PM Weekly Market Commentary - 10/5/2018

davefairtex
By davefairtex on Sun, Oct 7, 2018 - 1:09am

On Friday, gold rose +3.44 [+0.29%] to 1210.22 on moderately heavy volume, while silver climbed +0.06 [+0.41%] to 14.68 on moderate volume. The buck edged down -0.12%; gold and silver more or less tracked currency, although the gains in PM were slightly better than the loss in the buck. This tells us that gold/euros had another positive day. I'm becoming convinced that gold/Euros is the chart to follow, at least at the moment.

I saw three primary news items this week:

  • The PLA infected the servers of up to 30 US companies with hardware malware; the resulting reaction from this disclosure caused a sell-off in tech stocks and equities in general.

  • Fed Chairman Powell explained that current short-term rates were “far from neutral” implying that we should expect a long series of rate increases ahead of us.  This surprised the markets, who were clearly hoping for an end in sight to the rate increases.

  • The US concluded a trade agreement with Canada and Mexico, replacing NAFTA.  This caused a risk-on move at the start of the week, as well as being dollar-positive.

The metals sector map shows the reason why I'm liking gold/Euros: it led the pack this week, rising +1.74%, the best performance in the sector map. Silver trailed gold, and the miners were mixed. The “other metals” were generally negative, with copper doing worst. Most of the damage in copper happened on Thursday. Its a confused picture overall, but if you look at just gold/Euros, that's bullish for the yellow metal. It feels like a bit of a safe haven move to me. Gold outperforming silver supports this assessment.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Gold/Euro $GOLD:$XEU 1.74% -3.30% rising falling falling falling ma50 on 2018-10-02 2018-10-05
Junior Miners GDXJ 0.95% -18.26% falling falling falling falling ema9 on 2018-10-02 2018-10-05
Gold $GOLD 0.88% -5.03% rising falling falling falling ma50 on 2018-10-05 2018-10-05
Platinum $PLAT 0.78% -10.03% falling falling falling rising ema9 on 2018-10-01 2018-10-05
Senior Miners GDX 0.70% -19.68% falling falling falling falling ema9 on 2018-10-05 2018-10-05
Silver $SILVER -0.07% -11.65% rising falling falling falling ema9 on 2018-09-28 2018-10-05
Palladium $PALL -0.10% 13.01% rising rising rising rising ema9 on 2018-10-05 2018-10-05
Silver Miners SIL -1.24% -28.95% falling falling falling falling ema9 on 2018-09-26 2018-10-05
Copper $COPPER -1.50% -9.32% falling falling falling rising ema9 on 2018-10-04 2018-10-05

Gold rose +11.11 [+0.93%] this week, with almost all of the move happening on Tuesday. Gold managed to end the week just above its 50 MA for the first time in months, resulting in a buy signal for gold. Weekly gold is right on the edge of a buy signal as well, while the monthly remains in a downtrend. Gold in Euros is in an uptrend in all 3 timeframes.  This week I'm going to show gold/Euro daily, which has broken convincingly above the 50 MA, and is also in the process of breaking out more generally from its lows.

The September rate-increase chances fell to 77%.

COMEX GC open interest rose +12,178 contracts this week.

COT report shows very little change this week; commercial net remains at record highs, while managed money net is at near-record lows.

Silver fell -0.01 [-0.07%] this week, basically chopping sideways. Unlike gold, silver was unable to close above the 50 MA, although Friday's modest rally resulted in a buy signal for silver. Silver ended the week in an uptrend on both the daily and weekly timeframes. Monthly is still in a downtrend.  The chart below shows the weekly remains in a strong uptrend, although this week's move suggested indecision.

The gold/silver ratio rose +0.75 to 82.22. That's bearish.

COMEX SI open interest fell -2,552 contracts.

The commercial net position fell -6.4k contracts, with 7k new shorts. Managed money net rose by +6.6k contracts, with 8.6k shorts covered, and 2k longs sold. There was a big move last Friday that most likely accounts for all of the short covering by managed money. Silver remains in a near-record bullish position.

Miners rose +0.48% this week; Tuesday's rally was erased by selling during the remainder of the week. Friday's minor drop resulted in a sell signal for XAU, which leaves the miners in a downtrend on both the daily and weekly timeframes.  The weekly forecaster is looking increasingly bearish.  I think this week's shooting star candle didn't help.

The GDX:$GOLD ratio fell -0.22%, while the GDXJ:GDX ratio moved up +0.25%. That's neutral.

USD

The buck rose +0.52 [+0.55%] on the week. All of the gains came Monday-Wednesday. Although the buck moved higher, it remains in a downtrend on the weekly timeframe; it is in an uptrend on both the daily and monthly.  While the buck has headed north for two weeks now, the weekly still says the buck remains in a downtrend.

This week saw some increased uncertainty in the Eurozone: Brussels more or less jawboned Italian 10-year rates higher in an attempt to derail the Italian government's announced desire to expand its deficit in order to live up to its campaign promises, which include a tax cut, and means-tested UBI. This game ended up driving the Euro lower during the early part of the week. One Italian politician noted that these games would stop if Italy left the Eurozone. Salvini was a bit more testy, more or less calling Juncker a drunk.  More Europe, anyone?

https://www.express.co.uk/news/world/1026127/EU-news-Italy-Matteo-Salvini-Jean-Claude-Juncker-economy-budget-debate-latest-Di-Maio

Lastly, the emerging market currencies also suffered this week; AUD fell 2.38%, which was quite a large move.  My models say that flows into AUD tends to be a strong risk-on sign, so the plunge in AUD was a clear sign of risk off.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
South Africa Rand USD-ZAR 4.46% 18.57% rising rising rising rising ma50 on 2018-10-03 2018-10-05
Australian Dollar USD-AUD 2.38% 10.96% rising rising rising rising ema9 on 2018-09-27 2018-10-05
Indian Rupee USD-INR 2.12% 16.67% rising rising rising rising ema9 on 2018-09-21 2018-10-05
South Korea Won USD-KRW 1.98% 6.40% rising rising rising falling ma50 on 2018-10-03 2018-10-05
Swedish Kroner USD-SEK 1.93% 10.86% rising rising rising falling ma50 on 2018-10-03 2018-10-05
Indonesian Rupiah USD-IDR 1.71% 12.26% rising rising rising rising ema9 on 2018-09-25 2018-10-05
Russian Ruble USD-RUB 1.57% 15.82% falling rising rising rising ema9 on 2018-10-03 2018-10-05
Thai Baht USD-THB 1.52% 1.02% rising falling rising falling ema9 on 2018-10-03 2018-10-05
Turkish Lira USD-TRY 1.22% 70.85% falling rising rising rising ma50 on 2018-10-05 2018-10-05
Singapore Dollar USD-SGD 1.10% 1.32% rising rising rising rising ma50 on 2018-10-02 2018-10-05
Mexican Peso USD-MXN 0.59% -3.74% falling rising rising falling ema9 on 2018-10-05 2018-10-05
Philippine Peso USD-PHP 0.35% 8.56% falling rising rising rising ema9 on 2018-10-05 2018-10-05
Malaysian Ringgit USD-MYR 0.22% 3.26% rising rising falling rising ema9 on 2018-09-26 2018-10-05
Hong Kong Dollar USD-HKD 0.10% 0.33% rising falling rising falling ema9 on 2018-09-28 2018-10-05
Israeli Shekel USD-ILS -0.25% 4.98% rising falling falling falling ma50 on 2018-09-28 2018-10-05
Brazilian Real USD-BRL -5.19% 17.79% falling rising rising falling ma50 on 2018-10-02 2018-10-05
Argentine Peso USD-ARS -8.40% 105.60% rising rising rising rising ema9 on 2018-10-05 2018-10-05

US Equities/SPX

SPX fell -28.41 [-0.97%] to 2885.57. Most of the losses came on Thursday and Friday, in response to Chairman Powell's suggestion that a long series of rate increases were ahead, as well as China's infection of US servers with malware/control chips. SPX forecaster issued a sell signal on Wednesday, ending the week in a relatively steep downtrend. SPX remains in an uptrend on both the weekly and monthly timeframes, but the weekly is moving closer to issuing a sell signal also.

Weekly sector map shows energy and utilities leading, while consumer discretionary and builders doing worst. Tech didn't do well either. The picture suggests a mix: worries about economic impact from the rate increases, concerns over vulnerability to China, as well as a reaction to the large move higher in long rates this week: financials win, homebuilders & discretionary lose. This was a relatively bearish sector map. Rate increase impacts have been a theme for several weeks now.

VIX jumped +2.70 to 14.82. Risk is back.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Energy XLE 1.87% 12.40% rising rising rising falling ma50 on 2018-09-18 2018-10-05
Utilities XLU 1.86% 0.30% rising rising rising rising ma50 on 2018-10-05 2018-10-05
Financials XLF 1.52% 6.38% falling falling rising falling ma200 on 2018-10-05 2018-10-05
Gold Miners GDX 0.70% -19.68% falling falling falling falling ema9 on 2018-10-05 2018-10-05
Industrials XLI 0.68% 9.70% rising rising rising rising ema9 on 2018-10-01 2018-10-05
Materials XLB -0.50% -0.67% falling falling falling falling ma50 on 2018-09-26 2018-10-05
Defense ITA -0.61% 18.13% rising rising rising rising ema9 on 2018-10-05 2018-10-05
Healthcare XLV -0.90% 13.60% falling rising rising rising ema9 on 2018-10-04 2018-10-05
Cons Staples XLP -0.91% -1.67% falling rising falling rising ma50 on 2018-10-03 2018-10-05
Technology XLK -2.27% 22.99% falling rising rising falling ma50 on 2018-10-05 2018-10-05
REIT RWR -2.97% -2.89% falling falling falling falling ma50 on 2018-09-24 2018-10-05
Telecom XTL -3.08% 4.02% falling rising rising rising ma50 on 2018-10-05 2018-10-05
Homebuilders XHB -3.28% -8.06% falling falling falling falling ma50 on 2018-09-21 2018-10-05
Cons Discretionary XLY -4.25% 22.52% falling rising rising falling ma50 on 2018-10-04 2018-10-05

Before we get too worried about US equities, note that the US market actually did fairly well compared to most everywhere else.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Latin America ILF 3.82% -9.14% rising falling falling rising ma50 on 2018-09-26 2018-10-05
United States VTI -1.35% 12.45% falling rising rising falling ma50 on 2018-10-05 2018-10-05
Europe IEV -2.20% -5.79% falling falling falling falling ema9 on 2018-09-28 2018-10-05
Eurozone EZU -2.43% -7.34% falling falling falling falling ema9 on 2018-09-28 2018-10-05
Developed Asia VPL -2.76% 0.85% falling falling falling falling ma50 on 2018-10-04 2018-10-05
Emerging Asia GMF -5.71% -10.07% falling falling falling falling ema9 on 2018-09-28 2018-10-05

Gold in Other Currencies

Gold moved higher in every currency, especially INR, with the Euro coming in second.

Rates & Commodities

TLT cratered, dropping -3.61%, plunging 5 days out of 5, making a new low that dates back to September 2014. TY also fell hard, losing -0.97%, also making a new multi-year low. The drop in the bond market resulted in the 10-year yield rising +17 bp to 3.23%. This is what I meant when I said, “if yield breaks above the 3.12% previous high, they could move higher very rapidly.”  We could see this continue next week.  If you are a long term investor, its probably best to wait for the monthly to reverse before taking any long term bond positions.  TY is in a downtrend in all 3 timeframes.

If we look at the DGS10 (10-year rate) long term monthly chart, we can see it has been in an uptrend since late 2017. The monthly charts are pretty good at showing longer term momentum - and its usually a good idea to bet on the trend continuing.  This series, from FRED, goes back to 1962.

JNK plunged -1.39%, a good-sized move for JNK. Fridays candle (-0.48%) was one of those “strong line” candles, which means the move was large relative to recent activity. Volume was also immense, about 3-4 times normal. A strong line candle on huge volume tells us that traders are panicking out of junk debt – problem is, the stuff is not very liquid, and so the size of the herd is probably large, while the door that all the cows must fit through is quite small. Friday's move in JNK, coming after 3 days of selling, is screaming risk off. A coal-mine canary tipped over; dead or simply unconscious, its hard to know.

Crude rose +0.83 [+1.13%] to 74.16. Crude made a new high to 76.90 after a bearish-looking EIA report (crude: +8m, gasoline: -0.5m, distillates: -1.8m). A rally, on bad news – and an 8m build in crude was definitely bad news – is always a bullish sign. However Thursday saw some heavy selling, driven by news that Russia and Saudi had secetly decided to pump more, but kept this news back in order to avoid looking like they were following Trump's orders. Thursday's move caused daily forecaster to issue a sell signal, while crude remains in an uptrend on both the weekly and monthly timeframes. So far, at least for the past 15 months, that monthly forecaster has been proved correct. It is entirely possible crude is just taking a rest before it moves on to higher territory.  Still, we see a shooting star on the weekly, and the forecaster is telling us the uptrend is slowing.

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -12.06 tons with 730 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.63 -2.01% to NAV [increase]
 PSLV 5.29 -3.84% to NAV [increase]
 CEF 11.74 -4.35% to NAV [increase]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows a $7 discount for gold and perhaps a 15c discount for silver.

* Big bars premiums were: gold [1kg] 0.86% and silver [1000oz] 3.20%.

Grey Swans & Geopolitics

  • Ebola: total cases 162, with 106 deaths. Some families have chosen to care for victims at home (!), some have avoided follow-up from health workers, and/or refused vaccination.  At least one of the people refusing the vaccine has subsequently become a new case.  This ensures that the outbreak will continue, but based on the case rate, so far things appear to be more or less under control.

  • Turkey: latest inflation number was 25% y/y, with m/m inflation at 6.2% (or 74% annualized!).  This shocking news caused the 10-year bond yield to spike +237 bp to 19.68%. (By comparison, the US 10-year rose +17 bp). The USD/TRY rate fell -0.03 to 6.13; that's a bit surprising, I would have expected the currency to tank hard after the big jump in the 10-year yield.

  • German Government/Migration: the German government approved a new immigration law designed to attract more non-EU skilled workers (with German language skills) to the country, essentially to deal with Germany's demographics problem and its strongly negative impact on pensions. Even Seehofer seems to approve. Perhaps he likes this selective approach better than Merkel's previous policy of letting everyone in regardless of skills or language ability. https://www.reuters.com/article/us-germany-immigration-law/german-parties-agree-on-immigration-law-to-tackle-labor-shortages-idUSKCN1MC0RY

  • Italy – Migration: An Italian pro-migration group has funded and launched a new “migrant sea taxi”, which is Italian-flagged, so that Salvini cannot refuse it entry to an Italian port. It will be interesting to see how that plays out. It seems as though Salvini's policies have led to an overall reduction in the migrant death toll (many fewer people attempt the voyage), but the likelihood of drowning for individuals who do try has increased (there are no migrant sea taxis to pick them up if their rickety boat sinks). https://www.theguardian.com/world/2018/oct/04/italian-flagged-migrant-rescue-boat-mare-jonio-sets-sail-in-challenge-to-far-right-minister-matteo-salvini

  • China – Tariffs & Debt: after threatening to impose tariffs on all US imports from China, Trump has held fire. The impact on US consumers prior to the midterm elections is probably a consideration. China, for its part, has reduced import tariffs in a number of areas. It has also taken out 4-page ads in Iowa newspapers, apparently trying to influence Iowa voters prior to the midterms. Trump calls this "meddling in US elections", as part of a “whole of government” influence plan. And of course there's the server hardware infection attack from China - do we think the fallout from this will result in a scramble by US tech companies to move assembly out of the reach of the PLA?  I sure do.  I foresee cloud-computing ads that say: "our servers not assembled in China."  I hear Trump laughing in the distance.  Here's the view from China: https://www.scmp.com/news/china/diplomacy/article/2167242/us-turns-heat-china-trade-war-moves-beyond-tariffs-new

  • Yield Curve Inversion: the 1-10 spread widened +13 bp to 59 bp. This was all about the plunge in the 10-year bond this week.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 49.1% [+7.8%] vs Republicans 41.3%. Spread narrowed this week, likely because of Republican voter blowback from the Kavanaugh hearings. Current projections: Dems control house: 74% (+33). Dems control Senate: 22% (-0.5). https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: Pompeo is traveling to North Korea (and Japan, and South Korea, and China) this weekend to coordinate the next summit between Trump and KJU.

  • Mueller Investigation: Four prosecutors have departed Mueller's team, suggesting that the investigation may be winding down some of its activities. If Mueller does wind down his investigation, I suspect this would be quite dollar-positive.

Summary

The US 10-year rate broke out to new multi-year highs, likely causing a number of markets to sell off. Rising rates = lower rate of private money printing = a slowing economy in the future. Likewise, reports of secret Chinese chips infecting US server motherboards also took the tech sector down. Does your machine have Chinese Chips Inside? If you say no - how exactly would you know this?  Truly a globalization win.  Meanwhile, gold/Euros is doing fairly well, breaking out convincingly above its 50 MA, telling us that at least the Europeans are interested in gold.

Big bar gold premiums remain low, silver premiums are normal, while ETF discounts continue to increase. My supply indicators suggest there is no current shortage of physical gold.

The gold COT positions changed little, but net positions remain at historical levels, while silver's positioning has seen some short-covering by managed money, but remains near all-time highs. Positioning remains very bullish.

In spite of the two-week dollar rally, gold has managed to hold its own.  What with the Italian budget and the Turkish inflation issues (which causes concern over contagion), the Euro is looking relatively weak, and Europeans appear to be buying gold.  Gold's outperformance (vs silver) supports the safe-haven move analysis, as do the flows into the buck.

At the same time, both equities and bonds sold off on the last 2 days of the week, right along with junk debt and tech stocks.  This is about as clear a sign of "risk off" as you'd like to see.  If this sentiment continues, we could see a rapid move lower in risk assets as well as bonds.  Certainly emerging markets were hit this week also, and if that accelerates...things could get ugly fast.

If that occurs, I'd expect for a bid to come back into long term US treasury bonds, and for gold to rally; given that there isn't a lot of leverage to be wrung out of gold, I don't see a lot of selling pressure from traders needing to liquidate their leveraged gold positions.

That said - we could see more selling of gold by central banks - Turkey, for one - which is under pressure due to the rallying dollar and local inflation.

There are lots of moving parts once again.  Biggest issue for me?  Contagion in the Eurozone from Turkey.  Inflation at 74% annualized is going to swamp the recent rate increase by the Turkish central bank.  Honorable mention goes to China/PLA server hack; blowback from that could lead to an early settlement in the tariff struggle.

Current Trends (weekly):

Uptrend: silver, crude, gold/Euros, copper, SPX, bitcoin.

Downtrend: BAA corporates, 10-year Treasury, miners, USD, platinum, gold.

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