PM Weekly Market Commentary - 1/4/2019

davefairtex
By davefairtex on Sat, Jan 5, 2019 - 6:39am

On Friday, gold fell -9.72 [-0.75%] to 1290.12 on very heavy volume, while silver moved down -0.04 [-0.25%] on very heavy volume also. The buck fell -0.15%, TLT plunged -1.18%, crude jumped +3.14%, while SPX rallied hard (+3.43%), as did JNK (+1.78%).  This all suggests a unified move from safe havens into risk assets.

Friday's move was at least partially about a strong payrolls report, where there were lots of things to like. Average Hourly Earnings rose +0.4% m/m, or about 5% per year. That's wage inflation, a rare gain for the working man. The participation rate also increased +0.2%; people are coming back into the workplace. Most importantly for my calculus, the Part-Time/Economic Reasons series declined (I think of it as the: "I can only find part time work because the economy sucks" series), erasing the swing low for Q4 2018. Headline number was +300k. Payrolls blew out the top end of estimates in all categories.

My most important payrolls leading indicator is saying: "no recession coming."  At least not this month anyway.

Powell's speech at the American Economic Association's annual meeting (along with Bernanke and Yellen) also provided some fodder for the bulls. "As always, there is no preset path for policy," Powell said. "And particularly with muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves." Patient sounds promising. He also said that markets are pricing in "downside risks," particularly in the slowdown from China. He said the market is "obviously well ahead of the data" but pledged that “we're listening very carefully" to the signals it is sending.  That's only 50% dovish.  And a little whiny too.

Lastly, he made some comments about the balance sheet roll-off. "We don't believe that our issuance is an important part of the story of the market turbulence that began in the fourth quarter of last year," he said. "But I'll say again, if we reach a different conclusion, we wouldn't hesitate to make a change. If we came to the view that the balance sheet normalization or any other aspect of normalization was part of the problem, we wouldn't hesitate to make a change." Hmm.  That's even more whiny. And it wasn't nearly as dovish as what the Dallas Fed President said on Thursday, who seemed to suggest that the roll-off was definitely on the table.  Still, it was quite a distance from his prior stance that the roll-off was going to proceed regardless of what might happen.

https://www.cnbc.com/2019/01/04/powell-says-fed-will-be-patient-with-monetary-policy-as-they-watch-how-economy-does.html

So did that sound like no more rate increases? I'm not so sure. It seems like Powell was saying that the market really has no reason to be crashing right now, because the economic data for the US remains strong. (That's more or less of what I've been saying too, at least for the US anyway).  Just looking at the payrolls report – Powell appears to be right. But the bit about “listening very carefully” to what the market is saying does suggest that the recent plunge caught Powell's attention. And he also seemed to be saying that the balance sheet roll-off shouldn't be causing any of the fuss.

To me, the overal tone seemed to be at least half about him complaining that market is overreacting to Fed policy - a policy which presumably is reasonable given the continuing strong US economic data. It will be interesting to see how that conflict plays out over time. Risks are, while everyone may be happy now, the Fed will see more hot data coming in January, and then Powell will remind everyone that the Fed remains “data driven” (we can't have those wages moving up too rapidly, now can we?), and then the Fed will start to make noises about raising rates (quite possibly in March), and then...boom: a flock of chickens suddenly come home to roost.

https://www.bloomberg.com/news/articles/2019-01-04/powell-tune-changed-as-market-stress-morphed-to-market-apoplexy?srnd=fixed-income

That's the risk anyway.

The weekly metals sector map paints a picture of a bull market move in PM; juniors led seniors, silver leads gold, and the miners are leading metal. Copper is the sole non-participant, clearly in a downtrend, but most everything else has risen above the 200 MA.  It will be interesting to see if this lasts given the new enthusiasm for risk.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 6.25% -10.06% rising rising falling rising ma200 on 2019-01-03 2019-01-04
Palladium $PALL 4.54% 13.39% rising rising rising rising ema9 on 2018-12-26 2019-01-04
Silver Miners SIL 4.17% -21.02% rising rising falling rising ema9 on 2019-01-02 2019-01-04
Platinum $PLAT 3.87% -14.72% rising falling falling rising ma50 on 2019-01-04 2019-01-04
Senior Miners GDX 3.40% -10.20% rising rising rising rising ema9 on 2018-12-31 2019-01-04
Silver $SILVER 1.97% -8.77% rising rising falling rising ma200 on 2018-12-28 2019-01-04
Gold/Euro $GOLD:$XEU 0.57% 2.94% rising rising rising rising ema9 on 2018-12-20 2019-01-04
Gold $GOLD 0.22% -2.85% rising rising falling rising ema9 on 2018-12-20 2019-01-04
Copper $COPPER -1.12% -18.52% falling falling falling falling ma50 on 2018-12-17 2019-01-04

Gold rose just +3.77 [+0.29%] this week, basically unchanged. Most of gold's rally was unwound on Friday. Fortunately the weekly candle print was just a high wave rather than something more bearish like a shooting star, and weekly gold forecaster continued to rise. The daily chart wasn't so sanguine; daily forecaster dropped hard, almost issuing a sell signal, and Friday's bearish engulfing suggested a reversal (41% chance). Gold remains in an uptrend in all 3 timeframes, but is right on the edge of reversing on the daily.  Weekly still looks strong, however, at least for now.

The market is projecting only a 3% chance of a rate cut in March, and a 25% chance of a rate cut in December (as well as a 5% chance of a rate increase. That's a substantial improvement over what we saw on Thursday – I'd guess that's a product of the strong payrolls report.

COMEX GC open interest rose +13,320.

No COT report this week.

Silver rose +0.31 [+1.97%] on the week, clearly outperforming gold. Friday's reversal was minor in terms of size, and the daily high wave candle was somewhat bearish (32% reversal), but the forecaster was quite unhappy, plunging hard and issuing a sell signal for silver. What's that about? I'm not sure. Weekly chart still looks strong, with the long white candle a bullish continuation, and forecaster remaining in a strong uptrend. Silver is in an uptrend in the weekly and monthly timeframes.

COMEX SI open interest rose +4,418 contracts this week.

Miners broke out this week; XAU climbed +3.14%, confirming the double bottom pattern. Friday saw some selling pressure but miners managed to bounce back for the most part. The daily spinning top was somewhat bearish (34% reversal), but forecaster remains in a strong uptrend. XAU remains in an uptrend in all 3 timeframes.  The weekly uptrend is slowing, however.

GDX:$GOLD rose +3.10%, while the GDXJ:GDX ratio climbed +2.76%. That's strongly bullish.

USD

The buck fell -0.26 [-0.27%] to 95.62. It continues the pattern of large rallies, followed by large declines, and it appears to be heading slowly lower. Still, Friday's doji looked bullish (42% reversal), and daily forecaster issued a buy signal. On the weekly, the spinning top was neutral, and forecaster dipped a bit, moving closer to a sell signal. While the buck remains below the 9 and 50 MA lines, it is in an uptrend in both the daily and weekly timeframes. It feels a bit more bearish than that, but what do I know?  The chart to me looks like the buck is chopping sideways with a downward bias.

Major moves this week were: JPY [+1.69%], CAD [+1.84%], AUD [+1.10%], EUR [-0.60%]. CAD seemed especially happy about the breakout in oil.

US Equities/SPX

SPX rose +46.20 [+1.86%] to 2531.94. AAPL caused trouble on Thursday by issuing an earnings warning, but Friday's hot payrolls numbers and a dovish spin on Powell's speech more than made up for Thursday's plunge. A weekly swing low print was bullish (62% reversal), but forecaster isn't convinced, moving higher but remaining in a downtrend. SPX remains in a downtrend in the weekly and monthly timeframes.

The sector map has energy and homebuilders in the lead, while utilities and REITs did worst. Tech remains weak (most likely that's AAPL), while energy's rally was all about a recovery in the price of crude. This is just a mildly bullish sector map.  Hey look at that - the gold miners are the only sector completely green.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Energy XLE 4.94% -20.17% rising falling falling falling ema9 on 2018-12-31 2019-01-04
Homebuilders XHB 3.99% -25.23% rising rising falling rising ema9 on 2018-12-27 2019-01-04
Telecom XTL 3.92% -7.04% rising falling falling falling ema9 on 2018-12-28 2019-01-04
Gold Miners GDX 3.40% -10.20% rising rising rising rising ema9 on 2018-12-31 2019-01-04
Cons Discretionary XLY 2.93% -0.15% rising falling falling falling ema9 on 2018-12-27 2019-01-04
Financials XLF 2.84% -14.37% rising falling falling falling ema9 on 2018-12-27 2019-01-04
Materials XLB 2.36% -17.77% rising falling falling rising ema9 on 2019-01-04 2019-01-04
Industrials XLI 2.16% -15.49% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Defense ITA 1.75% -8.52% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Cons Staples XLP 1.36% -9.56% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Healthcare XLV 0.83% 1.69% rising falling rising falling ema9 on 2019-01-04 2019-01-04
Technology XLK 0.16% -6.26% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Utilities XLU -0.11% 2.77% falling falling rising falling ema9 on 2019-01-04 2019-01-04
REIT RWR -0.68% -6.75% falling falling falling falling ema9 on 2019-01-04 2019-01-04

Globally, the US was in the middle of the pack, with Latin America on top.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Latin America ILF 7.69% -7.42% rising falling falling rising ma200 on 2019-01-04 2019-01-04
Developed Asia VPL 2.09% -16.88% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Europe IEV 2.00% -17.60% rising falling falling falling ema9 on 2019-01-04 2019-01-04
United States VTI 1.95% -7.63% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Eurozone EZU 1.89% -20.20% rising falling falling falling ema9 on 2019-01-04 2019-01-04
Emerging Asia GMF 0.16% -18.22% falling falling falling rising ema9 on 2019-01-04 2019-01-04

VIX fell -6.95 to 21.38.

Rates & Commodities

TLT moved up +0.88%, rallying strongly on Thursday (thank you Dallas Fed President) but then losing it all on Friday (equity market rally + Powell not quite so dovish on either rates, or the balance sheet). The swing high on Friday could be a reversal (48% chance), and TY forecaster dropped hard, almost (but not quite) issuing a sell. TY also moved higher this week, up +0.42%, but it too suffered large losses on Friday, dropping -0.80% and printing a swing high (48% reversal). TY's weekly spinning top wasn't a reversal, but forecaster did drop. In spite of Friday's big plunge, TY remains in an uptrend in all 3 timeframes.  Here's a chart of the 10-year yield (the inverse of TY).  You can see it bouncing off the lows, possibly reversing.  That long lower shadow was: Thursday's excitement (the dovish Dallas Fed President) entirely unwound by Powell's less dovish speech.  The 10-year remains in a strong (rate) downtrend.

JNK shot higher up +1.70%, a very strong move for junky debt. Almost all the gains came on Friday, when JNK gapped up and rallied all day long, right alongside equities. My sense is that JNK really liked the payrolls report. JNK ended the week in a strong uptrend, as did its cousin HYB, which also issued a weekly buy signal. JNK is back to saying “risk on”.

Crude rallied this week, up +2.50 [+5.42%] to 48.66. Crude moved higher 4 days out of 4, finally closing above the previous high on Friday. There were a flurry of bullish technical signals: besides the breakout on the daily chart, the weekly swing low was very bullish (78% reversal), and the weekly and monthly forecasters both issued buy signals, putting crude in an uptrend in all 3 timeframes.

EIA report came on Friday (crude: unchanged, gasoline: +6.9m, distillates: +9.5m) and it caused a bit of a sell-off, trimming about 40 cents off Friday's move. Still, positive news included the hot payrolls report (positive for US demand), as well Saudi Arabia's production dropping 420 kbpd in December - one month before the OPEC production cut agreement was scheduled to take effect.  The Saudis are very enthusiastic about making sure oil doesn't stay in the 40s for very long.  That's quite positive overall for the oil market, in my opinion.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +10.58, with 798 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.44 -0.49% to NAV [decrease]
 PSLV 5.67 -3.87% to NAV [decrease]
 CEF 12.65 -3.68% to NAV [decrease]

* Bullion Vault gold (https://www.bul lionvault.com/gold_market.do#!/orderboard) shows a $1 premium for gold and a 4c premium for silver. [Calculation uses Kitco's closing spot prices in NY, minus the mid-point of bullion vault's current bid/ask on the metal in New York.]

* Big bars premiums were: gold [1kg] 1.39% and silver [1000oz COMEX] 3.57%.

Grey Swans & Geopolitics

  • Ebola: total cases 609, with 370 deaths. There were only 16 new cases; at long last, the number of new cases appears to be sustainably dropping. No new health workers were reported as infected this week.  Amazing effort by the people on the ground in Africa under some very tough conditions.  https://www.who.int/csr/don/04-january-2019-ebola-drc/en/

  • Turkey: the 10-year yield ended the week at 16%, while USD/TRY closed at 5.32, little changed from last week. All quiet in Turkey.

  • Migration-Italy: Italy's anti-migrant campaign is working well: arrivals are down 80% vs 2017, with drownings down 25%.  Spain is the new destination: arrivals are up 150% vs 2017. Rough calculations suggest that Italy has saved 3.2 billion Euros annually (can that be right?), about half the cost of the new “citizens wage” paid to 1.7 million poor Italians – a 5-Star program.  If you are on the left, do you find it more politically correct to support a bunch of uneducated, largely military-aged male migrants from other countries with tax money, or your own poorer citizens and their families?  The pot of money is not infinite.  http://https://data2.unhcr.org/en/situations/mediterranean/location/5205

  • Note that the PD actually did a lot to reduce migration before they were booted from power, but their efforts came too little to late for their own political survival.  Perhaps part of it had to do with not being able to publicly take credit for their share of the drop because reducing migration didn't sit well with their more politically-correct base.  Salvini of course had no such trouble.

  • Migration-Germany: Germany has rejected 235,000 asylum claims, but most have refused to leave Germany. Half don't show up for their deportation flights (surprise!), and the rest remain because they lack papers (surprise!), they suffer from illness, or their country of origin is too dangerous. “I seem to have lost my passport. I guess I'll just have to stay in Germany.”  Seehofer is trying to bribe them to leave, but I'm just guessing that won't work.  "Lets see...stay in Germany vs return to Afghanistan + 800 Euros.  Which shall I choose?" https://nationalpost.com/news/world/germany-entices-illegal-migrants-to-leave-with-bribes-free-rent-for-a-year-at-home

  • China – Tariffs: Robert Lighthizer, the US Trade Rep, is reportedly intent on preventing Trump from accepting fig-leaf concessions, such as promises to buy more soybeans. According to these sources, more tariffs may be required to bring this about. The roundabout sourcing (“friends and associates of Lighthizer”) suggests to me that the information was meant to leak out – all part of the negotiation-game. That way Trump can be the good cop, and Lighthizer the bad cop without any direct statements by the participants.

  • Yield Curve Inversion: the 2-10 spread rose +4 bp to +20 bp, a result of the rally in the 10-year bond. Last week was as close as we've come to entering inversion since 2006-2007.

  • North Korea: North Korea's Ambassador to Italy has reportedly defected one month before his term was scheduled to end. I guess he doesn't want to leave Italy for North Korea. North Korea continues to be unhappy about the US sanctions regime, while the US is holding out for denuclearization. Hopefully something breaks loose once the US-China trade situation gets resolved.

  • Mueller Investigation: A DC grand jury that the Mueller investigation is using had its term extended six months. Still no collusion with Russia.

  • Government Shutdown: this is starting to look a bit more serious, after three weeks in place. Democrats are unwilling to give any money for Trump's border wall, while Trump is giving signs he is willing to compromise. No doubt there is furious polling happening behind the scenes, with both parties looking for some path to victory. Democrats tell us that immoral anti-migrant walls “don't work” (ladders, ropes, they are “old fashioned”, etc) - except in immune-to-criticism-Israel, where the construction of anti-migrant walls are funded by US aid dollars, and where Israeli statistics show that they work exceptionally well at preventing illegal migration. https://www.jpost.com/Israel-News/Israel-completes-heightened-Egypt-border-fence-478840  No cognitive dissonance there. Supposedly each week of shutdown cuts 0.1% from the GDP. Most government employees are Democrats. The political calculus is fairly complicated, but I'm guessing Trump has figured it out using the same method he used to get himself elected. And if thwarted, he can always declare a national security emergency and build parts using money from the overly-endowed DoD budget.

Summary

The equity market was finally able to rally in the first week of the new year. All it took was a dovish Dallas Fed President, an exceptional payrolls report complete with a 5% annual wage inflation reading, and Fed Chairman Powell hinting he wasn't - necessarily - going to continue his rate-increase campaign. Gold is showing signs of topping out after hitting round number 1300, as is the bond market, while money is rushing back into high-yielding junky debt. AAPL provided the latest sign that all is not well in China. Crude is helping the equity story by moving off the lows; how much of that is Saudi Arabia cutting production significantly in December? Saudi appears to back in the saddle as swing producer.  I think this is critical for the oil price to recover.

Things weighing on a longer-term return to bullish sentiment include the government shutdown, any more bad economic news out of China, a failure to come to an agreement in the US-China trade talks, and any comments by the Fed that it will continue raising rates and/or continue the balance sheet roll-off. No doubt the Fed wants to continue raising rates, but as it stands right now, the market just doesn't believe the Fed. If it does start to believe the Fed once again, the market will most likely sell off. It will be interesting to see how this struggle plays out. I do not think the Fed wants to surprise the market with a rate increase in March, but if we get another hot payrolls report at end of January...all bets are off.

Big bar gold premiums on gold and silver remain low, discounts at the ETFs have dropped, and there appears to be no shortage of physical metal at the moment.

No COT report due to the holidays.

Below is a chart on what the 2-10 "inversion" looked like leading up to the 2008 recession.  First, the 2-10 spread inverted (1) in early 2006.  Then it bounced around in negative territory for a while, and then (2) emerged from inversion in mid-2007.  This is the period where the Fed lowered rates like mad, and soon after that, the US (3) entered the 2008 recession.  All-in-all, it took more than 2 years for this to play out.

Differences between then and now?  The Fed can't lower rates very far, and the market seems to be a lot more hair-trigger than it was back then.  I'm not sure this process will take 2 years this time around, but I wanted to provide some context to show that when someone talks about inversion, it isn't as if The Grand Crash is necessarily just around the corner, even when inversion does finally occur.

Weekly trends (in order of strength):

Uptrend: Gold, 10-year treasury, BAA corporates, gold/Euros, silver, miners, platinum, bitcoin, USD, crude.

Downtrend: SPX, copper.

Note: If you're reading this and are not yet a member of Peak Prosperity's Gold & Silver Group, please consider joining it now. It's where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the "Join Today" button.

 

2 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5874
2008 and gold

Good interview at KWN with Bill Fleckenstein which deconstructed what happened to gold in 2008. 

https://kingworldnews.com/bill-fleckenstein-broadcast-interview-available-now-1-5-2019/

Put simply: going into 2008, gold had gone up for 7 years, up almost 400% off the lows.  It was a popular trade.  What's more, there were some very highly leveraged banks who really needed to liquidate when the crisis hit.

This time around, gold is more of a lonely trade.  Nobody cares - nobody has cared for years now.  When the next crisis happens - which we may be approaching sooner rather than later - there will be nobody in gold that needs to sell because nobody has cared for quite some time.

Ever since 2008 I have been concerned about "how gold does during a major bear move."  This interview helped clear that up for me.

phusg's picture
phusg
Status: Bronze Member (Offline)
Joined: Jul 16 2014
Posts: 62
Gold in a down turn

When the next crisis happens ... there will be nobody in gold that needs to sell because nobody has cared for quite some time.

Interesting one. Gold may be a lonely trade in terms of participants, but if a major crisis hits that doesn't guarantee a large volume of gold won't flood the market. Countries and Central banks hold a lot so if a major crisis were to put some of these entities under selling pressure then gold could well drop like it did in 2008.

ps. BTW all the the best for 2019 Dave, busy here so only been lurking occasionally recently.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments