What’s next for the Dollar, Gold & Stocks?

By Axel Merk

Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for the dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…

Stocks…
The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.

Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.

I mention these as I see many parallels to 1987, including what I would call an outsized reliance on market liquidity ensuring that this bull market continues its rise without being disrupted by a flash crash or some a type of crash awaiting to get a label. Mind you, it’s extraordinarily difficult to get the timing right on a crash; that doesn’t mean one shouldn’t prepare for the risk.

Bonds…
If I don’t like stocks, what about bonds. While short-term rates have been moving higher, longer-term rates have been trading in a narrow trading range for quite some time, frustrating both bulls and bears. Bonds are often said to perform well when stock prices plunge, but don’t count on it: first, even the historic correlation is not stable. But more importantly, when we talk with investors, many of them have been reaching for yield. We see sophisticated investors, including institutional investors, provide direct lending services to a variety of groups. What they all have in common is that yields are higher than what you would get in a traditional bond investment. While the pitches for those investments are compelling, it doesn’t change the fact that high yield investments, in our analysis, tend to be more correlated with risk assets, i.e. with equities, especially in an equity bear market. Differently said: don’t call yourself diversified if your portfolio consists of stocks and high yielding junk bonds. I gather that readers investing in such bonds think it doesn’t affect them; let me try to caution them that some master-limited partnership investments in the oil sector didn’t work out so well, either.

Gold…
I have argued for some time that the main competitor to the price of gold is cash that pays a high real rate of return. That is, if investors get compensated for holding cash, they may not have the need for a brick that has no income and costs a bit to hold.

Continue reading What’s next for the Dollar, Gold & Stocks?

Roses Are Red and so’s Been EURUSD’s Trend

By Elliott Wave International

Learn what indicator foresaw the euro’s recent reversal to a one-month low

According to mainstream financial wisdom, market trends are driven by news events much in the same way a lover’s heart is controlled by Cupid’s arrow. A “shot” of positive news lifts prices; a “shot” of negative news hurts them.

Simple, right?

Not exactly. See, we believe the main force driving market trends is that of investor psychology, which unfolds as Elliott wave patterns directly on the market’s price chart. These patterns are not beholden to the current news cycle, and therefore, often run counter in nature to the mainstream outlook for future price action.

Take, for instance, the euro’s recent performance. On January 31, the euro was on cloud nine, having started the month at a 14-year low only to end it at a two-month high.

“Why the Euro is a Buy?” asked one January 31 news source.

And, according to the mainstream experts, the answer included a raft of positive economic data released on January 31, such as:

  • Eurozone inflation soared to its highest level since February 2013
  • Euro area’s GDP rose at a faster pace than the U.S. for the first time since 2008
  • Euro area registered its lowest unemployment rate in 7 years
  • The U.S. dollar suffered its worst January in 30 years

Also in the euro’s favor was supportive political rhetoric expressed on February 1 by U.S. President Trump’s top trade advisor, who on that day called the euro “an implicit Deutsche mark that is grossly undervalued.”

Everything was coming up red roses in the euro’s fundamental backdrop.

But, according to the analysis our Currency Pro Service posted on February 2, a major bearish development was underway in the EURUSD’s technical backdrop — namely, the end of an Elliott second wave, and start of a powerful wave 3 decline.

“EURUSD poked to a new recovery high before closing lower when compared to Wednesday. The possible reversal day might signal the second wave recovery is finally at an end. An impulsive decline would bolster that idea…

“A decline beneath 1.0620 would signal the turn might have occurred.”

So, what happened next?

Well, despite the rosy fundamental backdrop, the EURUSD indeed turned down (falling euro, rising dollar), plunging rapidly to a one-month low on February 14. Here, the next chart captures the dramatic decline:

Now, the February 14 Currency Pro Service reveals whether ample evidence is in place of a bottom — none of which, by the way, comes from the day’s news.


Free eBook
Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success

Learn how to put the power of the Wave Principle to work in your forex trading with this free, 14-page eBook. EWI Currency Pro Service editor Jim Martens shares actionable trading lessons and tips to help you find the best opportunities in the FX markets you trade.

Get free, instant access

This article was syndicated by Elliott Wave International and was originally published under the headline Roses Are Red… and So’s Been EURUSD’s Trend. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

It’s Not Really About Deutsche Bank

By Jeffrey Snider of Alhambra

In many ways Deutsche is the last remaining remnant of what is left of the reigning wholesale, eurodollar system

It is never a good thing when official sources either named or unnamed are quoted in the media as denying bailout discussions. For any bank such rumors and denials are harmful because, obviously, they are a reflection of common perception. Furthermore, most people know all-too-well the true nature of any denials, thus reinforcing only that much more the troubling perceptions in the first place.

For Deutsche Bank to be the institution in question is altogether different. When Germany’s Commerzbank, for example, was forced to request a capital injection from the state’s bailout fund SOFFIN in November 2008 that was a sign of the times. It was just another bad sign in an ocean of them. Should Deutsche Bank even get connected to something like that is perhaps a sign of renewal of those times.

Deutsche Bank is not Commerzbank; in many ways Deutsche is the last remaining remnant of what is left of the reigning wholesale, eurodollar system. Where other banks long ago saw this depression for what it was (all risk, no reward), DB was siding with central bankers and deploying “capital” into EM’s and junk bonds. The bank was reticent to reject its derivatives book, once a source of nearly all its power and strength. And it was dreams of reclaiming lost grandeur that drove the bank into its currently perilous state. When the firm first announced estimates for its coming loss in October last year, I wrote:

The net result of this toxic stew of bastardized banking is a highly negative return (revenue) environment for CB&S in 2015 beyond all scale of 2013, while its efforts to reduce assets (especially risk weighted calculations) continue to fly against its “dollar” activities. The firm managed to take the worst course possible by thinking the shrinking eurodollar system particularly post-May 2013 was an opportunity to replay lost pre-2007 financialism glory. To do that, the bank kept up its leverage and then went after the junk and EM bond bubbles with enthusiasm.

All that is forgotten in the mainstream media that wants to frame a systemically important bank’s troubles on once again regulation, or at least government action intruding into what it is supposed to be an otherwise stable and healthy environment. This weekend it was reported that Germany’s Chancellor Angela Merkel denied that the state would consider a rescue of Deutsche, even though the bank’s name literally means Germany’s bank.

Continue reading It’s Not Really About Deutsche Bank

Short the Euro

By Tim Knight

Equities have become so godawful annoying, I’ll turn my attention to currencies. In my view, the Euro is a safe bet on the short side right now. Medium-term, it seems to me we’ve broken an important channel on EUR/USD, as we did in the past (see circles below) and the upside risk is much smaller than the downside opportunity.

0715-euro

With a longer-term perspective, you can see how sickly the Euro has been (for many years now), and it seems altogether possible that the Trip To Parity could, in fact, become a reality within a year.

0715-eurolong

The British Referendum and the Long Arm of the Lawless

By Danielle DiMartino Booth

“Kings have long arms, many ears, and many eyes.” So read an English proverb dated back to the year of our Lord 1539. And thus was born an idiom that today translates to the very familiar Long Arm of the Law. It stands to reason that such a warning was born of feudal times when omnipotent and seemingly omnipresent monarchs personified the law, possessed of reach, eyes and ears against any and all nefarious souls who dare defy and attempt an escape into thick, ancient forests under dark cover of night.

Today we use the very descriptive and accurate idiom with little thought as to how it came to be a part of our modern language. The credit should go to Charles Dickens for bringing that borrowed but altered expression forward in time. It was he who first coined and made use of the phrase, “the strong arm of the law,” in his debut novel, 1836’s The Pickwick Papers. This satire opens a window onto life as lived in mid-nineteenth century England. It is through humor rather than judgement that Dickens appeals to and gives readers a glimpse of their true characters as they stand on the precipice of the Victorian Age.

The British Referendum and the Long Arm of the Lawless

Suffice it to say that many Britons today yearn for a time when hopefully fair and just monarchs, or later, elected officials, were the only lawmakers with whom they need comply. That bygone world starkly contrasts with the Britain of today, where the electorate finds itself being rigorously governed by the Bank of England (BoE), a deeply intrusive institution whose strictures may as well be law.

As is the case with the United States, those tasked with leading the BoE are unelected officials who have nevertheless risen to a power rivaling that of the duly elected. And, in the absence of any real fiscal courage, the words of central bankers are now being received as gospel rendering their ‘arms,’ and thus their reach, longer than was ever intended by those who envisioned at their inception bodies that were to be apolitical rather than the in-fact compromised institutions of today.

Continue reading at TalkMarkets →