EUR/USD Weekly Price Forecast – Euro Recovers For The Week

The Euro has broken to the upside during the trading week to break above the 1.10 level. That of course is an area that should attract a lot of attention from a psychological standpoint, and it should be noted that the Friday session is forming a somewhat exhaustive looking candle. The weekly candle looks much more bullish though, so at this point it’s likely that we will have a bit of a fight in this general vicinity.

EUR/USD Video 02.03.20

At this point in time, most of the selloff of the US dollar has more to do with the stock market and people repatriating money back to their home countries as the US stock market got absolutely crushed for the week. Ultimately, this is a market that has been in a downtrend for some time, so quite frankly I don’t feel the need to try to buy this market, and the fact that the market is giving up quite a bit heading into the weekend suggests that the downtrend will continue to show itself. Ultimately, this is a market that I do think tests the lows again, but if we were to break above the red 50 week EMA then we have to somewhat reconsider the situation.

The European Union is very likely that in a recession, and the ECB is much looser than the Federal Reserve. Coronavirus cases are breaking out all over Europe, and as a result it’s much more palatable to short this market than trying to buy it. Fading rallies on short-term charts should lead to longer term decline still.

AUD/USD Weekly Price Forecast – Australian Dollar Gets Crushed for The Week

The Australian dollar initially gapped lower to show signs of weakness, turned around to fill that gap, and then broke down to reach towards the 0.65 level during the Friday session. That of course is a large, round, psychologically significant figure, and therefore it’s likely that the market will react there. We are starting to see a slight bounce during the Friday session, but if we were to break down through that area it opens up the door down to the 0.63 handle which is the bottom of the financial crisis area.

AUD/USD Video 02.03.20

At this point, the market looks as if it could bounce, but bouncing from here could be a nice selling opportunity at signs of exhaustion, and the 0.67 level above will probably offer a bit of a “ceiling” in the market. If we were to break above that level it would change a lot of things but right now, I just don’t see that happening. At this point, the market is likely to bounce a bit, but I look at that bounce as an opportunity to pick up the US dollar “on the cheap.” Ultimately, if we were to break down below the 0.63 level underneath, that would be a disaster for the Aussie. The US dollar should continue to attract quite a bit of inflow due to safety concerns, and of course the fact that the Australians are so highly levered to China itself. With this, keep in mind that we are in a downtrend for a multitude of reasons to begin with, so buying is extraordinarily dangerous.

USD/JPY Price Forecast – US Dollar Continues to Melt Down Against Yen

The US dollar has broken down rather significantly during the training session on Friday, as we continue to see a run to safety and the financial markets. The Japanese yen is reasserting itself as a safety currency, as we have seen in spades over the last several sessions. The US markets have been selling off, and therefore money is flying out of New York as more concerned about coronavirus hit the headlines. As I record this, the Dow Jones Industrial Average is down 900 points, and looking very much like it’s going to reach 1000 lost yet again.

USD/JPY Video 02.03.20

The USD/JPY pair is getting close to the 200 day EMA, an area that will of course attract a lot of attention. At this point, I think that the 200 day EMA could cause a little bit of a bounce, but if we do break down below there then the longer-term trend suddenly becomes negative again. The ¥110 level is essentially “fair value” in the longer-term consolidation area and we have just gotten smoked by a false break out. Because of this, it’s likely that we may return to ¥110 again, as market memory dictates. However, the market is literally moving by the most recent headline, and to be honest the correlation between the S&P 500 in the USD/JPY pair has returned to the norm again, so pay attention to this correlation, as we are getting oversold, and it’s a matter of time before we get some type of nasty bounce. In other words, you can’t short the market quite right now, as you would be “chasing the trade.” That being said, it will be interesting to see what happens next but I would advise keeping a very small position regardless of what you choose to do.

GBP/USD Price Forecast – British Pound Struggles to Hang On to Gains Against Greenback

The British pound initially tried to rally during the trading session on Friday, just as it did on Thursday. However, just as we had seen on Thursday, the sellers overwhelmed the pair, and the British pound cannot hang on to gains. It looks at this point that the market is going fully into a “risk off” type of situation. I believe also that the British pound is suffering not only due to the fact that the global markets are complete mess, but the fact that the never-ending source of tension between the UK and the EU continues. Ultimately, I do think that the greenback is a bit oversold against most currencies, but the British pound will probably continue to be a little bit more insulated.

GBP/USD Video 02.03.20

If we break down below the 1.28 handle, it very well could open up the door to at least the 200 day EMA. At this point, it’s likely that the market would have a serious fight on his hand to determine the direction of the trend overall pair the market turning around and recapturing the 1.30 level though would be rather bullish and showed just how strong the British pound is in general. At that point, I would anticipate that the basing pattern would be somewhat completed, and we should go looking towards 1.35 handle. However, as things are starting to develop on the coronavirus front and the massive amount of money going into the US bond markets, that’s looking less likely by the day.

GBP/JPY Price Forecast – British Pound Gets Hammered Against Japanese Yen Yet Again

The British pound has broken down significantly during the trading session on Friday, as we continue to see a major breakdown and risk appetite. The Japanese yen is acting as a safety currency again, so having said that it’s likely that the markets will continue to drive toward the yen until the overall attitude of traders around the world stabilizes. Having said that though, it’s difficult to imagine a scenario where we will see some type of major turnaround right away. On the other side of that equation is the fact that the market is getting oversold, so a bounce is probably very likely. Even if that’s the case though, it’s very difficult to simply just jump in and buy this market because it is “cheap.”

GBP/JPY Video 02.03.20

If we break down below the ¥139 level, then the bottom will fall out of this pair and we will continue to go much lower. It should be noted that the British pound has held up a little bit better against the Japanese yen over the last several months, so this pair may have further to fall than other ones. When compared to other pairs such as the AUD/JPY and the NZD/JPY, there’s much more real estate to the downside if we do get a complete breakdown and collapse in confidence. Rallies at this point will probably be sold into unless of course something changes drastically, so we will probably have to look towards the weekly chart in order to make a bigger decision. If that’s the case, pay attention to how it breaks and of course my analysis here on longer time frames. This clearly looks very bearish at the moment though.

EUR/USD Price Forecast – Euro Roles Over As Fear Continues

The Euro rallied initially during the trading session on Friday again, but as time wore on, the market participants started selling it in order to form a rather bearish looking candlestick. Ultimately, the 1.10 level is a major area and it makes sense that resistance would show up in this area. At this point, the market looks very likely to go looking towards the lows again, because quite frankly we are in a large downtrend and quite frankly the European Union is starting to see an explosion in coronavirus cases. I do believe that the market is starting to look at the fact that the European Union is almost into a recession, and certainly looks as if it is going to head in that direction.

EUR/USD Video 02.03.20

To the upside, the market does break above the top of the candlestick for the day, then we could see a bit of a melt up, but I don’t think that’s going to be the case. Quite frankly as we go to the weekend a lot of people will have wanted to close the long position that they may have had in the Euro, as the US dollar continues to offer safety over the longer term. Granted, there was a repricing of the US dollar due to concerns about the coronavirus expanding in the United States, but at the end of the day we are in a downtrend and nothing has changed in the European Union, and therefore we should continue to see plenty of weakness.

AUD/USD Price Forecast – Australian Dollar Gets Hammered

The Australian dollar has been hammered during the trading session on Friday, but at this point it’s likely that the market will have to bounce a bit due to the fact that it is oversold. Granted, the Australian dollar is highly sensitive to the Chinese economy and what’s going on there, which of course is getting crushed by the coronavirus situation. A lack of demand for copper and other raw materials out of Australia will probably continue to suffer, so at this point I think it’s likely that the market will sell the Australian dollar is a bit of a proxy. Furthermore, the US dollar is picking up quite a bit of momentum due to the fact that the markets are completely freaking out around the world, as the coronavirus has seemingly accelerated.

AUD/USD Video 02.03.20

The market participants will more than likely sell into any rally that we get at this point, so looking for signs of exhaustion will be the way to go. I believe at this point, it’s a matter of time before you get some type of opportunity to sell this pair. Quite frankly, if we do break down below the lows of the Friday session, it is of course a selling signal, but I much prefer selling rallies Sibley because we are a bit overextended. I still believe that this pair is probably going to go looking towards the 0.63 handle, which was the bottom of the financial crisis back over a decade ago. To the upside, I believe that the 0.66 level could offer more selling, and most certainly the 0.67 level will. All things being equal it’s likely that the market could see a bit of a bounce late in the Friday session just due to short covering.

Gold Price Forecast – Did Gold Prices Peak?

Since January, we’ve been calling for Gold to reach $1700 by March. Prices hit $1691.70 on Monday before reversing sharply. The massive liquidation in stocks this week may have forced a premature top in Gold.

On Monday I wrote, Gold Nears $1700 Target as Stocks Plummet. Our Gold Cycle Indicator jumped to 405 and entered maximum topping, suggesting the 6-month cycle was nearing maturity. I assumed prices would stretch a little higher, but the ensuing market liquidation proved overwhelming.

Correction Target

If the gold cycle peaked at $1691.70, then I won’t expect the next 6-month low until late April or early May. Preliminary analysis supports a decline to $1480 – $1520.

A close up of a map

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What could change our outlook? If stocks continue to plummet, then the Fed will be forced to cut interest rates, and that could put gold back on its feet. With the S&P 500 down 13.40% for the week (as I write), the Fed could announce something as soon as this weekend.

Don’t Let The Bull Throw You

Despite all the volatility, precious metals and miners are in long-term bull markets. There will be pullbacks and corrections, sometimes deep – don’t let these events shake you. The bull is powerful and will do its best to throw you. Grit your teeth, cinch down that flank strap, and decide not to be thrown.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For more information, please visit https://goldpredict.com/

 

Natural Gas Price Fundamental Daily Forecast – May Be Overcooked; Don’t Get Caught Shorting Weakness

Natural gas futures hit a multi-year low on Friday, strongly suggesting the winter heating season is over and traders are ready to move on to the spring. Besides the weather, traders are also blaming the steep losses this week on coronavirus fears.

Another catalyst behind Friday’s rout is the loss of 22.3 gas-weighted heating degree days (gHDD) from the American model over the past 24 hours, according to forecaster DTN, which adjusted its latest forecast to warmer ahead of Friday’s opening.

At 14:39 GMT, April Natural Gas is trading $1.722, down $0.30 or -1.71%. The low of the session so far is $1.642.

U.S. Energy Information Administration Weekly Storage report

On Thursday, the EIA reported that domestic supplies of natural gas fell by 143 for the week-ending February 21. Total stocks now stand at 2,200 trillion cubic feet, up 637 billion cubic feet from a year ago, and 179 billion cubic feet above the five-year average, the government said.

Going into the report, traders were looking for a larger-than-average withdrawal for the week-ending February 21.

A Bloomberg survey predicted withdrawals ranging from 145 Bcf to 165 Bcf, with a median of 156 Bcf. Polls by the Wall Street Journal and Reuters produced similar results, while NGI’s model projected a pull of 152 Bcf.

The EIA recorded a 167 Bcf draw for the similar week last year, while the five-year average withdrawal stands at 122 Bcf.

Daily Forecast

Now that the market has hit its multi-year low at $1.642 and winter has been officially put to bed (aside from a few pockets of cold weather than tend to pop up in March) speculators can kick back and relax. What this means is that a few of the major short-sellers are likely to start booking profits so there exists the possibility of a meaningful short-covering rally over the near-term.

Start watching for signs of a bottom like a lower-low, higher-close, commonly known as a closing price reversal bottom. Turning higher on a move over yesterday’s close at $1.752 can produce such a move.

Don’t get complacent if short. This market can turn higher in a hurry if the short-sellers start to take profits. The next rally may have nothing to do with the weather.

Gold Daily News: Friday, February 28

The gold futures contract lost 0.04% on Thursday, as it continued to fluctuate after retracing most of Friday’s-Monday’s rally. The daily trading range remained relatively big yesterday, as it reached over 25 dollars. It shows how high short-term volatility is. Investors were buying the safe-haven asset amid corona virus outbreak, economic slowdown fears recently. But gold has retraced a big chunk of that rally after bouncing off $1,700 mark.

Gold is 1.3% lower this morning despite stock market’s sell-off and the mentioned corona virus fears. What about the other precious metals? Silver lost 1.00% on Thursday. Today silver is 4.0% lower after breaking below January lows. Platinum lost 1.02% on Thursday, and right now it is trading 3.3% lower. The metal broke below $900. Palladium was the only gainer again, as it advanced by 1.68% yesterday. However, it is 3.9% lower this morning.

The financial markets went risk-off since last Friday, as corona virus fears came back again. Yesterday’s Durable Goods Orders release was mixed, the Preliminary GDP was in line with expectations and Pending Home Sales number was better than expected. However, stocks accelerated their sell-off and the S&P 500 index lost a stunning 4.42%.

Today we will have the Personal Spending and Personal Income numbers release at 8:30 a.m. Then at 9:45 a.m. the Chicago PMI will be released. There will also be Michigan Consumer Sentiment number release at 10:00 a.m. So a lot of news releases ahead of us this morning. However, economic data releases seem less important than the mentioned virus scare recently.

Check more of our free articles on our website – just drop by and have a look. We encourage you to sign up for our daily newsletter, too – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Gold & Silver Trading Alerts. Sign up for the free newsletter today!

Thank you.

Paul Rejczak
Stock Trading Strategist
Sunshine Profits – Effective Investments through Diligence and Care

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Disclaimer

All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Paul Rejczak and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Rejczak is not a Registered Securities Advisor. By reading Paul Rejczak’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

The S&P 500 Enters Correction, Coronavirus Fear Grows, Consumer Data Still Solid

The U.S. Market Is Down In Early Trading

The U.S. index futures are down hard again in Friday trading. This is the 7th day of decline and puts the major indices deep in correction territory. The Dow Jones Industrial Average, S&P 500, and NASDAQ Composite are all down more than 10% in that time.  The Dow Jones Industrial Average fell nearly 1200 points in Thursday action, its biggest one-day drop on record. This has been the worst week for equities since 2008 and the pain is not yet over.

The sell-off was sparked by the coronavirus and the market’s realization it will have a profound impact on global GDP this year. Yesterday’s warning from Goldman Sachs, that EPS growth would fall to 0% or lower, is the prime example. In virus news, the spread of the virus is not contained. New Zealand and Nigeria have reported their first cases while China and South Korean totals continue to rise. South Korea is now the center of the spread with 500 new cases. China’s epidemic appears to be slowing with only 327 new cases.

The virus is expected to gain a foothold in the U.S. and may already have done so. California reported its first case of community-based transmission and now has roughly 8,500 hundred people under observation.

 Stocks On The Move

Caterpillar is the worst-performing stock in the Dow. The bellwether of global economic activity was down as much as 3.0% in early pre-market trading but cut the losses to only -2.0% by the open of the session. Shares of Apple were also down about 3.0% in early trading while Chevron and Cisco both posted losses near 2.0%. Hard-hit S&P 500 stocks include Norweigan Cruise Lines and American Airlines are moving lower in today’s session and down more than 20% since the broad-market sell-off began.

Paypal is the latest to issue a warning about the virus. The global payments company says revenue will be impacted by the virus because the cross-border activity is slowing. Paypal says revenue will come in at the lower end of the previously stated range and below consensus.

Consumer Data Remains Strong

The day’s economic calendar is topped by the Personal Income and Spending data. The report shows income rose by a larger than expected 0.6% while spending increased only 0.2%. Analysts had been expecting income to rise by about 0.3% and spending the same. Looking in the rearview mirror, the previous month’s income was revised down by 0.1% while spending was revised higher. On the inflation front, PCE prices rose 0.1% last month and are up 1.7% YOY. At the core level, consumer inflation is up 1.6% from last year.

Price of Gold Fundamental Daily Forecast – Watch for Buyers as Market Enters Value Area

Gold prices are down over 1% on Friday as investors continued to book profits after a recent run-up in prices. The market has now give back more than half of its gains from the rally that began on February 5. Nonetheless, the precious metal is set to finish with a third consecutive monthly gain although it is likely to end the week with a loss.

At 13:25 GMT, April Comex gold is trading $1623.80, down $18.70 or -1.14%.

The weakness in gold this week has come as a surprise to some. One would think that with the global equity markets plunging over 10% in just a matter of days, gold prices would’ve soared. But that hasn’t been the case.

Gold is probably under pressure this week for a number of reasons. Firstly, it may be too costly or overpriced. Secondly, traders may have fully priced in the sooner-than-expected rate cuts from the Fed. Thirdly, some of the bigger hedge funds may be booking profits to offset some of their losses or to meet margin calls in other markets. Finally, investors may have determined that buying U.S. Treasurys for safe-haven protection is a better play due to liquidity issues in gold.

Daily Forecast

We said earlier in the week that the longer-term fundamentals for gold are bullish and that investors may not buying again when the market hits a value zone. Not everyone has the money to chase a market higher.

Gold is currently trading inside a value zone defined as $1628.10 to $1604.80. Watch the price action and read the order flow on a test of this zone to determine if buying is taking place. Ideally, we’d like to see a closing price reversal bottom, but that moves seems unlikely today unless there is a dramatic turnaround.

Gold may have to spend a few days inside the value zone, building a support base, before prices move higher.

Silver Daily Forecast – Silver Slides to 10-Week Low

Silver has lost ground for a fourth straight day. Currently, silver is trading at $17.12, down $0.64 or 3.65% the day.

Silver Approaching $17

It has been a rough week for silver. The metal is down 7.5% and is on track to post its worst week since October 2016. Silver is struggling to stay above the symbolic 17.00 level, which has held since mid-December.

As a precious metal, silver can be considered a safe-haven asset. At the same time, it also has use as an industrial component, and this aspect has sent silver prices sharply lower. For example, silver is found in photovoltaic (PV), which is a key component in the manufacture of solar panels. China boasts the largest PV silver market in the world, and the coronavirus resulted in many PV factories having to close. South Korea, another industrial hub for silver, has been hit hard by the coronavirus, as the country’s economic activity has been sapped.

Will Fed Trim Rates in Response to Corona?

Only a few weeks, ago, Federal Reserve policymakers were confidently indicating to the markets that they did not anticipate lowering rates in 2020. However, the devastating economic consequences of the coronavirus may cause the Fed to reconsider this stance.

On Thursday, Chicago Fed President Charles Evans said that the Federal Reserve was paying “close attention” to the outbreak and said that “policymakers must commit to provide extraordinary accommodation in order to meet their mandate.” If the coronavirus spreads in the U.S., the Fed may be forced to cut interest rates.

 

Silver Technical Analysis

As silver falls, support levels continues to break. The 200-day EMA is situated at 17.10 and is located at the candlesticks. This is immediately followed by the round number of 17.00. Below, we find support at 16.30, which is protecting the 16.00 level. Above, we have resistance at 17.50, with the 50-EMA at 17.81. This is followed by the key line of 18.00.

 

Oil Price Fundamental Daily Forecast – Prices May Be Too Cheap for Buyers to Ignore

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures hit multi-year lows on Friday and were set for their steepest weekly decline in more than four years as the spread of the coronavirus raised fears of a global recession and consequently lower demand for crude oil and other refined fuels.

At 12:54 GMT, April WTI crude oil is at $45.73, down $1.36 or -2.95% and April Brent crude oil is at $51.04, down $1.14 or -2.18%.

Benchmark Brent crude, which fell about 2% on Thursday, has lost around 13% this week, putting it on track for its steepest decline since January 2016. The front-month April contract expires later on Friday.

“Brent crude under $50 a barrel will be a nightmare scenario for OPEC and may well provoke a … response of some kind from the core grouping,” said Jeffrey Halley, a senior market analyst at brokerage OANDA.

Still Hope of Rebound in Demand

Some market participants are expecting the recent sell-offs to be reined in as soon as the demand fears wane. Furthermore, with coronavirus cases in China beginning to slow, the country may soon return to full production, while the spread of the virus runs its course throughout the rest of the world.

“We have to believe that the COVID-19 virus will be contained sooner rather than later. I’m optimistic we should see some positive news by mid-next week at the latest,” said Sukrit Vijayakar, director of energy consultancy Trifecta.

“Subsequently, the sudden drop in demand will rise back just as suddenly, to at least 75% to 90% of prior levels. The rise back will be spurred by current low prices.”

Daily Forecast

The markets are getting pretty close to levels that will become attractive to speculators, but there has to be a catalyst to get the markets moving higher. China’s PMI data over the week-end are expected to come in weak, but that news may already be priced into the market.

News from China started the selling, and news from China is likely to ignite the rally. If you believe the data, the virus may be subsiding in China and the country may start to go back to work. Once investors know the duration of the virus then they’ll be better able to figure out when the outbreak is likely to end in the rest of the world. This will then encourage more buying in crude oil along with extremely cheap prices.

EUR/USD Mid-Session Technical Analysis for February 28, 2020

The Euro is trading lower shortly after the U.S. opening on Friday after the single currency hit its highest level since February 4 earlier in the session. The rally this week has been fueled by speculation of a sooner-than-anticipated rate cut by the U.S. Federal Reserve in the wake of the rout in U.S. equity markets and increasing fears of a global recession.

At 12:34 GMT, the EUR/USD is trading 1.0996, down 0.0004 or -0.03%.

The EUR/USD rally began to fizzle and the Forex pair turned lower after a key market gauge of long-term Euro Zone inflation expectations fell to a record low on Friday as concerns about the spread of coronavirus intensified.

The five-year forward fell to 1.1182%, its lowest level ever. It measures expected Euro Zone inflation over a five-year period, Reuters reported.

Daily EUR/USD

Daily Technical Analysis

The main trend is down according to the daily swing chart. However, momentum is trending higher. The main trend will change to up on a trade through the last main top at 1.1095. The main trend changes to down on a move through the last swing bottom at 1.0778.

The first main range is 1.1239 to 1.0778. Its retracement zone is 1.1007 to 1.1062. Today’s rally stopped inside this zone at 1.1053.

The new short-term range is 1.0778 to 1.1053. Its retracement zone at 1.0916 to 1.0883 is the next potential downside target.

Daily Technical Forecast

Based on the early price action and the current price at 1.0996, the direction of the EUR/USD the rest of the session on Friday is likely to be determined by trader reaction to the main 50% level at 1.1007.

Bearish Scenario

A sustained move under 1.1007 will indicate the presence of sellers. The next downside target is a downtrending Gann angle at 1.0995. This is a potential trigger point for an acceleration to the downside.

If 1.0995 fails as support then look for a potential break over the near-term into the short-term retracement zone at 1.0916 to 1.0883.

Bullish Scenario

A sustained move over 1.1007 will signal the presence of buyers. The first upside target is a downtrending Gann angle at 1.1029. Overcoming this angle will indicate the buying is getting stronger with potential upside targets coming in at 1.1053 and 1.1062.

Taking out 1.1062 could trigger a surge into a resistance cluster at 1.1095 – 1.1096.

The Technical Chart for this Index Points to More Losses for Equities

Major global equity indices carry a strong enough correlation to warrant keeping an eye on them for potential signals for the overall markets. The UK FTSE 100 (UKX) has made a notable downside technical break that signals a bigger shift might be taking place in the markets after an already unusually large decline in the last week of February.

Technical Outlook for the FTSE 100

Specifically, the index has broken down from a rising trend channel that had encompassed price action over the last 11 years.

FTSE 100 (UKX) Monthly Chart

The monthly chart above shows the rising trend channel and the downside break as a result of this week’s price action. Further, the index shows two distinct sequences of lower highs and lower lows.

FTSE 100 (UKX) Weekly Chart

The above weekly chart shows one series of lower highs and lower lows from the peak posted in July last year. A second series, of a larger degree, can be seen from the peak printed in 2018 near the 7900 price point.

To sum up there are four things that have caught my attention from these charts. The two distinct sequences of lower highs and lower lows, the downside channel break, and lastly, the downward momentum as a result of the price action in the last week of February.

Fundamental Outlook

UK fundamentals don’t necessarily support a sharp decline in the British index. Major economic data as of late has surprised to the upside which allowed the Bank of England to remain on hold in February after having considered cutting interest rates.

At the same time, the recent escalation in Coronavirus fears might shift the central bank back towards the prospect of monetary policy easing which generally would be supportive for equities.

But the Coronavirus itself presents a tremendous amount of uncertainty, especially after it became apparent in the past week that China is not doing well to contain it.

Members of the European Central Bank and the Federal Reserve this week did not appear to see the urgency in the virus threat this week in the same manner that the markets have. Comments from officials followed mostly the same rhetoric, that it was too soon to assess if a monetary policy adjustment will be required. Meanwhile, the Fed Funds futures show that the markets have fully priced in a US rate cut in March and are starting to price in a potentially larger 50 basis point cut.

Bank of England Governor Mark Carney took a more cautious approach in an interview with Sky News and acknowledged that the virus has led to a decline in tourism and is impacting businesses that rely on supply chains originating from China. However, he did not discuss whether UK policymakers were considering monetary policy easing.

Correlations in the Global Markets

Correlations in Major Equity Indices

The above charts show that the major indices – FTSE 100, Euro Stoxx 50, Dax 30, Nikkei 225, and the S&P 500 have a fairly strong correlation with each other. It can be argued the US index is much stronger compared to the others and the correlation is not as strong.

It is very much possible that a divergence takes place, considering that the UK is about to begin trade negotiations with the EU, although this is not something I would personally count on.

As a result of these correlations, my view is that the bearish signal in the FTSE 100 is pointing to more downside to come for the global equity markets.

Bottom Line

While it could be entirely possible that the UK index is forming a bear trap, I’m taking a much more cautious approach when it comes to equities. I think it is a dangerous time to try and catch the falling knife in stocks, even though it may have worked for some in the past. Rather, I think it’s best to sit on the sidelines and let things develop and revisit getting long equities once there is more clarity surrounding the virus and its potential impacts.

Global Shares Routed as Investors Ditch Risky Assets on Fear of Worldwide Recession

The major European stock indexes are trading sharply lower on Friday after entering correction territory the previous session, after falling 10% below the record highs seen on February 19. This follows steep sell-offs in seven major Asia-Pacific markets and the United States, which have also reached correction territory.

It took just six days for the benchmark S&P 500 and NASDAQ Composite Indexes to fall from record highs into correction territory. On Thursday, the blue chip Dow Jones Industrial Average plunged 1,200 points, its biggest one-day drop ever.

In Europe, at 11:44 GMT, the UK’s FTSE 100 Index is trading 6602.33, down 194.07 or -2.86%. Germany’s DAX Index is at 11974.17, down 393.29 or -3.18% and France’s CAC is trading 5354.27, down 141.33 or -2.57%.

Global Stocks Set for Worst Week Since 2008 Financial Crisis

World share markets were headed for their worst week since the depths of the 2008 financial crisis as investors ditched risky assets on fears the coronavirus would become a pandemic and trigger a global recession, Reuters said.

Hope that Fed Comes to the Rescue

Hopes that that the epidemic that started in China would be over in a few months and economic activity would return to normal have been shattered, as new infections reported around the world now surpass those in China.

Hope remains, however, that the U.S. Federal Reserve would cut interest rates as soon as next month to support economic growth.

“We don’t even need to wait for economic data to wee how badly the economy is being hit. You can tell that the sales of airlines and hotels are already falling by a half or something like that,” said Tomoaki Shishido, senior economist at Nomura Securities.

“It is fair to say the impact of the coronavirus will be clearly much bigger than the U.S.-China trade war. So the Fed does not have a reason to take a wait-and-see stance next month,” Shishido said.

Expectations the Fed will cut interest rates to cushion the blow are rising in money markets. Analysts say Fed funds futures are now pricing in about a 75% chance of a 25-basis point cut at the central bank’s March 17-18 meeting.

Fear of Major Global Economic Slump

Fear of a major economic slump is driving commodity and equity prices lower.

Fear as measured by the CBOE volatility index or VIX, jumped to 39.16, the highest level in about two years, well out of the 11-20 range of recent months, according to Reuters.

The index, which measures expected swings in U.S. shares in the next 30 days, typically shoots up to around 50 when bear market selling hits is heaviest and approached almost 90 during the 2008-09 financial crisis, Reuters wrote.

“The coronavirus now looks like a pandemic. Markets can cope even if there is a big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But at the moment, no one can tell how long this will last and how severe it will get.”

Sweden Ends Its Experiment with Negative Interest Rates. Should Gold Be Worried?

In December, the Sveriges Riksbank, the world’s oldest central bank, has raised the main interest rate from -0.25 percent back to zero, ending its experiment with the negative interest rate policy, as the chart below shows.

Chart 1: Riksbank’s repo rate from January 2010 to January 2020.

This is a huge change. As a reminder, Riksbank was a pioneer of negative interest rates. As early as in 2009, it moved the overnight deposit rate below zero. Then, in 2015, the Swedish central bank cut its main interest rate, the repo rate, to -0.10, worried about the repercussions of the sovereign debt crisis in the euro zone. In 2016, Riksbank was forced to go further, setting the interest rates as low as -0.50 percent, to prevent a Japanese-style deflationary spiral in Sweden.

And now, after all these years, Riksbank abandons the negative interest rates, again being in the avant-garde of central banking, as policy interest rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary.

Why Riksbank has ended the NIRP? One explanation is that Sweden’s inflation rate is close to the target, so the monetary tightening was necessary. In other words, the NIRP did its job and was not needed any longer. As we read in the Riksbank’s press release,

Inflation has been close to the Riksbank’s target of 2 per cent since the start of 2017, and the Riksbank assesses that conditions are good for inflation to remain close to the target going forward.

It sounds plausible, but the truth is that inflation has been hovering around the target for a few last years, as the chart below shows. So why did the Riksbank decide to hike interest rates only now – and in face of weaker economic activity?

Chart 2: Sweden’s annual CPI rate from January 2015 to December 2019.

The answer is that Sweden’s central bank has finally acknowledged what we were writing from the very beginning of the NIRP, i.e., that the costs of this policy outweigh the benefits, euphemistically speaking. Indeed, Riksbank admitted itself that concerns about the side-effects of the negative interest rates on the economy contributed to its decision. As we read in the minutes from the December meeting,

a long period of negative interest rates may have negative side effects on the economy, as the draft Monetary Policy Report commendably describes. This is a parameter that we should take into account.

In particular, the Sweden’s central bank is worried about the health of the housing market and households’ level of debt. As Governor Stefan Ingves noted,

Let me add, as I often do, that the long-term development of the Swedish housing market entails a risk to the Swedish economy in both the short and long term. There are a number of structural problems in the Swedish housing market. This creates both imbalances and risks, in the form of high indebtedness among households, and economic inefficiency, in that it will be more difficult for people to move in connection with finding a new job.

Indeed, the real estate price index has increased 33 percent since 2015 (from 180 points to 240) and doubled since the Great Recession, while the household debt-to-GDP ratio has risen from 65 percent in 2008 and 82 percent in 2015 to 88 percent in 2019. Please note that the whole Swedish private-sector debt has climbed to 285.7 percent of GDP, one of the highest rates in the OECD.

What does it all mean for the gold market? Well, the Riksbank’s recent hike confirms that the ultra loose monetary policy in general and the negative interest rates in particular do not support the real economy, but they rather zombify it instead. They also boost asset prices and debt, increasing the risk of a financial crisis.

Sweden is relatively small economy, but the ECB or the Bank of Japan are not likely to follow suit and also end their romance with the negative interest rates anytime soon. The Fed claims that it does not want to go below zero, but Trump supports this policy, so who knows…

So, the fact that Riksbank ended its NIRP should not upset the gold bulls. They still can count on other, more systematically important, central banks. One day, the unexpected negative shock arrives and it will expose the fragility of the current financial situation, so carefully cultivated under the strange world of negative interest rates. Investors would then also rediscover the safe-haven allure of gold.

If you enjoyed the above analysis and would you like to know more about the fundamentals of the gold market, we invite you to read the February Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Trading Alerts.

 

Crude Daily Forecast – Crude Slips Below $45 as Demand Slides

Crude prices continue to lose ground this week. Currently, U.S. crude oil is trading at $45.20, down $0.95 or 2.09% on the day. Brent crude oil is trading at $50.26, down $1.15 or 2.24%.

Crude Slips to 13-Month Low

As the coronavirus continues to spread, the economic fallout to the global economy is growing. This has been the catalyst behind a plunge in oil prices. Crude has declined by 14.7% this week and briefly fell below the $45 level earlier on Friday. This is its lowest level since January 2018. With analysts warning that things could worsen before they improve, oil prices will likely remain under downward pressure.

The bleak economic situation in China, with much of the industrial sector paralyzed, has led to a sharp reduction in demand for oil. China is the world’s second-largest oil producer, and the deteriorating situation is taking its toll on Saudi Arabia, which is China’s top supplier of oil. Starting in March, Saudi Arabia will sharply reduce its oil exports to China, which currently stands at about 2 million barrels per day (bpd). Analysts say that this amount could be cut significantly, perhaps as much as 300,000 bdp.  Chinese refineries have sharply cut refinery runs, leading to a growing oversupply of crude on global markets.

Technical Analysis

WTI/USD continues to fall and break below support levels this week. The pair tested support at 45.50 earlier on Friday and this line could break before the end of the trading week. The next support level is at 43.55.

On the upside, there is resistance at 47.50, followed by resistance at .$49.50, which is just below the symbolic $50 level.

Major Asia-Pacific Markets Tumble into Correction Territory; Investors Brace for Chinese PMI Reports

Asia-Pacific shares tumbled on Friday with China’s Shenzhen stocks diving nearly 5%, as investors feared the coronavirus might develop into a pandemic and trigger global recession. Investors continued to brace for an impact on economic growth with global shares heading for the worst week since the financial crisis in 2008.

On Friday, Japan’s Nikkei 225 Index settled at 21142.96, down 805.27 or -3.67%. Hong Kong’s Hang Seng Index closed at 26129.93, down 648.69 or -2.42% and South Korea’s KOSPI Index finished at 1987.01, down 67.88 or -3.30.

In China, the Shanghai Index settled at 2880.30, down 111.03 or -3.71% and in Australia, the S&P/ASX 200 Index closed at 6441.20, down 216.70 or -3.25%.

Coronavirus Update

New infections rapidly spread around the world with countries stockpiling medical supplies and preparing emergency responses, shattering hopes that the epidemic would be contained to China and economic activity would return to normal, Reuters said.

China to Release Key Economic Data This Weekend

While the markets are closed over the weekend, China will release reports on February Manufacturing and Non-Manufacturing PMI. The data is expected to show activity in in China’s manufacturing sector in February probably shrank at the fastest pace since the global financial crisis, a Reuters poll showed, as the epidemic took an excruciating economic toll on Chinese factories. Analysts estimate Manufacturing PMI at 45.1, down from 50.0 and Non-Manufacturing PMI at 51.4, down from 54.1.

Steep Losses in China after Stimulus Effect Wears Off

The global stock market rout knocked mainland Chinese shares lower, which have been relatively well supported this month, as new coronavirus cases in the country fell and Beijing doled out measures to shore up economic growth.

The CSI300 Index of Shanghai and Shenzhen shares dropped 2.9%, on track for its first weekly loss in three.

“Economic troubles outside China, especially in the U.S., could hurt the Chinese economy. Foreign investors, who were buying Chinese shares after the Lunar New Year holidays, have become a net seller since late last week,” said Wang Shenshen, senior equity strategist at Mizuho Securities. “Their selling might have intensified today.”