PM Daily Market Commentary - 1/7/2015

davefairtex
By davefairtex on Thu, Jan 8, 2015 - 3:58am

Gold dropped -7.90 to 1211.10 on moderate volume, while silver fell just -0.02 to 16.53 on moderately light volume.  Gold slowly sold off all day long; silver had a relatively larger drop during London hours, but recovered to close almost flat.  A low volume sell off after several rally days is not unexpected.

The USD rallied strongly for most of the day hitting a peak of 92.52 at 1130 EST, then falling off into the close.  Although USD printed a hammer candle signaling a failed rally, it still managed to close up +0.39 to 92.21, a fairly large move.  We have seen a number of failed rallies in the dollar, but none of them have yet marked a top.

The Euro plunged below the 2010 low of 118.76 today, closing at 118.39 down -0.50.  The drop through the 2010 Euro low is a big deal, with the next support at the 2005 low of 116.42.  Martin Armstrong suggested that a weekly close below 116.42 would be disastrous for the currency, leading to a move down to 103.  Perhaps more important for us than the actual move lower is what it continues to signal - a very serious crisis brewing in the Eurozone.

http://armstrongeconomics.com/2015/01/07/the-euro-in-free-fall/

Here's my sense of what is going on.  The ECB and the member states have managed to convince their banks to buy all the sovereign debt, and that has muzzled interest rates as a price signal for how well the European economies are doing.  The manipulation has been successful, but it has had unintended consequences.  They cannot control the currency - and so that is acting as the pressure valve rather than the individual sovereign bonds.  Since individual nation's sovereign bonds no longer properly compensate for the associated risk (Spanish 10-year rates of 1.67%??), Big Money has decided rather than invest in Europe, it will just go elsewhere.  It makes sense if you think about it: if Big Money isn't getting paid properly for the risk it is taking - and the risk of a Spanish "problem" is a whole lot higher than 1.67% - the only move is to leave.

And Dragi's response to fix this situation is to print money and buy even more bonds.  Do we imagine this will help?  Rates will drop more and make those bonds even less interesting to hold, more Big Money will flee, and that will cause the Euro to drop further.

PM did relatively well given the dollar's strength today.

Mining shares sold off today, with GDX down -1.86% on moderate volume, while GDXJ was down -2.96% on moderate volume also.  Miners were weak for most of the day; even when gold and silver were doing relatively well intraday, traders seemed unwilling to chase mining shares higher.  I suppose after three strong days it was time for a rest.  The miner rally seems a bit tentative at the moment, but if miners can find support on the 50 MA, that should bring the buyers out with a bit more enthusiasm.

SPX rallied today, up +23.29 to 2025.90.  It is possible that support at 2000 was significant after all, although I'm not entirely convinced by the move.  I don't get the sense we had enough selling to put in a real low.  VIX dropped -1.81 to 19.31.  Tomorrow we have Jobless Claims, and Friday we get the Nonfarm Payrolls report.  Both reports can move the overall market; perhaps SPX will reveal something of its current sentiment by its reaction to the upcoming reports.

TLT dropped -0.26, a modest retracement after three very strong rally days.  JNK rallied +0.55%, no doubt helped by the recovery in oil.

The overall commodity index ($CRB) dropped yet again, but it fell only -0.14%.  At least the rate of the move lower is slowing down.  The commodity index is very oversold (in daily, weekly, and monthly timeframes) and is due for a bounce.  WTIC actually did bounce, making a new low at 46.83 (!) and then rallied back strongly to close up +0.74 to 48.75.  Volume was heavy.  Oil needs a close above today's high of 49.31 to mark a swing low.  A close above the EMA-9 at 51.90 would be even better.

The fall in oil, commodities, and the Euro has just been relentless over the past six months.  Unlike during the last Eurozone crisis when bonds were the primary indicator, it appears that oil, commodities and the Euro currency are doing the signaling this time around.

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