The drift on up has continued across global equity markets with a consecutive 13 day straight run of higher highs for the Nikkei. The first time this has occurred for nearly 20 years since 1998. Whoever thinks you cant make nominal prices rise via monetary means was clearly on the wrong side of that trade.
US & European equity technical comments as follows:
“A very tight trading range and very low volatility is defacto exactly the opposite of market
nervousness and high volatility. In this context, we see the 10-year low in the average true range in Europe and the very low reading in the US as just another short-term warning signal that the market is simply too complacent, which is something we normally see ahead of important tactical tops or minimum prior to important tactical tops.”
Given these comments its interesting that the guys do not forecast a more severe setback here. Tactically for my book I am a buyer on reasonable retracement here, only. (A sharp and hard technical sell off is not my base case but I’m alert to the possibility).
Its a strong report from the guys with indications of a close at hand major top in the transports as a lead to weakness in the major indexes to come. Also a forecast of limited upside in copper to come. The start of the “topping out of the reflation trade into Q1 2018”. To be clear the guys are maintaining their general bullish bias but they raise several storm clouds on their forecasts here that needs to be noted.
For my book the call is very early as the price action in copper has been fairly compelling achieving a breakout of her bear trend and the new recent price highs were achieved on excellent momentum. Tactical weakness, yes certainly but medium term the instrument has at leas a few attempts on these recent highs “in the tank” due to the technical momentum she has received. Its way to early for me to call a top in copper or the transports for now but we need to watch for these early indicators of weakness, certainly.
Rates are clearly a key market indicator for risk assets. (See Fitzpatrick’s latest below). The guys forecast of the ten year to be at 2.8% in the run up to year end is a strong forecast and would provide a bearish backdrop to risk so correlation wise we would really want to see inflation expectations be rising strongly in parallel with rising rate expectations. We do not want to see a complete flattening (or worse inversion) of the yield curve. If LEIs start fading as central banks turn more hawkish then this would really add fuel to the bears case. Needless to say a rising US$ rate environment (ie strengthening US$) alongside a falling inflation expectation would generally be a bad set of indicators for gold.
Here the guys latest report:
On the Fx side of things we do appear to have a bout of US$ weakness coming here unless a FED hawkish chairman appointment spoils the technical flow. The eurusd has a good technical pattern here to at least provide the basis for an attempt on the prior recent highs. The euro has an excellent continuation pattern vs the gbp so both trades are in motion for my book for now. The eurjpy trade for now another good carry.
Here Fitzpatrick. On this occasion correctly focusing on rates again.
Ok, we have some rising rate action on the short end due to the possibility of a new hawkish appointment to replace Yellen and the FED’s rising baby step rate moves. But the ten yr and beyond remains pretty static and so the yield is flattening, which is not generally a bullish signal. Fitzpatrick forecasting a possible 2 yr rate of 3% and a possible ten year rate of 3%. That would not be a bullish scenario. Money velocity needs to increase here as rates rise.
On other business I see Marc Faber has been in the news for the wrong reasons with claims he made some racist comments. Marc has always provided some quick sound bites. Sound bites cant possibly contextualize the social history of any situation. They naturally polarize and simplify histories etc and i guess that’s why sound bites are so popular. True to form he commented on an email to us here at Capitalsynthesis as follows:
“If this is the only sin I committed in my life I would feel like a saint.”
Well I don’t doubt that for a moment Marc. I hope he is roll with the punches he is surely receiving right now.
The last week saw once again new higher highs for my book value. Good although tactical weakness appears baked in here and the downside has grown a little due to the lack of volatility, there is little basis for large shorts at this point. Therefore its a minimize leverage type scenario rather than hedge for now as uncomfortable as i am with this. The latent technical strength remains in the medium term.
All the best guys
Rich