Gold Resolves Some Bearish Divergences

By Tom McClellan

Gold vs Japanese yen
April 16, 2017

A week ago, it was not looking good for the gold bulls.  The dollar price of gold had not yet made a higher high, even though the Japanese yen had already pushed to a higher high.  When divergences like that happen, it is typically bearish news for both gold and the yen.

But what looked like a bearish divergence then has now been resolved in favor of the bullish case.  The price of gold has now joined the yen in making higher highs.

This is an important point for all chartists to understand: just because you see what looks like a divergence, that does not mean it has to persist.  Divergences do matter, and they deserve our attention, but they can resolve themselves so you have to keep watching and pay attention.

A similar divergence was also showing in the comparison between the dollar price of gold and the price measured in euros.

Gold priced in euros

A week ago, the dollar price of gold seemed to have stalled at a downtrend line, even though the euro price had already broken the equivalent long before.  And the price of gold as measured in euros had not yet made a higher high to confirm the dollar price’s higher high.  That is a problematic sign, and I like to say that whenever the two disagree, it is usually the euro price that ends up being right about where both are headed.  So it was troubling last week when we seemed to have a divergence.

Now that divergence has been made moot by the price of gold in both currencies moving higher.  Remember that all divergences in real time are only potential divergences.  One cannot call them “for sure” divergences until much later.  Apparent divergences are worth noting, but not worth panicking about absent more proof.  They can get resolved, as these examples illustrate.

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Related Charts

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Bonds and Gold in Unusual Correlation
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Gold’s 13-1/2 Month Cycle Low
Aug 18, 2016

Gold Bound To The Yen

Chart In Focus Archive

Central Bank Intervention for Dummies

By Heisenberg

It’s become readily apparent to me lately that retail investors do not appreciate the extent to which the returns they’ve enjoyed since 2009 are directly attributable to central bank largesse.

Normally, we could just write that off as harmless naiveté, but at this point it’s dangerous. Most investors have no conception whatsoever of the extent to which their performance is in no way, shape, or form a product of their own acumen but rather an inevitable consequence of the rising central bank tide that’s lifted all boats.

This will end in (a shit load) of tears when the punchbowl is pulled away and suddenly, every newsletter purveyor and homegamer-turned-self-described-guru discovers that this was all an illusion.

Well, in an effort to drive that point home, here’s a chart from BofAML which should (and I emphasize “should” because at least half of the people who read this still won’t get it) be an idiot-proof visualization of exactly what’s going on here.

This is credit implied vols annotated with colors (basically) to indicate periods of central bank intervention and periods where they’ve stepped away.


Here’s BofAML to explain that for anyone who still doesn’t understand:

Global monetary policies (tightening or expanding) have a profound impact on the credit implied vol market. Chart 8 clearly illustrates this phenomenon. Every time the Fed embarked on the different phases of its QE programme, credit implied vols declined materially. On the other hand, during periods of no policy or when the market started pricing the possibility of policy removal (tapering tantrum and the subsequent tapering phase) implied vols advanced.

Got it?


Serious Fun With Phillips

By Jeffrey Snider of Alhambra

At the end of February, FRBNY President Bill Dudley made what was a widely shared remark that “animal spirits had been unleashed.” Confidence of just this sort is exactly what monetary policy is after, using all kinds of tools by which to get people happy about the future. According to rational expectations theory, which guides every post-Great Inflation model, if people feel tomorrow will be better and are very confident about that feeling, then they will act today in anticipation. It’s not monetary policy without money so much as pop psychology.

The job of the Federal Reserve through this channel sounds really simple – provide these “animal spirits” with a credible, plausible basis by which to be sustained and amplified. From stocks to inflation expectations, the QE’s were supposed to instill this kind of foundation for full recovery.

Dudley’s comments six weeks ago, however, were not in relation to QE but rather the election. In that way, his remarks were almost damning of monetary policy because the world at the time looked a lot brighter for reasons that had little to do with him or the FOMC. But this was not the first time confidence and spirits had been unleashed, for the same could have been said, and was, about 2014 and early 2015 (which were attributed to the success of QE and its presumed positive boost in confidence).

Yet, ever since the Fed last “raised rates” in mid-March it’s as if the whole thing fell apart. From almost the moment the FOMC published its “hawkish” vote, risk aversion has been the dominant force once again. It is contrary to everything we are supposed to believe about monetary policy and what it means under these conditions. As Reuters wrote back on March 16, a good representation of convention “wisdom” about these things:

Continue reading Serious Fun With Phillips

“Coiled Springs,” Trump the Rates Strategist and “the Elephant in the Room”

By Heisenberg

Barring some kind of geopolitical catastrophe, it seems unlikely we’re going to get anything on Thursday that’s “bigly” enough to overshadow Trump’s comments to the Wall Street Journal (published Wednesday) when it comes to reshaping how the market feels about the reflation narrative.

Yes, we got bank earnings and claims, but when it comes to trading USD and/or Treasurys, there’s nothing like a Trump bomb (or five) to throw everyone for a loop – especially when the yen and the 10Y were already looking for any excuse whatsoever to rally following the “dovish” Fed hike, the health care bill failure, and recent geopolitical tension.

Meanwhile, the euro is just waiting (rather impatiently if you look at vol) on the French elections, which will determine one way or another whether we see parity or not.

Make no mistake, these considerations are really all you should be concerned about. Or at least that’s how we see it. Because while equities are the sacred cow for now, there’s only so long stocks trading at record high multiples are going to be able to withstand an incessant grind lower in 10Y yields and USDJPY.

Here with more on this is SocGen’s Kit Juckes…

Via SocGen

President Trump doesn’t like a strong dollar, does like low interest rates, may yet offer Janet Yellen a second term, recognises that China isn’t a currency manipulator, and is struggling to enact policies that will boost US growth. Looked at in that light, perhaps it’s only to be expected that the dollar is drifting lower. The medium-term case for the euro to usurp it as strongest of the major currencies grows steadily even if European political uncertainty holds it back in the short term.

10-year Treasury yields are now 22bp lower than they were at the start of 2017. The failure of the healthcare bill and mixed economic data have done most of the damage, though geopolitical uncertainty has played a part and the weight of positioning was a major factor too. With JGB yields down just 4bp and Bund yields down only 1bp, relative yields have been a major driver of dollar weakness against the yen, and a reason for it to fail to make gains against the politically-anchored euro. Even more importantly, lower US yields have provided support for emerging and higher-yielding currencies, despite a series of political risks shaking several EM currencies. The Mexican peso is 2017’s strongest currency and the dollar is only up against a handful of stragglers.

Looking ahead, it’s tempting but probably unwise to write off the dollar’s prospects completely. The Fed isn’t done tightening yet, the economy isn’t done growing and we don’t think we’ve seen the highs for yields yet. At this point, market expectations of a third Fed hike this year has faded significantly, and by too much. For all that though, further dollar strength is going to be muted because by and large, economic prospects elsewhere are improving too.

At the top of the list of frustrating currency pairs is USD/JPY, which continues to track yield differentials faithfully. The inability of JGB yields to decouple from US ones is the Achilles Heel of the BOJ’s yield-anchoring policy, and we’re in the vicious cycle where a stronger yen weighs on inflation expectations, magnifying the relative real yield move. But, for all that, if we believe US yields are set to recover, and that episodes of risk aversion are going to come and go like rain showers and not stick around like the monsoon, USD/JPY is a buy once US yields find a base. The BOJ will keep easy monetary policy in place for longer than US yields can go on falling.

The euro is more like a coiled spring than anything else. We will know the result of the first round of the French presidential vote in a week and a half, and we’ll know the eventual winner in two and a half weeks. A Marine Le Pen win would be bad for the euro, of course, and probably drag EUR/USD below parity in short order. But any other result is likely to support it. A rally would be slower than a Le Pen-inspired plunge, but 1.10 is likely quite quickly and we don’t rule out a very sharp spike higher later this year. On current market odds, a 27% chance of a sharp fall, and a 73% chance of a slower rally makes for a difficult bet, but in the longer run there is more upside potential than downside.


One question we’ve pondered is whether the best post-election trade is in bond-land or FX. The correlation between yield and FX trades is very high, and the respective moves are rewarded by a proportional volatility over that period, but unless you have the bond trade unhedged in FX terms, it doesn’t make much sense, yet. Meanwhile, in terms of absolute return (but also probably in terms of sleepless nights) EUR/JPY still looks like the biggest potential mover of all. The elephant in the room for trading EUR/USD is still, however, when to go long. Before the first round vote? Between the two votes? Or only when all is said and done?

50+ Global Markets: Today’s Top Opportunities (free)

By Elliott Wave International

[biiwii comment: I just remembered that this event is starting today and wanted to put up a reminder for anyone interested in these extensive, premium services… free for a week.  Here is a screenshot of the real-time menu of items they have updated so far…]

ewi pro services

On Wednesday, April 12, Elliott Wave International is “opening the doors” to its entire line of trader-focused Pro Servicesfree for 7 days — during their Pro Services Open House.

EWI Pro Services bring you opportunity-rich, professional-grade forecasts for 50+ of the world’s top markets — many 24 hours a day, complete with Elliott-wave charts and precise forecasts.

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Register now and you’ll also get:

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Join your fellow traders for 7 free days of forecasts now.

If an Electorate Falls in the Forest, is Their Voice Heard?

By Danielle DiMartino Booth

If an electorate falls in the forest, is their voice heard?, Danielle DiMartino Booth, @dimartinobooth, Fed Up

Quizzically-inclined quantum physicists quench their intellectuality by quoting philosophers first, then their fellow scientists

It is in fact questionable whether quantum physics would have come into being if not for George Berkeley’s 1710, “A Treatise Concerning the Principles of Human Knowledge.” Berkeley’s most famous saying is, ‘esse est percipi,’ or, ‘to be is to be perceived.’ He elaborated using the following examples:

“The objects of sense exist only when they are perceived: the trees therefore are in the garden, or the chairs in the parlour, no longer than while there is some body by to perceive them.” So matters of matter exist only in our mind. It is critical to note that Berkeley never posed a question but rather he made a statement of the world view through his metaphysical personal prism.

It was not until the June 1883 publication of the magazine The Chautauquan that the question was put as such: “If a tree were to fall on an island where there were no human beings would there be any sound?” Rather than pause to ponder, the answer followed that, “No. Sound is the sensation excited in the ear when the air or other medium is set in motion.”

A vexatious debate has ensued ever since, one that eventually stumped the great Albert Einstein who finally declared “God does not play dice.” In recognizing this, Einstein also resolved himself to the quantum physics conclusion, that there is no way to precisely predict where individual electrons can be found – unless, that is, you’re Divine.

Odds are high that the establishment, which looks to ride away with upcoming European elections, is emboldened by quantum physics. The entrenched parties appear set to retain their power holds, in some cases by the thinnest of margins. What is it the French say about la plus ca change? Is it truly the case that the more things change the more they stay the same?

Is this state of stasis sustainable, you might be asking? Clearly the cushy assumption is that the voices of those whose votes will not result in change will be as good as uncast, unheard and unremarkable.

Except…and this is a big ‘except’ – time is on the side of the castigated and for one simple reason – they are young. Consider Great Britain’s majority decision to leave the European Union (EU). An un-astonishing 59 percent of pensioners voted to leave the EU while only 19 percent of those between the ages of 18 and 24 supported Brexit. The aged see the EU as a cash drain at just the wrong time, and for good reason while the young view those 28 member states as the land(s) of opportunities.

With the caveat that polling has been revealed to be anything but reliable, young voters in France see things a might bit differently. Nearly half of surveyed French youth say they will vote for far-right candidate Marie Le Pen. At the opposite end of the spectrum, the dark horse far-left candidate, Jean-Luc Melechon, has enjoyed a late-stage surge in the polls by vowing to increase wages and shorten workweeks. Both insurgent camps view the lead contender, former banker Emmanuel Macron as the epitome of elitism, their ‘Hillary.’

Polls show the initial round of voting, which takes place on April 23rd, will make Macron sweat, but that he will survive to stand as the strongest contender in the second round. The status quo thus prevails, which for many represents continued economic stagnation and evasion of fiscal reforms.

Now factor in the rising recognition of the fallibility and limitations of central bankers. Mario Draghi, encouraged shall we say by the Germans, looks set to begin tapping the brakes on Europe’s answer to quantitative easing. Let’s be clear. Draghi has made it plain that he won’t go down without a fight. Nonetheless, it appears monetary policy will slowly become less accommodating, dragging on growth in the peripheral countries.

And then there is the matter of the refugee crisis, the cost of which few in the United States fully appreciate. Faced with impossible living conditions and no access to work in Jordan, Turkey and Lebanon, hundreds of thousands have opted to risk the journey to Europe. In 2015, 1.3 million asylum seekers landed in Europe, half of whom traced their origins to Syria, Afghanistan and Iraq. That number plunged in 2016 to 364,000 owing mainly to a deal between the EU and Turkey which blocks the flow of migrants to Europe.

The cost, not surprisingly, is enormous. Europeans spend at least $30,000 for every refugee who lands on her shores. By some estimates, the cost would have been one-tenth that, as in $3,000 per refugee, had the journey to Europe NOT been made in the first place.

Of course, aid money helps cover the cost of the crisis. Some $15.4 billion, about 10 percent of global aid monies raised in 2016, was directed to hosting and processing migrants in developed countries last year. While charity lessens the burden, it can’t staunch anger at headline-grabbing statistics claiming that Chancellor Angela Merkel’s ‘failed migrant policy’ will cost German and EU taxpayers $46 billion in the two years ending 2017.

Fear thee not, the consensus is that September’s elections in Germany will come and go with little to no fanfare; pro-Europe candidates enjoy wide leads in the polls. Many macroeconomists expect the year to end with the strongest ties in generations between Germany and the rest of the eurozone, led by France. Bullish analysts expect the euro to shake its jitters and end the year above €1.10.

The biggest obstacle to a happy ending, for the time being at least, comes down to Italy. General elections must take place by May 2018 but an early vote remains a possibility if the current prime minister of the eurozone’s third-largest economy does not survive the year. Investors, for their part, yawn at the mention of Italy. As the Wall Street Journal pointed out in a recent story, numbness tends to set in after 44 governments have come and gone in the space of 50 years.

The most recent survey revealed a record one-in-three Italians would vote the Five-Star Movement into power if elections took place today. The rebellious, populist party has tapped the anxieties of Italians whose per capita economic output has suffered the most since the euro was formed in 1999. Even the Greeks can claim to have suffered less.

Is an Italian uprising in the cards? The bond market certainly doesn’t buy into the potential for major disruption, grazie Signore Draghi.

At some point demographics will start to matter. The situation in France is no doubt grave, with youth unemployment at nearly 24 percent. But that pales in comparison to Italy where 39 percent of its young workers don’t have jobs to go to, day in and day out. Older voters determined to keep the establishment intact will begin to die off. In their wake will be a growing majority of voters who are increasingly disenfranchised, disaffected and despondent.

If there’s one lesson Europeans can glean from their allies across the Atlantic, it’s that bullets can be dodged, but not indefinitely. As we are learning the hard way, necessary reforms are challenging to enact. Avoidance, though, will only succeed in feeding anger and despair. The longer the voices of the desperate go unheard, as just so many silently falling trees in the forest, the more piercing their cries will be in the end.

You Will Have to Pry Goldman’s Bullish Commodities Thesis From Their Cold, Dead Hands

By Heisenberg

Let’s just get one thing straight on Wednesday: you are going to have to pry Goldman’s Overweight commodities outlook from their cold, dead hands.

Yes, the global reflation narrative has fallen on hard times recently, and yes, things were looking decidedly tenuous in early to mid-March what with the bottom falling out from crude and correlations between copper/oil and HY spiking commensurate with the pain.

But generally speaking “patience is working [and] reflation requires time.” Or at least that’s what Goldman is out saying this morning.

Here’s a bullet point summary of the bank’s note followed by a few short excerpts and visuals.

  • Besides agriculture, commodities are back to the same levels they were in February, bank says.
  • Bank says markets likely to be supported by hard macroeconomic data, real physical demand for metals in China and U.S. oil inventory draws caused by OPEC production cuts
  • Markets “need more patience”
  • Goldman says its 2017 top trading recommendation to go long on the enhanced GSCI is up 7% “due to patience”
  • “The strategic case for commodities remains as solid with cross-commodity and cross-asset correlations collapsing. We believe this is a direct result of the reduced uncertainty around long-term oil prices due to confidence in shale as the marginal source of supply”

Via Goldman

1) Oil prices have rebounded back to their pre-March sell off levels. Take out the weather driven sell-off in agriculture, commodity markets are back to the same place they were in late February and are seemingly facing the same questions as they were then. Will the survey macroeconomic data turn into strong hard macroeconomic data; will the Chinese credit data turn into real physical demand for metals; and will the OPEC production cuts turn into solid US oil inventory draws? We believe the answer to all of these questions is yes and that the base case logic remains intact. We still believe that the market needs more patience. The macroeconomic data has been partially distorted by weather events in the US. In China, we still have no hard data yet for March to know whether the post-Chinese New Year rebound in activity has occurred, and the oil draws were not anticipated until second quarter. As a result, we maintain our overweight recommendation on commodities and our 3- and 12-month ahead forecasts of +5% and +4% respectively. Due to patience, our 2017 top trading recommendation, long the enhanced GSCI, is back to being up 7%

2) In addition, the strategic case for commodities remains as solid with cross-commodity and cross-asset correlations collapsing (see Exhibit 1). We believe this is a direct result of the reduced uncertainty around long-term oil prices due to confidence in shale as the marginal source of supply. With shale now the dominant new resource base, the only uncertainty on the supply side is how much will shale cost to extract, not what technology the marginal barrel of oil will come from.


3) We have long argued that demand drives commodity markets on a 1-to-2 year horizon while supply drives these markets on a 2-to-10 year horizon. With supply uncertainty mostly resolved across most markets, this reinforces confidence in long-term pricing, leaving demand as the primary focus for the market.

4) On the macroeconomic front there are three variables we are focused on to pace the transmission of survey data into hard data: industrial production, retail sales and labor participation. The global manufacturing data, which is the most important for commodities, has been very strong through March (see Exhibit 5).


5) In addition to ‘peak’ sentiment, the market also appears to have lost confidence in the Trump administration’s ability to implement policy. Currently, the only part of the Trump trade that the market still remains confident in is the impact from deregulation, as that can be implemented without congressional approval. Although the equity market has lost confidence in ‘good’ policy such as an infrastructure spending program, we are far more optimistic on potential infrastructure spending, though not our base case, as infrastructure can be self-funding through potential user fees that can back bond issuance.

6) Adding to the political uncertainty around the Trump administration – French elections, US missile strike on Syria and increased military tensions in North Korea – we believe the elevated gold price reflects a market that is caught in a tug-of-war between heightened geopolitical risks and a strong underlying global economy (despite a weak US payroll number last Friday). This tug-of-war has been reflected in the recent disconnect between real interest rates, that have been pricing an improving global economy, and gold that is reflecting the increased political uncertainty. Barring a US government debt ceiling crisis, which ultimately would affect the government’s ability to carry out tax reform later this year, we believe that the upside in gold from here is limited.

7) Unlike gold, copper remains in the same holding pattern as it did at the end of last year, waiting for evidence of stronger demand and physical tightness. Concerns over demand weakness have been supported, but not conclusively so, by 10-20% declines in steel and iron ore prices over the past month. But we believe this ferrous weakness can be explained by ferrous de-stocking after prices rallied to extremely high levels earlier this year, particularly as steel demand growth remains healthy (see Exhibits 8 and 9). Substantial upside risk to our current 3-month price target of $6200/t comes from the Chinese property market. Should property sales volumes in the cities not subject to a crackdown on speculative activity more than offset the slowdown in sales volumes in the 40 odd cities subject to restrictions, our 1H17 tactical bullish copper view could stretch through 2H17. With capital controls increasingly successful, the probability of this occurring is rising in our view, though not our base case. We await the March nationwide sales data.


A return to the pre-2003 environment goes to the core of our outlook for strong commodity returns this year, which is based upon backwardation and not price appreciation. In the 1990s, commodity returns were generated from carry not price appreciation. For example, in 1996, investing in oil generated 100% returns despite only a 30% rise in prices (see Exhibit 12). While we see prices almost unchanged from here, we expect 4% – 5% total returns, driven primarily by the positive carry. In addition, the stability in long-term oil prices is also what helps create the lack of correlation between oil and the dollar, which from 2003 to 2016 acted as a buffer to higher commodity prices to the rest of the world, as higher oil prices reinforced a weaker dollar. With that correlation substantially reduced the inflationary impact of higher commodity prices is also increased. In other words, it doesn’t take nearly as much of a move in commodity prices in the current environment to create commodity returns and much welcomed inflationary pressures outside of the US. Finally, the decline in correlation across commodity sectors is also driving the volatility of the broader basket of commodities in the S&P GSCI lower, which further increases, from a sharpe ratio perspective, the appeal of investing in commodities. This was particularly visible last month with further declines in 1-mo realized volatility despite the sharp sell-off in oil prices, and has brought commodity volatility closer to the current low equity volatility levels (see Exhibit 13).


‘Reflation’ Breakdown, This Time Without Interruption

By Jeffrey Snider of Alhambra

In the early trading on Friday, it looked as if “reflation” might break down entirely. The flurry of information seemed to be uniformly bad, from Syria to payrolls there wasn’t much for optimism to remain relevant. All of a sudden, however, it all reversed so that trading in the latter part of the day was as if related to an entirely differently world.

Such trading reversals are not unheard of, and usually they are a sign that a trend or established intermediate direction might be ready to go back the other way. Whether buying or selling, an intraday capitulation can be a signal of a temporary end.

Though that is how it worked out in the raw data streams of eurodollars, bond yields, and most especially the Japanese yen, there was something different about it all that to my view suggested not a meaningful intraday reversal but instead an artificial intrusion (subscription required).

Thus, if “reflation” breaks down more completely, it would be China that might experience the most in the backlash from it. Not to depart into the realm of conspiracy, but who might have had motive to intervene in “dollars” on Friday? It might have been the market all on its own deciding to toggle risk despite all the breakdowns being presented at that moment, or maybe it was the hint of “somebody” trying to keep alive at least the balance that has persisted since December because if nothing else volatility is everyone’s enemy (except bond bulls and eurodollar longs).

It turned out to be (so far) just a one-day reprieve, as yesterday trading slid back against “reflation” before today’s session put the exclamation point on it. Eurodollar futures are up across the board, including more contracts toward the front end. Most of the buying attention is still focused on 2019-2022, the very maturities that define best longer run expectations. Since mid-March, significant flattening all over again.

The latest curve, despite an additional “rate hike” in between, has submerged below the last flat point on February 8. The current price of the June 2020’s is today only slightly less than the intraday high on Friday, again suggesting the breakdown of “reflation” and therefore whatever little topside probability was included in it.

Continue reading ‘Reflation’ Breakdown, This Time Without Interruption