities. He might take comfort that he is not alone on the battlefield. But then he looks over at the Washington, DC, fiscal battalion and realizes they are drunk on 5% deficit beer. That’s what Powell is facing, whether he recognizes it or not. And how he navigates this is going to be fascinating to watch.

https://www.zerohedge.com/news/2018-03-01/apocalyptic-paul-tudor-jones-warns-fed-about-lose-control

Giant Elk's picture
Giant Elk
Status: Member (Offline)
Joined: Dec 13 2014
Posts: 18
SPX

Wow that is a great chart for SPX. I'd love to fast forward 6 months on that.

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