PM Daily Market Commentary - 8/9/2018

By davefairtex on Fri, Aug 10, 2018 - 6:59am

Gold fell -1.69 [-0.14%] to 1220.61 on moderate volume, while silver rose +0.02 [+0.10%] to 15.46 on moderate volume also. The buck shot higher [+0.49%], but somehow gold and silver managed to resist the pull of the currency.  How did that happen?  One word: Turkey.

The sharp move higher in the buck, up +0.46 to 95.12 – the first close above 95 for more than a year – is a sign that something is not right. The problem is the Euro, which plunged -0.72%, dropping down to 115.29, which is right on the edge of a breakdown for the Euro. As I am writing this, in Asia trading the Euro has continued to plunge, and has dropped clean through 115 support, making a new low to 114.31. The buck has blown through 95 resistance and is now trading at 95.83.  The chart below shows the weekly as of yesterday's imagine another +0.45 added to the top.  The buck looks to be conclusively breaking higher.

This is about the debt and currency crisis in Turkey, which was quietly disintegrating, reported occasionally on the back pages of the business section (a newspaper metaphor?  really?) until Trump decided to impose sanctions on specific individuals in Turkey in order to extricate some US pastor who has been arrested by the Erdogan government. As a result, contagion is now spreading to Europe; traders have figured out that a real currency & sovereign debt crisis in Turkey (which has been in progress for a while) will cause the failure of some important banks in the EU – and those banks cannot be bailed out by the same trickery used in 2010 on Greece. Do we imagine that Erdogan will permit the IMF to come in and do its usual disaster capitalism trick? My gut says no. Anyhow, the fuss has caused some recent, serious capital flight from Europe to the US.  Here's what the TRY/USD looks like - it has dropped 50% in a year (50% is a huge move!) and 7% over the past two weeks.  Turkey is in deep doo doo.

It's always the swan that's not on the list that causes the trouble, right?

Gold largely chopped sideways, drifting lower at end of day. The spinning top candle was slightly bearish, and the newly-recalculated gold forecaster edged lower – and remains in a downtrend. Gold in Euros jumped +0.58% today, when measured at the close in New York. Gold remains in a downtrend in all 3 timeframes. That said, gold looks to be doing remarkably well given the strong moves in the buck. This tells me that gold in Euros is moving strongly higher.

COMEX GC open interest rose 3,234 contracts.

Rate rise chances (September 2018) rose to 96%.

Silver also chopped sideways, doing slightly better than gold and managing to close a bit higher than the open. The spinning top candle was neutral, and the silver forecaster ticked down -0.03 to -0.03, which means silver remains in a very slight downtrend. Silver is just slightly above the 9 MA, and silver weekly is showing a buy signal this week, assuming prices close here.

COMEX SI open interest rose 6,080 contracts. That's a 3% increase, or about 12 days of global supply. The continual increase in selling pressure from the managed money shorts continue to keep silver from moving higher. That's my belief anyway, based on the heavy, daily increase in open interest.

The gold/silver ratio fell -0.21 to 78.65. That's somewhat bullish.

Miners rallied early, then sold off for the rest of the day; GDX dropped -0.24% on moderately heavy volume, while GDXJ climbed +0.27% on moderate volume. XAU moved up +0.09%, but the high wave candle had a very long upper shadow, indicating a failed rally. Still, the forecaster climbed +0.23 to -0.06, which suggests that the miners are about to reverse higher. Maybe. Miners remain in a downtrend in all 3 timeframes.

The GDXJ:GDX ratio rose +0.27%, and the GDX:$GOLD ratio fell -0.10%. That's very slightly bullish.

Platinum rose +0.19%, palladium climbed +0.62%, and copper moved up +0.36%. Both copper and platinum appear to be (slowly) putting in a low, while palladium has a bit more work to do before it reverses – although the bullish harami in palladium is fairly bullish (42% reversal). With the buck up so strongly, this was a decent move in the metals, although the candle prints definitely show signs that the currency moves definite affected metals prices.

After being creamed yesterday, crude tried to rally but failed, closing down -0.10 [-0.15%] to 65.90. It was a fairly feeble rally attempt, and it didn't really go anywhere. I'm still trying to figure what caused the big drop yesterday. Its not just a US-oil issue; both WTIC and Brent both dropped hard yesterday. Crude forecaster fell an additional -0.18 to -0.44. Oil is at risk of breaking below 66 support; if that happens, we could see a brisk $2 drop down to the next support level at 64. We may have higher oil prices in our future, but the near term doesn't look so great. Crude is in a downtrend in both daily and weekly timeframes.

SPX fell -4.12 [-0.14%] to 2853.58. It was a fairly uneventful day; the short black candle was neutral, SPX forecaster fell but remains in a relatively strong uptrend. Materials led (XLB:+0.54%) while energy trailed (XLE:-0.93%) along with financials (XLF:-0.60%). This looked a bit bearish.

VIX rose +0.42 to 11.27.

TLT shot up +0.84%, moving higher as a part of the flight to safety. TY also moved higher, up +0.20%. The 10-year yield fell -3.6 bp to 2.94%. Bonds remain in no-mans land, with the daily and monthly pointing higher, and the weekly pointing lower. But if this crisis in Turkey worsens, I'd expect to see a strong move higher in US treasury bonds as money flees Europe for the US.

JNK fell -0.17%, printing a swing high, a confirmed bear NR7 (43% reversal), with the forecaster moving lower but not yet in a downtrend. JNK doesn't like debt crises very much, it would seem.

CRB fell -0.32%, with 4 of 5 sectors moving lower, led by energy (-0.38%). It was a fairly minor move in commodities today. CRB remains in a downtrend, below all 3 moving averages.

So how will the unfolding crisis in Turkey affect the assets we normally watch? Here's what I see unfolding in real time - right now:

  • USD - bullish [+0.49%]

  • Bonds – bullish [+0.44%]

  • Crude – neutral [+0.18%]

  • Gold – neutral [-0.14%]

  • SPX - bearish [-0.43%]

  • Euro/USD - bearish [-0.44%]

  • Silver - bearish [-0.56%]

  • Copper - bearish [-0.67%]

So its pretty much what you'd expect. Risk assets get hit, safe haven assets (USD, US treasury bonds, and gold) do well, with crude somewhere in the middle.

Things are now getting interesting. Can the ECB print its way out of a Turkish sovereign debt & currency crisis? Will the Eurozone countries bail out their banks that have large investments in Turkey? Or will they risk contagion?

Some really interesting things might happen this weekend.  That's usually when the exciting stuff happens...this could be gold's catalyst...

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davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5860
TRY/USD (turkish lira) -16%

The Turkish Lira is down 16% just today - a truly massive move for a pretty important country.  This has dragged the Euro down -1.14%, while gold is flat (rallying strongly in Euros), and silver is off -0.85%.

I'm not sure what the knock-on effects of this currency move will be, but I'm sure it will blow someone up, somewhere.  Nobody really expects a semi-major currency to blow out like this; any institutions on the wrong side of derivatives on this currency are going to take enormous losses.

Dragging the Euro down more than 1% is an indication of just how serious this currency move is.

What happens over the weekend?  That's the question.



DennisC's picture
Status: Gold Member (Offline)
Joined: Mar 19 2011
Posts: 363
Pull It

I'm curious to see what gets pulled out of the hat this time, if anything, or what the various "sphincters" involved can pull together on this one.  This article from ZH this morning had some useful background for me and the scope of potential "contagion".

Meanwhile, Turkey continues to pretend that all is well, and on Thursday the Turkish finance ministry said that the banking sector was protected by its robust capital structure and balance sheets. “Contrary to the speculative statements being made in the market about our banks and our companies, our regulatory institutions do not see a problem posed by the exchange rate or liquidity risks."

As the FT adds, according to cross-border banking statistics from the Bank for International Settlements, local lenders, including foreign-owned subsidiaries, have dollar claims worth $148bn, up from $36bn in 2006 and euro claims worth $110bn. Spanish banks are owed $83.3bn by Turkish borrowers, French banks are owed $38.4bn and Italian lenders $17bn in a mix of local and foreign currencies. Banks’ Turkish subsidiaries tend to lend in local currency.

I'm wondering if all the "furiners" are sending their great uncle Samuel lots of money today.  I noticed the 10-yr. treasury is down almost 2%.

debu's picture
Status: Silver Member (Online)
Joined: Aug 17 2009
Posts: 242
Turkey and Contagion Risk

Good commentary by Tom Luongo on the Turkey situation.

I've recently added Gold, Goats 'n Guns to my reading list because I find Luongo's thinking on geopolitics and markets interesting and orginal.

Having said that, he pooh-poohs peak oil (and once called out CM by name for "scaremongering" on the topic!!??) and dismisses climate change out of hand so as always caveat lector! There are vanishingly few analysts out there who have everything right...

sand_puppy's picture
Status: Diamond Member (Online)
Joined: Apr 13 2011
Posts: 2112
Eurpean Banks

A couple of banks mentioned above that are being affected by the Lira devaluation:

France-- BNP Paribas  -2.9%

Italian--UniCredit -5.8%

Spain --BBVA  -6.4%

German --DB  -5.4%

German --CS -2.8%

American --C  -2.7%

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