PM Daily Market Commentary - 2/7/2019

davefairtex
By davefairtex on Fri, Feb 8, 2019 - 9:33am

Gold rose +3.43 [+0.26%] to 1314.81 on moderate volume, while silver climbed +0.06 [+0.41%] to 15.73 on very heavy volume. SPX had a bad day [-0.94%], so did crude [-2.37%], while bonds rallied [+0.66%]. Today was a risk off day.

The big news of the day was some backtracking by the Trump administration on whether or not Trump would meet with Xi before the end of the month. Apparently, right now the answer is “not likely”. Kudlow, Trump's economic advisor, said “we’ve got a pretty sizable distance to go here” on the subject of the trade talks. And just like that, the air started running out of the happy-news-equity-market-balloon. The thought of 25% tariffs applied to all Chinese imports is looming over those two words: “not likely.” I'm guessing the Chinese are not yet willing to address the structural issues. Its all part of the dance.

Gold made a new low in Asia to 1306, and then rallied for the remainder of the day. The spinning top candle was a bearish continuation, while forecaster went nowhere, remaining in a slight downtrend. slowly higher today. Gold remains in an uptrend in both the weekly and monthly timeframes. The daily trend hasn't reversed just yet, but if equities continue to fall, I'm guessing we'll see that reversal soon enough.

COMEX GC open interest fell -4,361 contracts. That looks like short-covering on the bearish news from the US-China trade talks.

Futures are showing a 1% chance of a cut in March, and a split in December (2% increase, 20% cut). The mood is darkening a bit more.

Silver moved higher in fits and starts in a relatively narrow trading range, eventually ending the day near its highs. The short white candle was a bearish continuation, and forecaster moved slightly higher, but remains in a downtrend. Today's move was enough to unwind the weekly sell signal; this puts silver back in an uptrend in both the weekly and monthly timeframes, although we are definitely hovering on the edge of a correction at this point.

COMEX GC open interest rose 1,984 contracts.

The gold/silver ratio fell -0.10 to 83.22. That's slightly bullish..

Miners looked weak today; they rallied briefly in the morning, but then spent the day selling off fairly briskly. GDX fell -0.86% on moderately light volume, while GDXJ dropped -1.50% on moderate volume. XAU dropped -0.60%, which wasn't all that bad, but the candle pattern was ugly: swing high/confirmed shooting star, a 54% bearish reversal. Forecaster also plunged, resulting in a sell signal for the miners. What's more, XAU is now below its 9 MA. XAU remains in an uptrend in the weekly and monthly timeframes, but it appears as though traders are fleeing the miners, even as gold rallies. Will the bid for miners return if equities continue to sell off? That's the question.

The GDX:$GOLD ratio fell -1.11%, while the GDXJ:GDX ratio dropped -0.65%. That's bearish.

Platinum dropped -0.80%, palladium rose +1.00%, and copper moved up +0.25%. Copper was actually up a whole lot more, but the rally mostly evaporated after the negative news surfaced about the US-China trade talks. Platinum is back to looking pretty awful once more; it ended the day just above 800.

The buck rose +0.13 [+0.14%] to 95.96. Roughly speaking, the buck rallied as the equity market moved lower. The spinning top candle was a bullish continuation, and forecaster moved higher – the uptrend is now quite strong. Today's rally took the buck back above the 50 MA. It also caused the monthly forecaster to issue a buy signal; this puts the buck in an uptrend in all 3 timeframes. That's a big change from where we were just one week ago.

Big currency moves today: CAD [-0.94%], AUD [-0.50%]. CAD doesn't like falling oil prices, and AUD – probably still reacting to the dovish signals from the RBA, as well as bad news out of the US-China trade talks. Just a guess though.

Crude plunged -1.29 [-2.37%] to 53.06. Oil started heading lower in Asia, but it really started to plunge when equities started to sell off at around 11 am – its hard to know which of the two went down first. Today's move took crude convincingly below the 9 MA, pulled the daily forecaster deeper into a downtrend, and caused the weekly to issue a sell signal. Crude is now in a downtrend in both the daily and weekly timeframes. If the news out of the trade talks continues to be negative, we could see crude re-test the lows – especially if those 25% tariffs actually get applied at the end of February.

SPX fell -25.26 [-0.94%] to 2706.05. SPX made a new low to 2685 intraday, but managed to bounce back somewhat by end of day. The confirmed bearish NR7 (and the 3-candle swing high) could be a reversal (35%), and forecaster plunged but not quite enough for a sell signal. SPX remains in an uptrend in all 3 timeframes, but that won't last long if we have another day like this tomorrow.

Sector map shows energy leading down (XLE:-2.21%) along with basic materials (XLB:-1.38%), while utilities (XLU:+1.32%) and REITs (XLRE:+0.85%) did best. That's the classic bad-China-News-bearish sector map.

VIX rose +0.99 to 16.37.

TLT rose +0.66%, moving the daily forecaster more strongly into an uptrend. TY rose +0.25%, causing the daily to issue a buy signal. That puts TY into an uptrend in all 3 timeframes. The 10-year yield fell to 2.65%.

JNK plunged -0.42%; that's a swing high for JNK, but not quite enough for a sell signal. JNK remains in an uptrend.

CRB plunged -1.36%, with 4 of 5 sectors falling, led by energy (-1.89%). Commodities do not like bad news from US-China trade talks.

Well you know it had to happen. With 3 more weeks before the 25% tariff deadline, it is not as if Trump would just allow things to slowly progress towards an outcome. There just has to be some drama. It is just how he does things. While other politicians didn't want to rattle the markets and would keep things steady-as-she-goes, Trump has no problem wanging things around in an attempt to improve the deal he is negotiating.

Wouldn't it have been fun to have Trump negotiating BRExit for the UK? Boy, the fireworks that would have come out of that process.  I dare say it would have been all "Hard BRExit" right up until March 29th.

Of course we're also getting some bad news out of the EU too; the ECB reduced growth projections from 1.7% down to 1.2%. Possibly that dropped the economic outlook for Fed rate increases; now traders are getting more certain we are going to see a cut in December.

Even when the trade deal gets done, I doubt if it will be enough to rescue the US from the effects of the impending global recession.

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2 Comments

dragonfishy's picture
dragonfishy
Status: Member (Offline)
Joined: Jan 1 2011
Posts: 7
Real inflation, real yields, US bond rates falling into a recess

Hi all,

I have just watched Ned Naylor-Leyland's interview on Real Vision, he made the case that the bond markets are mispricing future inflation. We all know about ShadowStats and Chapwood index sugesting much higher real inflation ? (5-9%) so you would think no rational investor would be buying bonds. But then I watch Raoul Pal and Keith McCullough on HedgeEye talking about how front running the soon to be falling yields in response to the upcoming economic slowdown make bonds a great investment and clever guy's like Druckenmiller have made boatloads off this trade in past cycles.

My question is, how to sit with the cognitive dissonance I'm feeling about both arguments being true. I think yields will fall in the next recession/ depression, maybe even become negative in nominal terms. Bond prices will rise. But when will people stop being mesmerised by the fake inflation numbers that haven't matched with reality for decades?

I guess thats the point where the gold chart starts to look parabolic.

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5792
rational investors

My question is, how to sit with the cognitive dissonance I'm feeling about both arguments being true. I think yields will fall in the next recession/ depression, maybe even become negative in nominal terms. Bond prices will rise. But when will people stop being mesmerised by the fake inflation numbers that haven't matched with reality for decades?

History tells us that money will flee to safe havens when things turn down.  Last time around, that was the US long bond.  That also seems to be happening this time around too.  At some point this behavior might change, but until the long bond stops rallying when bad news hits, its probably best to bet on this particular behavior continuing.

That said, I think gold is behaving quite well this time around too.

I have found it more useful to be guided by what people actually are doing, rather than to follow theories about how people think that money should work.  This helps a lot with the cognitive dissonance.

The whole "rational actor" theory of economics is so clearly untrue it is a wonder anyone can even utter those words with a straight face.  We are, with very few exceptions, emotional beings, so expecting the aggregate of a group of emotional beings to total up to a "rational actor" flies in the face of both common sense as well as the historical record.

I think the reason economics tried to foist the "rational actor" hypothesis on the rest of us was because it is only possible to develop well-behaved formulae for rational actors.  Coming up with an equation to describe the behavior of a bunch of easily-spooked herd animals that every now and then thunder all together right off a cliff?  Much less easy, perhaps even impossible, and more in the realm of evolutionary biology and psychology, rather than economics.

 

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