PM Daily Market Commentary - 10/3/2018

By davefairtex on Thu, Oct 4, 2018 - 12:51am

Gold fell -5.99 [-0.49%] to 1204.14 on moderate volume, while silver dropped -0.06 [-0.37%] to 14.66 on moderate volume also. The buck climbed again today (+0.26%) and the Euro fell (-0.65%) which seemed to pull the metals lower.  However the real story was in the US treasury market: the 10-year treasury yield screamed higher, up +10.5 bp to 3.16%. Bonds raced across the line-o-death, breaking out above the previous high. This was a big move in a big market, likely driven by a very hot non-manufacturing ISM report at 10 am that blew out the top end of expectations.

What was in the ISM report? According to Econoday:

Led by a record high in employment and a 14-year high in business activity, the Institute for Supply Management's non-manufacturing composite index easily beat Econoday's consensus range coming in at 61.6 for September. This is the strongest result yet for the composite which was established in 2008. The survey itself was established in 1997.

... backlog orders are up, export orders are up, inventories in the sample are building, and input costs are accelerating with construction labor, steel and titanium all in short supply. If there ever was an ISM non-manufacturing report that was consistent with overheating, this one is it.

Wow. This points to a likely very-strong employment report coming on Friday, and it explains why the bond market cratered. Bonds do not like good news, and today's ISM report was good news piled on top of good news.

Also supporting this was an interview that Fed Chairman Powell gave to PBS News Hour, where he more or less said that rates were “a long way from neutral” and really the only open question was how fast they would move higher. Wolf Richter has the details:

That's what a bunch of unpaid-for-tax-cuts will do for an economy. Borrow a bunch of money, inject it right into the economy by giving it to actual people, and presto! Economic activity jumps. This is why the Republicans are the picture of fiscal rectitude when out of power (“let's strangle the economy when the Dems are in control, if at all possible”), and why they spend like drunken sailors when actually in power. It's not about policy differences with the Democrats – its just about getting in power and staying there.

And its all paid for by you and me!

Gold rallied in Asia along with the Euro, and then moved slowly downhill for the remainder of the day, closing right at the lows. The bearish harami was slightly bearish (31% reversal), and gold forecaster dropped -0.61 to -0.17, which resulted in a sell signal for gold; it also unwound the weekly buy signal too. Gold is back in a downtrend in all 3 timeframes – but gold/Euros remains in an uptrend in all 3 timeframes.  Likely that's becaue the Euro dropped even more than gold did today.  On the chart, it looks as though gold has run into resistance at the 50 MA.  A convincing close above the 50 would be a positive sign.

COMEX GC open interest fell -1,981 contracts.  We can't blame today on the shorts.

Rate rise chances (December 2018) rose to 81%.

Silver also rallied in Asia and then moved slowly lower as the day wore on, eventually closing at the lows. The dark cloud cover candle was neutral rather than bearish, and silver forecaster ticked up +0.03 to +0.06, keeping silver just barely in an uptrend. Silver remains in an uptrend on the daily and weekly timeframes.  Silver also looks to have run into resistance at the 50, but the forecaster is telling us that  - at least for now - the dips should probably be bought.

COMEX SI open interest rose +18 contracts. Today's failed rally wasn't about the shorts.

The gold/silver ratio fell -0.13 to 81.91. That's slightly bullish, and the current level for the ratio suggests PM could be at or near a long term low.

Miners gapped up at the open, and then sold off for most of the day, with GDX off -1.36% on heavy volume, while GDXJ dropped -1.00% on moderate volume. XAU fell -1.24%, with the dark cloud cover candle being neutral rather than bearish. Forecaster edged up +0.06 to +0.37, which is a reasonably strong uptrend. Miners remain in an uptrend on the daily and monthly timeframes.  Unlike gold and silver, the miner forecaster looks optimistic.

The GDX:$GOLD ratio fell -0.87%, while the GDXJ:GDX ratio rose +0.37%. That's slightly bearish.

Platinum fell -0.60%, palladium climbed +0.57%, while copper rose +1.07%. The other metals did fairly well given the rise in the buck. Copper may be getting ready to break out to the upside.

The buck climbed +0.25 [+0.26%]. The trading range today was large; the spinning top candle was slightly bearish (30% reversal chance), while forecaster was unchanged at +0.46. That's a strong, steady uptrend. The buck is now well above all 3 moving averages. That's not enough to pull the weekly back into an uptrend just yet, but both daily and monthly are pointing higher.

The steady move higher in the buck – probably due to ongoing issues in the Eurozone (what with Italy's desire to “print money like Republicans”, along with an increasingly likely hard BRExit coming up early next year), and partially due to the strength of the US economy – is not hitting the metals as hard as I would have thought. That's because of the rally of gold/Euros.

Crude rose +1.11 [+1.48%] to 75.99, making a new intraday high to 76.90. The long white candle was a bullish continuation, and forecaster fell -0.12 to +0.21. Today's EIA report was bearish (crude: +8m, gasoline: -0.5m, distillates: -1.8m), and that was good for a 50 cent downspike in the price at the time of release. However, crude almost immediately reversed, and crude broke out to new highs 30 minutes after the report. When a market rallies on bad news, that is quite bullish. Crude remains in an uptrend in all 3 timeframes.

SPX moved up +2.08 [+0.07%] to 2925.51. SPX rallied in the futures overnight, then sold off in the afternoon, printing a neutral spinning top for the day. Forecaster inched higher, up +0.02 to +0.09. SPX remains in an uptrend in all 3 timeframes. SPX is bumping around quite near to its all time highs.

Did anyone notice that September has passed without a disaster in the equity market?

Financials led (XLF:+0.94%) while utilities trailed (XLU:-1.20%). Given the cratering bond market, this is more or less what you'd expect. This was a bullish sector map.

VIX fell -0.44 to 11.61.

TLT was crushed, losing -1.74%, making a new low that dates back to August 2014. All the various candle prints (“bear strong line” among them) were very bearish. TY also plunged hard, down -0.72%. TY issued a sell signal on the daily, and is thus in a downtrend in all 3 timeframes. It looks as though the monthly chart was the one to follow – it has been consistently bearish over the past month and sure enough, we finally get the breakdown to new lows. As mentioned, the 10-year yield rose +10.4 bp to 3.16%.

So what's the big deal about rising long rates? It is the price of money going up. Bottom line: it means mean fewer loans taken out by people and companies to buy things. This will slow the economy, with a delay. It is exactly as if the Fed raised rates by 0.1% just today – but targeted right at the housing and corporate long-term lending market, rather than just at the short-term money markets. Although the move on the long term (10-year span) chart looks small, it is a big deal, because the holders of 10-year bonds may well start to panic out of their positions - especially if they become convinced (as the ISM report seems to suggest) that the economy could be starting to overheat.

JNK fell -0.17%, making a new low and flipping the forecaster into a downtrend. After a lot of indecision, it seems as though JNK has decided to move lower.

CRB moved higher again today, up +0.63%, with 2 of 5 sectors moving higher, led by energy (+1.39%) with industrial metals (+1.36%) close behind. CRB is looking quite strong at this point – it has moved back above 200, and it may be heading for a re-test of the previous highs at 207.

The picture right now is of a very strong US economy, stimulated by borrowed money, attracting money from the rest of the world.  Europe (led by Germany) is focused on deficits, money printing, and negative rates, although supposedly the ECB money printing will end in just two months.  What happens to all that money parked in Eurozone debt?  It will certainly panic somewhere. Armstrong tells us that Dragi's bond-buying campaign has destroyed the bond market in Europe.  Once the ECB stops buying, bond yields could move very rapidly up to US levels and beyond. That would mean huge losses for current bondholders.  Perhaps thats why we are starting to see a bid for gold over in Europe.  Money will probably flee in advance.

According to Chairman Powell, we have a fair number of rate increases ahead of us.  We are "a long way from neutral."  Right now, a 28-day treasury bill yields 2.15%.  That's better than a poke in the eye.  So what would "neutral" look like?  Perhaps 3.25%?  Higher?

Don't look now, but by next year, it might be possible to actually count on interest income.

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davefairtex's picture
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China: Hacking the Computer Hardware Supply Chain

For anyone who has any doubts about why the US needs to bring manufacturing back to our shores, please read this article about how subcontractors in China have inserted special-purpose hardware components onto motherboards that more or less provide a backdoor for Chinese government hackers to access said computers whenever they want.

I have been waiting for this sort of announcement for years now.  I expected it to be about a hacked super-cheap ethernet chip that everyone uses (that has a backdoor in it), rather than about a motherboard add-on, but who can say, maybe they've done that too and we just haven't heard about it yet.

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I'm waiting to hear that aircraft flight controls have backdoors

With components of military equipment made in China, I am waiting to hear that the flight controls of bombers and fighter aircraft have been discovered to have backdoors built in.

What an awesome Trojan Horse strategy to disable or crash another nations air force.  A single radio signal might be able to crash an aircraft or render it inoperable.

davefairtex's picture
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Yes, the hardware backdoor has the very real prospect of being the Big Off Switch for military equipment.

But I think simply shutting down your adversary's economy is a lot more powerful.  Imagine if every server in every server farm just shut down one day.  Or - every server just wiped its own disk, and THEN it shut down.

Got Cash?

Heck.  Got Food?

Interesting tidbit.  In Powell's NPR interview, he suggested that a cyberattack might be the cause of the next crisis.  Just as an "oh by the way."

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More hacks

At this year's Embedded Systems Conference, there was a session on reverse engineering. There is video recording of the session on YouTube:

Here is a link to the Powerpoint:

The presenter talks about reverse engineering and provides examples of bad actors on slide 4: 6:56-14:00

At 9:43, the presenter shows a chip under a chip that had been discovered

At 11:58, the presenter discusses a system that phones home to China after 6 months

These sound similar to the attacks mentioned in the Bloomberg article.

cmartenson's picture
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Dave - you nailed it
davefairtex wrote:

For anyone who has any doubts about why the US needs to bring manufacturing back to our shores, please read this article about how subcontractors in China have inserted special-purpose hardware components onto motherboards that more or less provide a backdoor for Chinese government hackers to access said computers whenever they want.

I have been waiting for this sort of announcement for years now.  I expected it to be about a hacked super-cheap ethernet chip that everyone uses (that has a backdoor in it), rather than about a motherboard add-on, but who can say, maybe they've done that too and we just haven't heard about it yet.

Dave - this is exactly the scenario you talked about in terms of routers and chips...what?...a year ago?

Now that this super massive cat is out of the bag...I'm wondering about the selling ont he stock AND bond markets today.  Connected somehow?  Is China dumping Treasuries enough such that 'flight to safety' cannot provide enough lift?

Just conjecture.

But the sell off looks fairly pronounced, and the China situation is as ugly as it seems...unless you are a seller of clean equipment.  Then it's bonanza time.  Who is that?  Can we detect that in the stock prices of any specific companies....I better go check.

At any rate, your plausible chip set scenario just got outed as true.

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patience, grasshopper

The supreme art of war is to subdue the enemy without fighting.
― Sun Tzu, The Art of War

Edwardelinski's picture
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Likely Purpose of the Leak

Was to bring back the supply chains to this US or other locations in Asia.Some  believing it's Governmental PsyOps,derailing 5G technology etc.Either way,this will blow up their tech center in a big way...How could it not? 

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That’s Not All

Computers and electronics are not the only thing that we get from China these days.  That medication you take on a daily basis - do you know where it comes from?

More and more meds are made in China.


davefairtex's picture
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purpose of the leak

We can all imagine this is some (US) government conspiracy - but its just too easy to get one of these boards and see for yourself that its true.  There are lots of people with the capability to reverse engineer the chips.  Just for fun, I mean.  The "reverse engineering" hardware lecture at the embedded systems conf is a perfect example of that.  Listen to the guy speak.  He loves his work.   I mean, he LOVES his work!

And I literally guarantee you that this is just the beginning.  The stuff they haven't found yet, well, I still think my super-cheap ubiquitous ethernet chip is out there.

Every single time I've thought of some crazy security issue, and I tell myself I'm being paranoid, I end up not going far enough.  The Snowden leaks was a case in point; I was absolutely blown away by some of the clever things they did.  Malware inside the disk drive firmware!  How crazy is that!   But I think infecting the supply chain was a bridge too far even for the NSA.  (Instead, they infect individual boxes by intercepting logistics/delivery; rifle shot vs. a nuclear blast - and it doesn't affect the reputations of the manufacturers). 

Anyone who imagines that bitcoin is secure when the underlying hardware has backdoors built into it by China - well - guess what?  Its not secure.  If the PLA owns the underlying hardware, how hard is a 51% attack when you can tell the hardware - all of it, around the world - exactly what you want it to do?

The mining rigs are built by just a few companies.  Own the mining rigs, you own bitcoin.  Where are the mining rigs made, again?

But I'm sure the PLA wouldn't want to do that.

Curious that China has made bitcoin more or less illegal in China.  Almost as if they don't want their own people to get caught in any sort of blast that might occur if/when bitcoin goes down.

Lily Tomlin used to say, "No matter how cynical you get, it is impossible to keep up.”  That's how I feel.


Edwardelinski's picture
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I Absolulutely Agree With You

Bloomberg stands by the story and public admission by any one of those companies would become a legal nightmare.Coincidentally,or not,final bids are being submitted by October 9th on the Pentagons 10 billion dollar Joint Enterprise Defense Infrasructure Project.Amazon Web designs is the front runner.Definately not a conspiracy theory gal...

davefairtex's picture
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white powder from china

AK Granny-

FWIW, I had a recent experience where I ordered a white, powdery substance from 3 different Chinese suppliers.  (No, not drugs - it was gsh powder, for an experiment I'm running).

I also went and purchased a SCIO - for the purpose of comparing the substances against a reference sample of GSH that I purchased from the US for twice the price.  (One hopes that the US item was genuine)

Only one of the 3 Chinese samples matched the reference sample.

The first wasn't even close - it didn't smell, look, or taste the same.  Other than being white powder, it just wasn't even close.  I made a movie, whined about it being counterfeit, and returned the sample and got my money back.  Below is a pic of the run from the SCIO phone app: green line was the spectral fingerprint for the reference sample, purple line was the spectral fingerprint for the fake.

The second sample was a partial match - it might have been "cut", or it might have been old.  The first half of the spectrum matched, while the second half did not.  It didn't quite smell the same either, but the texture was a much closer match.

The third sample was an exact match.

That's 1:3.  Not very good odds.  And without the SCIO, there's no way I would have had the confidence to hit the first supplier with snippy comments even though the powder smelled and tasted different.


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Jim H
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Bitcoin in China, and IR spectroscopy

Dave,  Interesting new development this handheld spectrometer.  Based on my previous experience developing NIR, "training" data for particular lab-based analyses, just be careful interpreting these spectral differences, because it may be entirely mundane in some cases, i.e. %  retained moisture.  Then again if your own highly sensitive sensors (nose and mouth) are also telling you something is different, then you have a strong case indeed. 

I think that China wants to control Bitcoin more as a means to keep money from flowing out of China.. since once exchanged into Bitcoin, the money is now borderless.   

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