Is Stock Market Volatility About to Spike Higher than March?

A very interesting setup is currently taking place in the VIX chart with our Adaptive Fibonacci Price Modeling system that has us quite concerned.  The Daily VIX chart running our Fibonacci Price Modeling system, which is one of our primary price modeling tools, is suggesting upside price targets for the VIX near 110, 134 and 158.  The reason these levels are extended into future price expectations is because of the recent explosion in volatility over the past 90 days.

Yet, the real concern originates from the question “what would it take for the VIX to rally to these levels and is this a real possibility in the current global markets?”.  So, we attempted to answer that question by attempting to identify what it would take for the VIX to skyrocket above 110 in the near future.

Volatility Index (VIX) Daily Chart

First, pay attention to this VIX Daily chart and the targeted levels above 100.  Please understand that in order for the VIX to skyrocket higher reaching levels above 100 would require another massive downside price move in the US and global markets – something unexpected and very dramatic.  Is this an unrealistic expectation given the current global market environment headed into Q2 and Q3?  We really don’t believe it is an unrealistic potential expectation at this point.

We’ve recently authored a series of articles suggesting the global markets are marching through a human psychological process related to the virus event (crisis).  Somewhat similar to the “Grieving Process”, a crisis event prompts a similar set of human emotions ending in an angry and helpless feeling.  We believe this early stage crisis event process has positioned the global markets clearly within the Denial and Stigmatization phase of the crisis event. These are the Second and Third human responses to a major crisis event.

If we are correct and the markets are reacting to the Denial and Stigmatization phases of this virus event, then the next transitional phases are Fear and Withdrawal/Hopelessness.  Could this transition into a more fearful human instinct prompt a massive collapse in the US and global markets?  If so, what would be the cause of this transition into fear?

We believe the transition may come from the continued economic strain that is likely to become very evident in Q2 and Q3 of 2020.  Right now, the US stock market is only -10% to -15% from recent all-time highs.  The reality of the virus event for traders is that this is only a minor blip in the markets so far.  Yes, the markets fell much lower recently, but traders/investors have shrugged off the real risks and put their faith into the US Fed and global central banks to navigate a successful recovery.  What if that doesn’t happen as we expect?

What if the real numbers for Q2 and Q3 come in dramatically lower than expected?  What if global GDP contracts by -10% or -15% for the next 12+ months?  What if consumers don’t return as quickly as we expect?

Its going to be the race to cash and bonds once again. I talked with Cory Fleck from Korelin Economics Report today. Listen to our thoughts on the race to the safe-haven assets, bonds, and cash. What about gold and gold stocks? These have been more correlated to the US markets but the charts of the major stocks and gold are still very bullish.

CLICK TO HEAR OUR CONVERSATION

Weekly DOW (YM) Chart

Take a look at this Weekly YM Chart and pay attention to the downward sloping price channels that help guide us to a conclusion.  Additionally, the Adaptive Fibonacci Price Modeling system is showing us a new target near 12,475.  If this is accurate, then a breakdown in price over the next 6+ months may push the YM to levels near 12,500 (-50% from the recent peak in April 2020).  A move like this would certainly prompt a massive increase in the VIX and would frighten traders, investors, and consumers into a “helplessness” mentality.  What can you do when the markets are collapsing like this except wait for the bottom.

The one thing we can be certain of is that at long as humans exist on this planet, economies will continue to function at some level.  Being human in today’s world means we engage in economic activity and trade.  Therefore, we believe there is a moderate risk that the US and global markets have completely misinterpreted the true price valuations and expectations based on this research.  Simply put, we believe a Denial phase has taken root where investors and traders simply deny and ignore the real potential for future collapse.

I keep pounding my fists on the table hoping people can see what I am trying to warn them about, which is the next major market crash, much worse than what we saw in March. See this article and video for a super easy to understand scenario that is playing out as we speak.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is going to be an incredible year for skilled traders.  Don’t miss all the incredible moves and trade setups.

Subscribers of my ETF trading newsletter had our trading accounts close at a new high watermark. We not only exited the equities market as it started to roll over in February, but we profited from the sell-off in a very controlled way with TLT bonds for a 20% gain. Yesterday we closed out SPY ETF trade taking advantage of this bounce and our account is at another all-time high value. Exciting times for us technical traders!

I hope you found this informative, and if you would like to get a pre-market video every day before the opening bell, along with my trade alerts. These simple to follow ETF swing trades have our trading accounts sitting at new high water marks yet again this week, not many traders can say that this year.

We all have trading accounts, and while our trading accounts are important, what is even more important are our long-term investment and retirement accounts. Why? Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during a time like this, you could lose 25-50% or more of your entire net worth. The good news is we can preserve and even grow our long term capital when things get ugly like they are now and ill show you how and one of the best trades is one your financial advisor will never let you do because they do not make money from the trade/position.

If you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Long-Term Investing Signals which we issued a new signal for subscribers.

Ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

 

Two Leading Indicators for Crude Oil Point To Higher Prices

On Friday morning I created these charts on the price of crude oil, the energy sector stocks (XLU), and also the Canadian Dollar, which I think paint a clear picture of what to expect for the price of crude this coming week.

I always like to look at the leading indicators of the asset which I am interested in trading. For those trading the price of crude oil you should be watching what the energy stocks are doing or the sector as a whole. I use XLE ETF for this. I also will show you the Canadian dollar and what it is going later in this post.

Energy stocks are a way for traders to leverage the move in oil so the smart/big money tends to move into these stocks before the underlying commodity (oil) will start to change direction.

Price of Crude Oil – Daily Chart

Oil has been trading sideways for a couple of weeks. The range may not look big but just note that it’s a roughly 25% range from the bottom to the top of the blue box. The key take-aways here is simple. Oil is still trading at the bottom of the chart and trading sideways. What we will be looking for is a breakout of this zone in either direction which should induce a strong rally or selloff to the expected price levels of $34, or $14. These moves are likely to happen quickly over a 2-3 day period to expect an explosive move.

Price of Energy Sector Stocks ETF (XLE) – Daily Chart

Energy stock generally leads to the price of oil by a few days. The important points on this chart are that price has rallied off the lows, and is forming a bull flag pattern which means higher prices are expected.

Much like crude, a break in either direction in XLE can be traded, but the pattern which has formed puts the odds in favor of an upside breakout and rally of roughly 12%.

Price of Canadian Dollar – Daily Chart

The Canadian dollar is very tied to the energy sector, both the price of oil and energy stock because we are a resource-rich country, with oil being once of our top resources.

As you can see in the chart below the Canadian dollar it too has formed a bull flag pattern and looked primed and ready for another rally higher. The currency market, in general, is massive and when a large asset class is showing signs of reversing you better pay attention.

When I see a currency forming strong pattern to give us an expected price breakout direction, I like to look at what that is telling me. What companies or commodities will this move affect? In this case, money is moving into the Canadian dollar expecting oil to bottom and rally which should help increase the value even more.

I Talk Live On TV about These Trade Setups

If you want more details on this trade setup just watch this clip from TraderTV where I talked with Brendan Wickens in detail.

Concluding Thoughts:

In short, this coming week is most likely going to be much wilder than last week. While I didn’t cover on the other asset classes just know that precious metals, the major stock indexes, bonds, and oil have al built powerful patterns. Breakouts of these patterns will trigger big moves 10-25% in some cases, so get ready for fireworks this week!

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for short-term swing traders.

I hope you found this informative, and if you would like to get a pre-market video every day before the opening bell, along with my trade alerts visit my Active ETF Trading Newsletter.

We all have trading accounts, and while our trading accounts are important, what is even more important are our long-term investment and retirement accounts. Why? Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during a time like this, you could lose 25-50% or more of your entire net worth. The good news is we can preserve and even grow our long term capital when things get ugly like they are now and ill show you how and one of the best trades is one your financial advisor will never let you do because they do not make money from the trade/position.

If you have any type of retirement account and are looking for signals when to own equities, bonds, or cash, be sure to become a member of my Long-Term Investing Signals which we issued a new signal for subscribers.

Ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
Chief Market Strategies
Founder of Technical Traders Ltd.

Equities Take a Stroll Through Wonderland, Awaiting “Herd Immunity.”

Markets

US equities were stronger Thursday, S&P closing 2.3% higher. Smaller gains in Europe, mixed in Asia. US 10Y treasury yields up 2bps to 0.61%. Oil prices lifted 22.1% after the US president indicated that he expected Russia and Saudi Arabia would agree to reduce production by “approximately 10 million barrels, and maybe substantially more”. Price action has been choppy, though, as Russia denied talks had taken place only for Saudi officials to express willingness to reduce production if others did as well. Separately, the number of confirmed cases of coronavirus has surpassed 1 million globally, having doubled in the past week.

US initial claims rise more than 3mn for another week, a spike in continuing claims suggests the labor market has come to a full stop Initial claims jobless claims for the week ended March 28 were 6.6mn, up 3.3mn from the previous week.

Since markets have seemingly become immune to the rise in COVID 19 case counts, I’m not sure where the more important story lies today. Is oil the talk of the town, or is it the thought-provoking ( non) price action across a breadth of US asset classes in the aftermath of the ghastly jobless claims number. The optimistic read here is that the market is already toggled for horrendous economic numbers. In other words, a bleak picture is already in the price.

But the process of risk normalization will continue to be chaotic, and we should expect it to stay on a downward, albeit choppy, trend for the stock markets. After all, the world is expected to extend lockdowns.

Even if the market has seemingly hit a trough, equities rarely bounce back to their previous highs immediately. A medical breakthrough could cause that, but for investors to get back on board the rally bus, they will need to see falling case numbers, alongside an end in sight to mobility restrictions.

We are entering a climate with lower or no dividends, fewer financial options, but most importantly, fewer jobs, lower output, and probably a lot fewer companies around the word. Many small and large-sized businesses will not survive this storm.

I’m not sure what to say about the speed with which the labor market is being hit. Jobless claims of 10M in May would be eye-popping. But 6M was incomprehensible a month ago. It came that quickly one day there the next day gone.

I’m not so much a bear as a realist and not buying into the notion that this is a temporary dip followed by a huge rebound. Voluminous job losses and bankruptcies could lead to permanent wealth deviation. If and when things return to normal, restaurants and hotels (for example) will hire back in a gradual, incremental, and cautious way. And Wave 2 fears will lurk around every previous and cranny until we either achieve “herd immunity” or a health care solution is discovered.

Thanks to the volatility suppressant nature of the unprecedented peacetime fiscal and monetary stimulus. Market makers feel comfortable replenishing inventories of their favorite COVID 19 risk immune stocks on a dip, and now they can gingerly add oil stocks back to their laundry lists despite being hampered by a wet blanket. So for today anyway, all is good in the Wonderland scenario.

In the meantime, our energies should be less focused on the yield curve and currency markets, and more focused on the roll out the proper test, track, and trace technology in the major economies.

Oil markets

Based on my dire macro views from above, I don’t think WTI prices have that much farther to climb, and I’m sticking to my guns that WTI $25 will be the new normal over the short term until a compliance deal gets sorted out. Even then, given the worrisome logistics of shutting in 20- million barrels of oil per day needed to balance the markets and where the cure might be worse than the symptoms itself, adjusting the oil markets to any semblance of balance is next to impossible.

At this stage, probably the best we can count on is graduated, and globally coordinated production curtailment that will provide sufficient wiggle room before its game over when storage capacity overflows, and oil becomes cheaper than the tanks it’s physically stored. And in this scenario, we could see WTI $30 be then new short term benchmarks.

Gold markets

Gold rebounds as data show US jobless surge and as bullion bullishly ignored the equity rally and firm USD.

Gold continued to reverse recent losses, jumping in active trading. After steadying in Asia, gold began to move higher in Europe with the gains then accelerating in US action. Initially, the broader financial markets struggled for direction with no clear indication of risk sentiment. The initial move in gold was likely triggered by rising oil prices, which points to less deflation and improves gold outlook.

But the short term game-changer for gold came with the release of the US jobless claims. In addition to being a new record weekly rise, the data was above the highest expectations.

The fact that gold moved higher despite stronger equities and a firmer US dollar suggests there could b a bit more upside to come. But with near term positioning, a bit stretched, it’s difficult to gauge if there still enough meat on the bone to whet investors appetite for bullion on a Friday after a roller-coaster week.

My view is to reduce into the weekend as I’m not a fan of when correlations break positively or negatively for gold as the misalignment never seems to stick over time. You can tell your self this time is different until you turn blue in the face, but you’re probably wrong.

Currency markets

The Euro

The Euro is unlikely to get much headroom with the dollar still in demand and Europe in lockdown. While there are nascent signs that Chinese activity is returning to normal levels, much of the west remains in lockdown. As a result, markets have come under severe pressure as the virus has spread trigger dollar safe-haven flows.

But there is an opportunity here. With the cost of hedging dollars now significantly reduced and with the virus showing signs of slowing Europe compared to the US. Its the coronavirus divergence and not the yield curve convergence trade that opens up a panacea for short dollar positioning. Currencies of countries that will see the virus pass quicker should be in demand as those nations will see a faster economic recovery.

The Yen 

Not sure how much is left to do from the GPIF US bond purchases from a week ago assuming we are nearing the end. US funding pressure has recanted, and US yields are low enough to send the USDJPY toppling on the next sigs of equity market weakness. There is less exporter selling demand for general hedging purposes. Its likely offset by fewer importer dollar demand with oil prices in the $ ’20s.Although there has been a bounce in the USDJPY with risk sentiment, USDJPY and S&P 500 is not the truth bearer. Instead, its US rates that are the truth stayer so we could see USDJPY fall under pressure on the first sings of equity market weakness what will undoubtedly happen sooner or later. If you are bearish equities, now might be a good time to get short USDJPY.

The Ringgit 

A more positive risk sentiment, USD dollar funding easing, and the prospect of higher oil prices should see the Ringgit trade on a more friendly not today. A rise in oil prices sheds a lot of unwelcome baggage that has been hobbling the KLCI. And while the bounce in oil does not signal an all in green light for the Ringgit, we’re in a much better position today than we were mired in midweek, which is a good thing for local sentiment.

Asia Open: US Stocks Plummet Overnight, Another Day in the Dumps?

Markets 

US equities were weaker Wednesday, S&P500 down 4.4%, smaller losses seen through Europe and most of Asia. US 10Y treasury yields fell another 6bps to 0.61%. The tipping point came President Trump warned Americans to brace for an unprecedented crisis. At the same time, Boston Fed President Rosengren confirmed the sum of the market fears by suggesting the US would see two consecutive quarters of negative growth and that unemployment will likely “rise dramatically.”

Let’s face is it could have been worse if not for the nearly unprecedented peacetime fiscal and monetary stimulus on a global level with the possibility of another US budgetary package.

With the global economy in freefall, markets have gone back to risk-off mode overnight as investors are struggling to look through President Trump’s ominous forecast suggesting Americans could keep dying into June. Now the markets dispute to come up with some alphabet letters to analogize a potential economic recovery. Still, it’s going to be anything but a “V” shape recovery. That’s for sure.

Sentiment remains exceptionally fragile as investors are a flat-out bundle of nerves fretting over the potential impact the coronavirus will have in the US markets and the economy.

Economists continue to downgrade the macro forecast, while stock pickers are focusing on balance sheets and earning statements in the wake of 5 UK based lenders’ decision to withhold 2019 dividends. And also they are looking at other sectors where shareholder returns look questionable, But for many market observers, all roads lead lower.

Similar to UK lender bowing to pressure from the BoE’s Prudential Regulation Authority, the UK’s top financial supervisor. The RBNZ ordered New Zealand banks on Thursday to stop paying dividends or redeeming capital notes, amid widespread economic uncertainty caused by the coronavirus pandemic.

EPS

Before the virus, the bottom-up earnings estimate was $161. In other words, a sliver down from 2019. Now the bottom-up street consensus for EPS is -4% Q1 and -9% Q2. Suggesting that it will take an inconceivable bounce required in H2 to get the EPS aggregate up, especially when most companies have suspended earnings guidance, so there’s nothing for the street to work with.

Yet looking back to previous downturns, P/E has typically overshot downward. And simply put, it’s beyond belief that the only influence the virus and sudden economic stop has had is a 4% EPS loss, and an unwind of last year’s multiple expansion, from 21 times back to an average 16

Simply plugging in a 14 X variable that better reflects the average downtown and a more logical 7% EPS loss, which is the average for a downturn, you get 14x $151 to give 2114. That would represent a lower low than the SPX 2194 on March 19 and is pointing to another 14.5 % down move from here.

Overall, this will continue to be a short-term trader’s market as trying to take a longer-term view in this means you will probably need to run wide stops. But there is still two-way business going on, especially now that systematic selling has ended, and the market is ‘cleaner.’ Even then I’m not sure where the volumes will come from with institutional traders getting position limits cut by risk management to protect the banks against any massive trading losses

Oil markets

Oil prices are higher on news that President Trump will hold a round table discussion with the country’s top oil executives. Presumably, to discuss possible coordinated production curtailment measures in an attempt to buy some time for the struggling US shale industry as the nation’s logistical storage capacity is getting overwhelmed and is nearing total saturation levels.

President Trump’s acknowledging of the problems in the oil patch is critical, and he also revealed he had spoken with the feuding Vladimir Putin and Mohammed bin Salman on the subject. However, there is, as of yet, no obvious move or reconciliation between the producers.

But the threat of intervention or some type of coordinated global compliance agreement put a plank under prices as opposed to what many oil traders had expected this week, which was for oil prices to walk the plank.

Interestingly enough, Russia’s central bank has already need to adjust its policy due to the lack of petrol dollars per barrel. Not only have they stopped buying gold in the open markets, but they had to sell RUB16 bn of FX to settle March 31. While $200 million is small by central bank standards, but it does suggest a shortage of US dollars in their coffers, and the markets expect that reserve replenishing necessity to increase in April, especially oil prices remain low. But is this dire enough to motivate Russia to pull up a chair at the negotiation table with Opec or the US DoE?

At the same time, there’s again more chatter on the street that refiners in the US and Europe are reluctant to buy Saudi Arabia’s crude, despite the steep discounts being offered as part of Saudi efforts to pressure Russia and other global producers. The suggestion here is that this could cause Saudi to rethink + 12 mn barrel per day in April.

Right now, all we have to go in is lip services and hope that something can be salvaged from these talks. But if nothing comes out of these discussions, oil prices most certainly head for the floor. So, despite the bump in prices in New York, oil traders are still bracing for the storage tanks to fill, and the curve to flatten as oil producers will then have to dump what they pump. And to say they might have to give it way might not be that far of a stretch.

Gold 

Over the medium-term, gold should be a safe bet. The sizable fiscal and monetary stimulus that has been announced should be the main factor supporting gold from here, as reasonably aggressive fiat money printing seems to be here to stay. The only concern is the deflationary effect from deeper dive on oil prices, which is harmful to gold prices, especially if oil prices remain lower for longer.

Currency Markets

Despite quarter-end/month-end behind us, and with USD funding stress is decreasing, the USD’s safe-haven appeal so far continues to overwhelm the potentially negative impact of looser US monetary and fiscal policy.

While the China canary in the coalmine trade based on buying currencies of countries who took swift containment measures and that should see their economies return to normal quicker, fell flat on its face yesterday as the market went into “risk-off” mode as economic data was week across Asia and the rest of the world outside of China

The Malaysian Ringgit is trading off overnight lows as oil prices are stabilizing a few dollars above recent lows. Foreign investors are nervous wrecks watching the US economy freefall inflows to risky assets like the Ringgit will dry up as the reality sets in we could be in global lockdown mode longer than anyone had expected even last week. Indeed, the global outlook is dire. The Ringgit will trade defensively in this hazardous environment.

Entering the Covid19 Rabbit Hole

For a while last week, it felt like a stroll through Wonderland with the Federal Reserve Board “all in” and world leaders dropping nearly $5 trillion fiscal stimuli in the markets lap. All amid sugar-coated promises, this would be the deepest yet shortest recession in modern-day financial history. But with Coronavirus cases in the US rising exponentially with lethality projection rates soaring and secondary cluster fears gripping Asia and Europe causing county-wide lockdowns, it certainly feels we’re nudging ever so closer to falling down the Covid19 Rabbit Hole with reports that the US death counts could reach 200,000

Global cases increased by 26% since Friday (now 713,000), led by the US 136,888 total cases (48% growth). Less well known is where the virus building now:

  • Turkey 147%, Portugal 43%, Belgium 47% all had significant growth over the weekend
  • Australia, New Zealand, Canada >60% growth over the past three days
  • Chile, Argentina >75% growth

Now policy responses read like a playbook: cut rates to zero, purchase a more comprehensive array of assets than ever before, pump fiscal spending with little regard to debt sustainability. Suggesting we are nearing policy fatigue where it becomes less effective, and as the surprise element diminishes, no one cares.

So, while policy responses in the US and Europe have been spectacular, allowing for markets to rebound last week. But the coronavirus keeps spreading globally, deepening fears of the economic and financial impact across countries. More market turmoil likely lies ahead.

If you’ve spent any time ocean fishing, you’re probably aware of the term “sucker hole, “a colloquial term referring to a short spate of good weaker that “suckers” sailor into leaving port just in time for a storm to resume at full force. Well, that’s what last week’s market felt like as now we are about to enter a vortex of bad earnings, bad economic data, and bankruptcies. Indeed, last week’s animal spirits will be severely tested.

Oil and copper did not rally; the Vix isn’t pulling back despite the S&P 500 10% higher last week.

With no visibility on the end of lockdown,the world is becoming increasingly branched, with business people wanting a quick reopen thinking the solution to a problem produces a worse net result than the problem itself. And scientists pleading for caution as we don’t want to overrun the hospitals and potentially deal with multiple rolling lockdowns. And possibly triggering the ultimate policy destabilizing moment that no one wants to see as the President (emphasizing business priorities) and Governors (highlighting science priorities) lock horns. Fortunately, the President says he is extending virus guideline to April 30.

Oil prices 

The primary narrative 

The spread of Covid-19 and the impact on oil demand will continue to pressure oil prices. And the virus headcount numbers out of New York City are providing those especially poor optics this morning.

Oil prices have softened in the aftermath of the US package hoopla and suggesting the direction of travel skews lower as markets anticipate a 2Q that will inevitably see a large build in inventories as demand echoes the shutting down of major global economies.

Storage facilities 

There is a relatively wide range of estimates on how much global crude storage capacity remains and on how quickly that capacity is filling.

However, when the storage capacity is filled, we should probably expect a response from Saudi Arabia, Russia, and other essential oil producers. On the other, the longer their response takes, the higher the risk of another steep decline in oil prices.

While WTI seems settled in the low 20$ as a baseline for now, however, it’s tough to rule out a drop into the teens or lower if Saudi Arabia and Russia stay the course.

Only then would the cash cost accelerate shut-ins and ultimately lead to a price rebound, but it would make for a horrible year for a good chunk of the world who are oil price takers.

Supply 

On the supply side, which I think is less relevant today but a factor none the less. US Oil companies seem to be reacting more quickly this time than they did in the previous downturn. Energy firms cut the most oil rigs since April 2015, removing platforms for a second week in a row as a coronavirus-related slump in fuel demand has forced massive reduction in investment by oil and gas companies.

Drillers cut 40 oil rigs in the week to March 27, bringing down the total count to 624, the lowest since March 2017, energy services firm Baker Hughes Co. said in its weekly report.

False hope

Is there light at the end of the tunnel as several sources are reporting that refiners in the US and Europe are not buying Saudi Arabia’s crude, despite the steep discounts being offered as part of Saudi efforts to pressure Russia and other global producers.

Excess supply was brewing even before the Saudi – Russia falling out & long before the collapse in oil demand. Indeed, this the most significant mismatch between supply and demand in modern history, suggesting that these aggravating factors will l limit any price recovery even with a truce.

Gold Markets 

A shift back to ‘risk-off’ sentiment did little to support gold as the thought of distressed sales is still too fresh in trader minds. So, the market remained in tight ranges on Friday were all three sessions bore witness to profit-taking after steep gains last week. But US weakness helped to temper profit taking price declines.

But gold should shine through as risk sentiment weakens this time around. For the most part, the immediate need for equity margin call selling has already been done, suggesting there is no apparent reason to sell gold in this environment other than to book profits.

In both 2008 and 2020, gold has briefly been caught in the mix, where good trades were being liquidated in distressed markets. But last week there were clear signs the market is warming up the idea of central banks monetizing debt and leaving considerable excess liquidity in the banking system. But the key differentiator in 2020 is that QE is financing helicopter drop into households around the world. And interestingly enough, QE is even being discussed in ASEAN markets even when interest rates are far from zero, which could be the harbinger for a new form of debt monetization policy around the globe.

Currency markets

GFXC Issues Statement on FX Market Conditions

The Global FX committee (made up of banks and other stakeholders) has issued a statement (unprecedented as far as I can tell). Effectively it just says – “be careful this is going to be a big and busy month end” in slightly more technical language.

GFXC Issues Statement on FX Market Conditions

Dollar liquidity 

The dollar liquidity crisis appears over. It has taken more than $30 trillion in annualized bond purchases from the Fed, among others, but the dollar crunch now appears under control. US real yields have dropped almost 100bps in a few days, and cross-currency basis has normalized. So, with policy rates converging to zero, traders are now looking to take the Asia “virus divergence” trade global. In other words, bet on those economies that will see the virus pass quicker and return to some type of economic normalcy.

Markets may be able to look through some pretty horrible economic data—like the non-reaction to the historic spike in US jobless claims last week—but will likely be sensitive to the news on the duration of shutdowns and any signs of second-round effects extending travel alerts and lockdown measure.

Last week the Dollar pulled back as risk assets rebounded, but our best guess, as that all most of us are flying on, is that the epic USD rally is not quite over. But moth end flow will complicate matters, but with US equities in the tank, it’s unlikely we will see USD demand from rebalancing flows kick in today.

The Ringgit

The Ringgit will remain defensive due to secondary cluster fears, the negative economic effect of the MCO, and the prospect of lower oil prices, which reduces the supply of petrodollars, which is a crucial stabilizer for the Ringgit.

Cash Is King, Not Gold, Not Bonds

Exactly one month ago, on February 20th, the SP500 made an all-time high and reversed its trend to the downside. What a wild ride the last month has been across virtually all asset classes.

Out of all the major indexes, commodities, and currencies, only one asset and trade moved higher. It’s no surprise given the title that cash or the US Dollar is the asset of choice having rallied over 9% while everything else fell with bonds down 22.75%, stocks 30%-40%, gold miners 58%, and crude down 62%.

My team and I have talked about this rotation to safety into USA/US Dollar since the lows back in 2018. During the recent stock and commodity price crash, we have seen where investors are dumping their money. It’s not gold, it’s not bonds, but the US Currency. Stocks and commodities are being sold around the globe, and that money is buying up the US dollar.

US Dollar Rises Above the Rest
Proof the Greenback is Still the #1 Currency World Wide

Daily S&P 500 Index – Support, Bottoming signal, and Resistance

The 30+% correction in the ST&P 500 index has been an extraordinary event. Those who have proven trading strategies and abide strictly to position, and risk management rules have been able to not only avoid the market crash but profit and reach new account highs. While those who trade for the thrill, expect oversized gains regularly, and who don’t have a clear trading plan or position management are suffering from the recent selloff.

Ok, so let us jump into the charts. As a technical analysis and trader since 1997, I have been through a couple of bull/bear market cycles. I have a good pulse on the market and timing key turning points for short-term swing traders and long-term investors.

As you will see from the chart below, I keep things easy for you to see visually and get the idea of what to expect moving forward. The green line is a very significant long term support level on the S&P 500 index. Knowing that price has fallen straight down to this level gives us a much higher chance of a bounce at a minimum.

Trade Tip: The faster the price moves to a critical support or resistance level, the higher the chance you will have a bounce back from that level for a candlestick or three.

The pink arrow on the chart points towards a candlestick pattern, which I call Tweezers. These should be seen as a possible reversal signal.

Lastly, is the red resistance zone. I know it’s a huge range, but at this point, it’s the area we will zero in on once/if price starts to near that level.

30 Minute S&P 500 Trading Chart

This chart is the 30-minute chart of the index and only shows regular trading hours between 9:30 am ET and 4 pm ET. While this is only 1/3rd of the trading day for futures, it is when the majority of contracts/shares are traded, so that is my main focus for analysis.

Since 2001 I have been building and refining my trading strategies to make them somewhat automated. This chart below shows my trend colored chart, which is the basis of my trading for almost all asset classes. What the S&P 500 does directly relates to how I trade or avoid other asset classes.

Recently, we created a market gauge showing you visually where the market is within its 30-50 day price cycle.

When the trend changed, and the bars turned orange on Feb 25th subscribers, and I closed our equities position because they were now out of favor. This allowed us to avoid the market crash through trend analysis, and from our trailing stop order.

First Wave of Safety Was in Bonds

The two charts below of bonds show the same trend and trades but share some different trading tips.

The first 30-minute chart shows a pink line, which was our trend trade. The strategy is to look for large patterns, wait for a trend change, and then take advantage of the new trend. This trade we entered mid-January.

The key points from this chart are to know when the price goes parabolic in any direction and with huge price gaps, know its time to start scaling out of a trade, or close it.

The second point is that you must have a trading plan and actively manage your trade by moving up protective stop orders, so when price corrects, you are taken out of the trade automatically.

This daily chart of bonds shows the large bullish chart pattern (bull flag). I waited for price to breakout, the trend to turn green, and then entered the trade using Fibonacci extensions for price targets, which I have found are the absolute best way to spot our price targets. If bonds were to rally to the 100% measured move, we would close the trade, and that is what happened exactly.

A few things took place at that price level, which has the charts screaming at me to sell. First, the 100% target was reached. The second was that price was going parabolic with a 10% gap higher above my target, and volume was extremely high, meaning everyone, including their grandmother, were buying bonds. If everyone is buying the same thing, its time to move on to a new chart.

Gold and Gold Miners as a Safe Haven

While subscribers of my ETF trading signals and I profited on GDXJ as an early safe-haven trade exiting our position at the high tick of the day before it reversed and fell 58%, most traders I know still hold their gold miner’s positions.

For most of us, it is tough to sell a winning trade, and it is even harder to sell a losing trade. And knowing most trades will turn into a losing trade if you hold them long enough, the odds are clearly stacked against you as a trader.

This pullback in metals and miners, which turned into something much larger than I ever expected, is a huge shock to most people. The reality is history shows during extreme volatility/fear both gold and bonds collapse, and it is nothing new or unexpected.

In fact, I posted a warning that both will fall two days before they topped and collapsed.

Concluding Thoughts:

In short, we are experiencing some unprecedented price swings in the financial system, but other than extra-large market selloffs, and rallies the charts are still moving and telling us the same things for trading and investing.

There are times when the markets are untradable as a swing trader, which is has been the last 15 days because of how them market has been moving. It is a fantastic time for day traders, but with some sectors moving 10-25% a day back to back like the gold miners or crude oil, it is high-risk trading (gambling) right now.

With all that said, my inter-market analysis is pointing to some tradable price action potentially starting next week. The potential is larger than normal because price volatility remains elevated, meaning 10-20% moves over a week or two are expected.

Visit my ETF Wealth Building Newsletter and if you like what I offer, and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
www.TheTechnicalTraders.com

 

Coronavirus: Beating the Global Collapse

This article provides an update on the virus problem and the global economic outlook, so that traders could orient themselves in this changing environment and make profit.

China

In China, the count of total virus cases comes to 80,813, among which 3,176 are deaths. The analysis of these figures allows assuming that the country’s authorities have managed to get the situation under control. For the first time since January, the daily number of new infections dropped to single digits. Compared to 15,000 new infections in one day just a month ago, that surely seems like a victory. The diagram below shows a clear decline in the pace with which the virus is spreading and puts things into a positive perspective for the country.

Source: Bloomberg

As a result, China may probably start cheering for having already passed the tip of the crisis. Now, Chinese authorities will be tasked with economic recovery and putting their country back on track as quickly as possible. Beijing will also need to make sure it doesn’t falter on the US-China trade agreement signed in January.

That leaves us with the rest of the world to observe. That’s where we face a heavy sight.

Global picture

Worldwide, there are more than 130,000 confirmed coronavirus infections. Among these, almost 5000 are fatal. Out of each number, the biggest portion comes from China. However, that’s not important now. Not anymore.

What is important is that a month ago, the coronavirus was almost exclusively a Chinese problem and global powers were treating it accordingly. Bloomberg’s virus map that had China in the center reflects this point well.

Source: Bloomberg

That was a month ago. Look at the picture below and see the shift.

Source: Bloomberg

There are no more white spots on the map, except for Africa, Central Asia, and Greenland. What does it mean in view of the figures we just studied about China? It means that the virus is done ravaging the country it originates from, and is currently waging war on the rest of the world. Is that a problem? Definitely, yes. Why? Because in the rest of the world people, businesses and social structures do not toe the line under the government’s command, as they do in China.

That means the virus may spread much easier. Hence, the damage – humane and economic – may be significantly more severe.

The US

Just a few weeks ago, Donald Trump was confident, as usual, about the entire situation. He was hailing the “best ever” professionals that are prepared to fight off the virus as soon as it comes to the United States. From the financial side, Federal Reserve’s Chair Jerome Powell reported that there was no reason to act on the virus preemptively as the domestic economy enjoyed “strong fundamentals”.

Since then, things have changed. On March 3, the Fed “suddenly” lowered the interest rate by 50 basis points after an emergency meeting. Later on, President Trump addressed the nation informing about wide (although, unclear) fiscal support measures for businesses. The President also banned travel from Europe for 30 days.

Observes keep factoring in the upcoming disappointment with the country’s economic performance in the Q2-2020 and lowering targets for the stock market. S&P fell by 30% since its all-time high in February. It is bad? The curve of the virus expansion is still looking up, and more and more experts say that the US may have already entered a recession.

Source: Bloomberg

Europe

Fighting the virus should be the most difficult in Europe as it is not a single entity but a collection of states that have open borders and shared economic space. Containing and controlling the virus is based on unified measures. For the EU, generating such a response seems more and more difficult with each passing day. That is, even if we put Brexit aside.

On top of that, the last press conference of the European Central Bank puts doubts on the financial power the regulator has left to revive the Eurozone. It is also unclear whether it possesses any leverage over sovereign states. Even French President has voiced out his “I don’t think so” in response to Christine Lagarde’s plans to selectively quantity-ease here and there. What Germany, the biggest economy in Europe, thinks of that, we already know without asking.

In the meantime, Italy is second in the list of countries affected by the coronavirus after China with 1,016 deaths and 15,113 total cases. Spain got number four with 84 fatalities and 3,004 infections, and France is at the sixths place, with 61 and 2,876 respectively. Given the libertarian inclinations of these countries, it is hard to imagine communities being forcefully quarantined and everyone compelled to wear a mask.

So are we done?

No, the opposite. We are just starting. Why? Because the global doomsday presents opportunities to trade that may not come in decades. Stocks dropping by 40% and more, currencies going into major turbulence, and oil at $25 – that doesn’t happen often, especially, together. That’s why, instead of following the prevailing moods and rushing away from the trading terminal, a trader needs to concentrate more and make sure all the levels are properly set and the trade tactics duly prepared. All of this should be carried out in the very common manner of a daily trade routine with proper risk management.

More specifics, please?

Ok. First, there may never be a situation that blindly harms everybody. Someone always gains amid the total Armageddon. Speaking about stocks, you may think of the pharmaceutical companies, which may get millions and billions of government contracts to fight off the virus resulting in unprecedented sales and cash flows – something that would never happen without a virus. So you can bet on these if you want to go bullish. In addition, you can bet on those companies, which can benefit indirectly – such as Netflix, for example. If thousands of people have to stay home to wait out on the virus, they will be “forced” to their screens – and Netflix will be there. Facebook’s stock has also proved so far quite resilient. Be careful and selective though – Disney’s stock plunged on the news about the company closing its theme parks.

Second, in the long run, the economy will eventually hit the rock bottom and reverse, whatever happens. Trust Warren Buffet if he says so. So again, choose a stock CFD, set the support level to aim at, and go bearish. Once you see a reversal, set the confirmation checkpoints, and go bullish. Straight as always.

Apart from these options, currencies, oil and gold are waiting for you. JPY and CHF will win in the longer term as undisputed safe-havens. AUD and NZD will be losing in the medium term due to the crippled Chinese demand for Australian and New Zealand’s exports, exotics lose against the USD even when the latter is shaken. Gold will keep rising in the long term as long as the oil war and recession fears are around, and oil price will be under pressure as long as Russia and Saudi Arabia are wrestling over the European market and supply quantities. This is your fundamentals kit to get into the crisis with a good chance to win in the end. Trading strategies abundantly provided in our Tips for trades can be your technical ammunition.

The idea is the following: stay confident and consistent in your trading. Yes, some panic is there, but winners are there too. During the crisis, the one who can stay is the one who can win.

P.S.

Good habits are a blessing. Read how to benefit from the global collapse, wash your hands and keep trading.

Currency Carnage: FX Market’s Unhinged

  • In periods of excess market volatility and heightened uncertainty, the preference for staying ‘liquid,’ i.e., holding a more substantial amount of cash, increases. Some of it is purely technical (due to margin calls or a scramble to hedge currency exposure, for example), and some of it is precautionary (some corporates drawing on credit lines).
  • Corporate credit spreads have widened on the view that disruptions to supply chains alongside falling demand as a result of the viral outbreak could impair firms’ ability to access liquidity.
  • COVID-19 has disrupted trade on both the supply and the demand sides

 

  • The pandemic has increased pressures on globalization, amid signs of rising protectionism.

 

  • The surging dollar hits the global economy like a sledgehammer.

Markets

Well, its 3:30 AM in Bangkok, and I’m on my third cup of coffee trying to make sense out of this market carnage. But a safe bet I’m not the only market participant in Asia who had a restless night while continually waking up to check their trading apps and other mobile news services.

The market now realizes its some of all fear that the world’s central banks are powerless to stop the market turmoil.

With a more extensive and far quicker spread of the virus than generally expected just weeks ago and with early evidence that the impact on Chinese activity was far worse than initially projected, investors are hunkering down for a severe global recession.

As we buckle in for another volatile day on global trading floors, The S&P500 closed 5.2% lower Wednesday, unwinding the gains seen Tuesday. Weakness extended further after a 15-minute trading halt in the early afternoon, though a sharp rally in the last 30 minutes or so of trading softened the scale of losses. Smaller declines in European equities, and more minor again in Asia as well. What has been especially notable in recent days has been growing signs of forced selling of safe assets: US Treasuries sold off again Wednesday, with US 10-year treasury yields lifting a further 11bps to 1.18%. Gold fell 0.7%. And oil prices went into a freefall, down 24% to their lowest level since 2002.

Here’s my take of the currency carnage

Circumstances rapidly deteriorated with global mobility restrictions in full force. The global lockdown trigged self-accelerating appreciation of the US dollar as investors were forced to reduce leverage across all asset classes.

With few liquid options left to hedge into, the entire gale force of global risk hedging requirements spilled into the Foreign Exchange markets as nowhere else to hide other than the US dollar scenario steamrolled.

Much of the currency market focus has fallen on Cable overnight as the UK economy goes down the route of elsewhere and into full lockdown. The GBP hit 1.1500 overnight in fragile trade – the last time it traded lower than this was in March 1985, when 105 was the previous low. However, that is merely a symptom of the cause. Investors are forced to reduce leverage across all assets compounded by the USD liquidity squeeze.

It’s not like the downside outlook for the US economy is any better than elsewhere; in fact, non-traditional data confirm the US economy is shutting down quickly. Global currency markets have completely unhinged from a mechanical/technical reason compounded by the dash for dollars amid a USD liquidity squeeze.

Economics in the time of Covid

Economics in the time of Covid is a different beast with the best data being real-time that provides insight into the extent of the slowdown. US Restaurants are shuttered by mandate, and the data confirms a collapse with a few cities already at -100% table rates. But one of the more interesting ones is traffic data from TomTom. It shows the speed with which Houston went into a virtual shutdown, which both illustrates the ghost town outlook due to the collapse of the shale industry and mobility restrictions.

Yesterday London closing note I referred to the looming tail risk is that US unemployment is set to rise quickly. Attention has already turned to the scale of job losses, which will hit the US economy in the coming weeks and months. We’ll get our first clue of this on Thursday with initial jobless claims at 12.30 London. Headline expectations are for 220k initial claims, a modest increase from the previous week. The range of expectations isn’t huge, but the standard deviation of forecasts at 8500 is the biggest since December.

However, next week will be the truth bearer after state unemployment websites in Kentucky, Oregon, and New York crashed under the weight of traffic. And that according to an NPR/Marist poll conducted Thursday and Friday, 18% of households already reported someone being laid off or having hours reduced because of the coronavirus outbreak.US jobless claims highs of 695k in October 1982 and 665k in March 2009. I would expect these previous high-water markets to be obliterated and possibly hit 1 million new jobless claims.

Unlike the Lehman crash outside the financial sector, life went on as usual. In essence, restaurants took bookings; taxis took rides, shops were still bustling. This time around, the entire US (and global) economy on the precipice of shutting down, which means unemployment will skyrocket.

Where do we go from here?

Recently the focus has been on the market’s struggles, but ever so increasingly amid the market turmoil, and attention could start to turn towards the institutions that drive this market, especially the hedge funds themselves and their solvency. Yesterday it was announced that two UK property funds had become the first to “gate” due to market conditions. These will raise questions over whether other property funds follow suit, especially as investors in that sector could decide to sell whatever is liquid and is actively trading. Given the unbridled use of credit and leverage many of these institutions were operating on, we could be only bearing witness to the tip of the iceberg.

Will there be more financial repression if this continues? After all, there is nowhere safe at the moment to put your money other than a bank. The Fed and Bank of England may say they aren’t going to take rates negative, but what is going to stop commercial/ wall street and high street banks from starting to impose negative interest rates on their customers?

Oil markets

Crude oil is having a bit of a tough day today. Much of the impetus for the fall came after the headline earlier that Saudi Arabia’s oil minister told Aramco to keep supplying crude at a pace of 12.3mbpd over the coming months. And it has been one-way traffic since then.

The continued containment and lockdown response of the world’s major economies in response to Covid-19 will advance to a sharp impact on oil demand, but the OPEC+ producer group’s cranking up of supply into these unprecedented conditions will trigger even more selling.

The EIA US crude oil stockpiles rose last week while gasoline and distillate inventories fell last week, but the report predates the U.S. Covid 19 lockdown.

Even if global production remains static over the near term, let alone factoring in Saudi Arabia increased supply. Inventories will swell as gas and oil demand drops precipitously in the weeks ahead of when physical storage facilities are filled to the brim around the world. In this situation, it’s unclear if a point of equilibrium even fits into this scenario. As once the swift and savage physical rebalancing takes place, the markets could quickly fall to WTI $15 or even further, which is now becoming the base case for some.

Gold Markets

The gold narrative hasn’t changed provided there a cause for forced liquidation of other assets; gold prices will probably remain capped over the near term.

But as the demand for cash becomes more pervasive as personal liquidity and capital preservation become a dominant consideration in investors’ decision making. Bullion owners in any form physical, paper or scrap, will probably continue to liquidate in order to boost capital levels the more protracted the Covid19 global lockdown extends.

And if you’re wondering where the sovereign demand for gold is, according to Goldman, Russia demand has fallen off due to lower oil revenue.

But in my view, central banks are more concerned about increasing their USD holdings by any means and increasingly so through SWAP lines. At this stage, buying gold is well down their list of concerns. However, for the gold market concerns, hopefully, we don’t get to the stage where Central Banks need to sell gold to raise dollars as that’s when the trap door most certainly springs.

How To Trade Gold & Bonds During High Volatility: March 18 2020

Chris Vermeulen of http://www.TheTechnicalTraders.com shares his take on the Gold and Bond market corrections. You should not have been surprised at all and should have profited from this recent price action. FX Empire posted my special report warning of this and my analysis here: https://www.fxempire.com/forecasts/article/fear-reaches-a-level-seen-only-4-times-since-2008-signature-pattern-637481

Find out what is next and watch this video.

How To Trade Gold & Bonds During High Volatility: March 18, 2020

The World is All In!!

Markets

The Fed’s all-in strategy has failed to lift sentimentThe S&P fell more than 12% Monday, European stocks were between 4 and 5% lower following losses in Asia. US 10Y yields fell 22bps to 0.74%. Oil fell by almost 10%. Those moves follow weaker-than-expected Chinese activity data for January and February, intensification of citizen restrictions in the US and Europe, and despite leaders of the G-7 nations vowing to do “whatever is necessary” to support the global economy.

Unlike most instances of a sharp downturn in economic activity, this one was seen coming. The Fed bazooka does mater, But – critically – while the Fed wishes it could fire at the left-side of the V, it can only hit the right side with its stimulus efforts. Swamping credit markets with cash is their crucial motivation as conveying the appearance of keeping both credit lines and lending facilities awash with money during a possible credit crunch amid an economic downswing of this magnitude is critical. But painfully as it is, when you shut an economy down, low rates do not have a simulative effect on consumption until the shock passes.

This is 2008, but with a completely different focus. Back then, it was banks, his time bank balance sheets as fine the buffers built in after the GFC are working. Furthermore, liquidity tools are all working.

But this isn’t a banking crisis; it’s a global economic crisis where virtually every global industry will be facing extreme pressure without a public bailout.

Speaking of bailouts, one thing that has always been key in the market eye was how policymakers deal with a plummet in air traffic, which has sent Airlines shares into a death spiral while taking credit markets along for the ride. He combined One world, SkyTeam, and Star Alliance members have called on governments and stakeholders to provide extraordinary support. The group said there should be a re-evaluation of landing charges to mitigate revenue pressures.

Fortunately, for the airline industry, the White House was listening as economic adviser Larry Kudlow says the administration is drafting a financial assistance package for the airlines that are expected to include direct assistance, loans, and tax relief.

He also says it would consider sending cash to households as short-term relief. Hong Kong did something similar a few weeks ago, which, it was suggested then, is how sufficient helicopter money might work in practice while getting cash in the hands of the folks that need it the most.

Measures of volatility and risk in credit & equity markets are back to levels last seen in 2008 even as the Fed steps in again. But don’t misinterpret peak volatility with a trough in risky asset classes – history implies otherwise.

US bank stocks are around 18% lower. Eight US banks have announced they are suspending share buybacks and will instead focus on supporting clients.

Oil markets

Oil prices lifted off the mat in late NY trade after 24 hours of “sell sell sell” as COVID-19 newsflow over the weekend was exceedingly grim as Europe, and now the US begin to aggressively step up their reaction to the spreading of the virus. And emergency Fed cut in rates to zero serves to highlight the gravity of the situation.

Oil market historians are quick to point out that this is only the 5th ever demand decline in the modern era. But what’s different this time is that we are experiencing simultaneous supply and demand shocks.

Presumably, the market is getting supported by physical bargain hunters, but those storage facilities are rapidly filling. If storage does fill, quashing that demand, oil prices are sure to collapse further, and the global markets will then have to hope that the dispute between Saudi Arabia and Russia is resolved before we reach that point of no return.

In addition, the bounce in Asia could also be due to the front running of a possible China stimulus. Many traders are buying into the thesis that China will unleash the mother of all stimulus once China sees the virus through and people return to work

But Oil traders are hardly confused by the latest developments. On top of simultaneous supply and demand shocks, the market continues to move linearly as reports of global containment measure and more travel restrictions roll in. All of which suggest rallies will fade

And more damningly for oil prices is that perhaps the markets have underpriced the extent of the economic carnage as Covid-19 moves like a wrecking ball through the global economy.

When social distancing becomes and acceptable and widely used expression in everyone’s phrasebook, I don’t think people around the world are all that eager to jump in trains, plains, or automobiles, even if they wanted to. While the fear of secondary outbreak will likely keep them hunkered down well beyond peak virus

Gold markets

Yesterday early morning gold gains on the Fed rate cut reversed as equities slump, but losses pared; bullion is showing some signs of stabilization. Still, gold declines remain linked to investor’s need for cash.

A constant question on every bullion investor’s mind is why is gold retreating when uncertainty and’ risk-off’ sentiment is rising? Gold’s recent declines are chalked up to margin-related selling as equities fell. But there is an added fear element: the need for capital preservation is becoming a primary thought in investors’ decision-making process. Holders of gold, whether it be physical, paper, or even scrap, are liquidating to boost capital levels. But this may only go on for as long as equities remain so weak. The rebound late in NY is impressive.

Precious metals flow appear to be driven exclusively by forced liquidation across the yellow complex. ETF accounts are the most active with platinum leading the volume (the market is long; investors wanted to get out) and silver (XAUXAG ratio puffed up to all-time highs). Gold, which had attracted so much determinative subscription, there was initially more selling across the board overnight. Still, gold prices have axiomatically rebounded as gold is a hedge for all-seasons crowed was likely motivated by the deluge of central bank easing, which has made credit lines both reachable and actionable.

Similar conditions were seen in the aftermath of the financial crisis. Gold was initially caught in the crossfire but soon embarked on a rally to all-time highs. The policy response has been fast, and the velocity of devastation in asset values is unprecedented. But If gold is to retain its risk-off appeal, the recovery needs to be quick.

Good news for the gold investors is that the risk parity and vol control segment of the markets are running out of equity market risk to pare as stock market exposure plunged to GFC lows.

Forex markets

G-10

 

Traders need a more compelling reason to short the USD. Zero rates and QE will be very efficient in weakening the dollar once global growth sentiment turns around. But dollar funding stress across a breadth of global markets as evidenced but widening in the cross-currency basis last week signal more USD buying to come. However, if today’s Fed action effectively alleviates some for that credit stress, this would be the first step to a weaker dollar, particularly against currencies where risk premia are extensive such as EUR and AUD.

Beyond China (at a stretch), there is scant evidence that life is returning to normal. On the contrary, more significant restrictions on international travel, proximate social contact, and intra-country transit seem likely, which will undermine economic growth, with equity markets and credit markets taking more pain. Suggesting the greenback is not going out of favor anytime soon.

EM Asia FX

Yes, the global economic outlook is miserable, but what’s more critical for Asia FX risk is China. Yesterday’s China high-frequency activity data was horrible and even worse than expected amid the virus pessimism, which should continue to weigh on sentiment as China GDP revisions get marked lower.

The Bankers Association of the Philippines says FX and fixed income trading will be suspended from Mar. 17. (Bloomberg)

Taking a page out of China playbook, the Philippines policymakers are imposing the ultimate circuit breaker but shutting down the PSE as the island effectively goes into lockdown containment mod. It sounds like a prudent measure, although ultimately curbing short selling for a month or so might have been the first order of the day.

But the US dollar liquidity crisis needs urgent repair QE announced by the Fed overnight will help increase dollar liquidity in the global financial system. Still, the money needs to flow down to the real economy. This could give time. The fact EM central banks were not offered up Swap lines by the Fed at this time for them exchange UST’s for cash at the Fed window makes things a bit more urgent for small markets like the Philippines.

If there is a currency run in other parts of Asia due to the USD liquidity crisis, we may see similar curbs across Asia, starting with short selling restrictions.

In my view, its the USD liquidity crisis, not the economic damage is the absolute wrecking ball through Asia FX.

As Asia sees the virus pass before the west, things return to normal in ASEAN currencies quicker that most of G-10.

Is This A Bear Market When Stocks Crash 20% and Bonds Spike 30%

It is another blood bath in the markets with everything down, including TLT (bonds) and gold. Safe havens falling with stocks is not a good sign as people are not comfortable owning anything, even the safe havens, and this to me is a very bearish sign.

Now, with that said, this is one day one of this type of price action and one day does not constitute a new trend or change the game, but if we start seeing more of this happen, we could be on the verge of the bear market we have all been expecting to show it ugly face.

The SP500 (SPY) is down 19.5% from the all-time high we saw just three weeks ago, and the general bias for most people is once the market is down 20% that is a new bear market. I can’t entirely agree with that general rule. Still, a lot of damage is happening to the charts. If price lingers down here or trades sideways for a few months I will see it as a new bear market consolidation before it heads lower, and we start what could be very deep market selloff and test 2100 on the SP500 index (SPY $210) for the next leg down looking forward several months.

20% Stock Market Correction Are Not Bearish

 

Just because the markets have a deep correction of 20% does not mean its game over for stocks. Just take a look at the chart below on what happened the last time the market corrected 20%. As you can see, they were the biggest and best investor opportunities over the past 12 years. Today, my friend called and said they heard on the news that we are now officially in a bear market, and what should he do?

20% Corrections Can Turn Into a Bear Market – Be Ready

The SP500 fell 20% in 2001 and again from the 2007 high its lows, then bounce 10% – 14 over the next few months before rolling over to start its first bear market leg. I feel something similar will happen this time, which would put us a few months before the price should test these lows again and breakdown to give us optimal time to reposition our long term portfolio.

Once we do start a bear market, you will notice price moves very differently from what we have experienced over the past 12 years. How you trade now likely will be a struggle to make money. If you try to trade bonds, they are relatively tricky because of how they move during a bear market. The stock market can fall for a year, and bonds are still trading at or below the price they were when the bear market started. This different price action is what happened in 2001-2002, and again in 2008.

Bonds Go Ballistic

Bonds also take on the price action similar to how the VIX trades with violent price spikes only to fade back down again quickly, and this generally happens near the end of a bear market, or extreme selloff like we are in now. Heck bonds (TLT) jumped 30% just in the past few weeks, we caught it, but most traders missed this move. You need to understanding market sentiment and how to trade bear market type price action because that is how the market is moving this week, and trading/chart patterns become more sentiment-driven than logical trading setups and trades become counterintuitive.

I also traded GDXJ for a 9.5% gain and closed that position at open for the high tick with my followers, and we didn’t follow my proven trading rules for price targets, trailing stops, and reading the market sentiment we could be down over 30% today which I know many traders are simply because they lack control of their trading (no defined rules, fall in love with positions). I’ll be doing a detailed gold and gold miners article so stay tuned!

Concluding Thoughts:

I share this analysis, not to scare you, but let you know where we stand. The stock market is treading on thin ice, and if/when it breaks down, a new bear market will have started. Remember, we are still in a bull market, but the coronavirus is stopping businesses, which means earnings will be poor, and that is why stocks are falling. Investors know stocks are worth less money if they make less money; it is that simple.

The type of market condition I think we have entered could be here for a while, a year or three, and it’s going to be a traders market, which means you must have a trading strategy, plan your trades, and trade your plan. It’s amazing how simple a few trading rules are written down on paper can save you thousands of dollars a year from locking in gains, or cutting losses. It’s easy to hold winners until they turn into losers, taking to large of a position, or maybe you have masted the art of buying high and selling low repeatedly? Yikes! It happens to most traders, and it can easily be overcome with a logical game plan I cover in the crash course, pun intended ?

Someone yesterday I spoke with said that in the USA alone already had 10,000 people die just from common influenza, yet here we are freaking out over 17 dead in the USA. Sure, its bad news, but the common sicknesses for older citizens makes coronavirus seems a little blown out of proportion. There are conspiracy theories out there and this could be bioweapon which is scary and I am no expert in this field but my sources are not concerned with the Conornavirus. I want to think a cure gets found soon, and if so, the markets will rebound with a vengeance, and we can relax.

In short, if you have lost money with your trading account this year, holding some big losing trades that were big winners just a couple of weeks ago, I think it’s worth joining my trading newsletter so you can stay on top of the markets. I take the loud, emotional, and complex market and deliver simple common sense commentary and a couple of winning trades each month.

My trading is nothing extreme or crazy exciting because I’m not an adrenaline trading junky. I only want to grow my entire portfolio 2-4% a month with a couple of conservative ETF trades and make a 22%-48% return on my capital without the stress of being caught up in this type of market and feeling like I always need to be in a trade.

Happy Trading!

Chris Vermeulen
Chief Market Strategist
www.TheTechnicalTraders.com

Market Riding The Wave Of Fiscal Leadership 

Better market sentiment eventually won out in US equities overnight, the S&P500 closing almost 5% higher after a volatile session that saw the index in the red at one point, and after substantial recovery in oil prices. Oil prices are up ~10% over the past 24 hours after the historical declines were seen Monday. US 10Y treasury yields have also risen, up 25bps to 0.79%.

But with White House headlines driving the bus, this thing could flip on a dime as we’ve had many failures to communicate with this administration, fingers crossed they don’t mess this one up big time.

Expectations for a “major” fiscal stimulus package by the US government have underpinned sentiment – even if the volatility suggests the market still needs a bit of coaxing. Indeed, investors were in desperate need of leadership from policymakers’ Central banks can do their bit, but in times of viral cataclysm, it’s governments that must be seen as in charge of the proceedings. US President Trump’s actions evidenced how little it takes for markets to respond favorably.

In the early stages of a fiscal response, an expression of dogged determination to do by any means necessary can be a game-changer. In a later stage, however, discernment will be based on the quality and how rapidly the measures are rolled out.

Although there remains a lot of uncertainty and pessimism in the market, traders are flourishing in this environment as the big swing moves are a recipe for fast money to merry make given the linear smorgasbord of risk on/off trades available in the market.

Oil markets

Oil investors are taking comfort, and prices are finding support from the White House administration plans for economic stimulus and a slowdown of new COVID-19 cases in both China in Korea. The virus outbreak in China looks increasingly to have come under control, while the drop in case counts in Korea, the best proxy case study for investors, is providing a light at the end of the Covid19 tunnel. As Korea sees off the virus, markets will assume aggressive quarantining in countries with advanced medical care will follow suit.

The good news is that oil markets appear already to be pricing in the rapid return of Asia oil demand. While we should expect volatility that could even briefly punish oil into the upper $20/b range, with the fiscal taps expected to open wide on a global manner, oil prices could find support. They may even continue to claw back lost ground when those fiscal pumps actuate.

The overnight bounce also demonstrates there is already some awareness that markets may have been too quick to price in a worst-case supply scenario for oil.

The bad news is that there no end insight sight to Saudi Arabia and Russian squabbling. However, OPEC members have been quick to remind market participants that backroom channels remain open. But if both colossal oil-producing giants are determined to take this fight ” the championship distance, it will be bad news for oil bulls. Reports overnight that Saudi Arabia is committing to supply 12.3mb/d of crude in April (around 2.8mb/d above their current production level) suggests any prospect that relies on cooperation from Saudi seems unlikely in the near term. While other press reports suggest Rosneft could raise production by 300kb/d very quickly from 1 April, suggesting Russia is also digging in for the long haul

Falling an exogenous supply shock, I see two possible upside scenarios from here: 1) Russia and Saudi Arabia could resolve their differences, paving the way for a return of the OPEC+ agreement and coordinated supply cuts to support the oil price. 2) Saudi Arabia and the rest of OPEC could decide to go it alone and collectively do what they can to help oil prices.

Despite the sizeable crude build, as reported in the API survey, oil prices have held up as the White House continues to fortify the cracks with a mega stimulus package.

Gold Markets 

The once-in-a-generation supply/demand shock in oil has temporarily diverted cross-asset market maker’s attention away from gold. It feels like the broader commodity complex has bedewed the price action, but so far, deeper dips to $1640 are currently well supported. Negative real rates and the sticky nature of the gold buyer propensity could offer up a primary level of support. Still, it’s far from a one-way street amid newfound USD demand as confidence remains shattered after failing to take out $1700 when the gold stars were aligned. And gold could fall much more now if Covid19 case counts continue to fall in Asia and the incidents in Europe stabilizes, which could trigger a cheapening of the global yield curve (price decreased yield goes up) and green light risk sentiment.

I also expect more opportunistic producer hedging at these levels – interest remains out of South Africa remains heavy, which continues to cap upticks.

If you follow my blog, you know I’m a regular buyer of RCM one once bars, but with Bangkok awash with scrap given the XAUTHB elevated level I don’t leave home without my gold testing kit these days as I can buy scrap 96-99 % pure $ 50-100 below spot yesterday. This could be taking some physical demand away from the market given Asia is awash with scrap, and smelters are doing vibrant business these days while offering Jeweler demand at a discount to spot. Indeed, the essence of gold is all about the supply and demand curve.

Currency markets 

The US Dollar

Despite rising fears of a global recession and credit crisis spurred by bankruptcies in energy, tourism, airlines, and other industries, the trading equation is getting more complicated. Over the last 24 hours, we have had a ton of policymaker noise.

President Trump’s seeming denial of the coronavirus crisis has unquestionably been a significant factor driving flows over recent weeks. Investors started to price in ever worse pandemic outcomes; the longer a credible response was absent. The ultimate game-changer came about on Monday, when the first indications that the White House might change tack, and immediately markets responded positively. Trump said that on Tuesday afternoon, he would announce ‘very dramatic’ actions to support the economy with ‘major’ steps to get ‘very substantial relief’ for businesses and individuals. It’s great for the USD when the President has the US  markets back

The Euro

The Euro fall is not merely a position reduction move ahead of the ECB, although that notion provided to be an extremely timely inflection for those that cut on the EURUSD surge to 1.1470-1.500 (my target zone entering the week). The move higher in EURUSD was all about the Fed cutting rates, likely down to zero, possibly as soon as next week, with the ECB unable to match the moves. Because monetary policy cannot backstop a coronavirus-driven economic hit, equity and fixed income markets panicked regardless. Once fiscal policy measures are being taken, they will become a driver of relative market performance. With the White House administration leading by example, US exceptionalism will without any time. As long as the European policy response remains underwhelming, EURUSD might not move much beyond 1.1500.

The Japanese Yen

Equity futures are a fair bit off the lows, and USDJPY has moved above 105 as a consequence of risk turning on. And while the critical risk marker has been subject to express elevator rides in both directions. The thought of fiscal by the US and Japan in a coordinated fashion does hint that the US treasury is willing to overlook a Tokyo policy influenced marginal cheapening in the Yen for the betterment of global trade and investor sentiment.

The Ringgit

Trades will take some comfort in the White House fiscal policy inspired rebound in the commodity markets that see oil prices claw back a chunk of the Monday losses. The problem for trading ASIA FX is how will lower US interest, but weaker growth in China impact currency sentiment. So, we could be back to growth vs. differentials. In my model, the three-month growth outlooks win out every time with global interest rates, so low m high yielder strategies aside.

In stock markets flow the Asia to big to miss optimism continues to resonate to a degree amid the genesis of rapidly falling regional rates, and the prospect of a stable and even more robust RMB does flicker the green light on ASIA FX pullbacks. However, growth risks suggest that chasing a local currency rally is but a mug’s game until the economic data definitively pivots.

With the market in a dollar buying from of mind, there will be some spots to pick on a pullback to 6.97 USDCNH while currency Ringgit leaves look attractive if you think the Oil market rebound will stick as the Ringgit could be a stable beta to oil trade in the making.

Gold Peeks Above $1,700 amid Coronavirus Fears and Market Turmoil

On Sunday, Italy registered a huge jump in new cases of the COVID-19, the stock market plunged, while the oil market crashed. Tuesday morning, and Italy is on lockdown. Meanwhile, gold jumped above $1,700. What’s next for the yellow metal?

Gold Jumps Above $1,700

Last week, I wrote that:

from the fundamental point of view, the environment of fear, ultra low interest rates, weak equity markets and elevated stock market volatility should be positive for the yellow metal (…) the good news is that the markets expect further Fed’s interest rate cuts on the way – it lays the foundation for future gains in the gold market.

And indeed, we did not have to wait long for more gains. On Sunday, gold jumped briefly above $1,700, reaching another psychologically important level, as the chart below shows. The yellow metal made it to this price point for the first time since late 2012.

Chart 1: Gold future prices from March 3 to March 9, 2020.

C:\Users\arkadiusz.sieron\Desktop\GOLD\FUNDAMENTAL GOLD REPORT\stooq gold march 9.png

Yes, you guessed, gold went further north amid the growing spread of the COVID-19. Data reported to the World Health Organization by March 8 shows 105,586 confirmed cases in the world, of which 24,427 originated outside China. Actually, over 100 countries have now reported laboratory-confirmed cases of the new coronavirus.

What is really disturbing is that Italy reported a huge jump in total cases and deaths from the COVID-19 on Sunday, a surge from 4680 and 197 to, respectively, 7424 and 366, as one can see in the chart below. The jump in figures comes as the Italy’s government introduced a quarantine of 16 million Italians in the Lombardy region and 14 provinces and announced the closure of schools, gyms, museums, ski resorts, nightclubs and other venues across the whole country. In the US, more than 500 people have been confirmed to have the virus and more than 20 of them have already died.

Chart 2: Total number of confirmed cases of COVID-19 in Italy from February to March 2020.

The spread of the COVID-19 increased the risk of a full-blown world pandemic and global recession. The expected economic slowdown slashed the demand for oil. To make matters worse, the OPEC and Russia did not agree on production cuts. Instead, the Saudi Arabia slashed its April official selling price and announced plans to raise production in a bid to retake market share. As a consequence, the WTI oil price plunged below $30, or 34 percent in the biggest crash since 1991, as the chart below shows.

Chart 3: WTI oil price from March 3 to March 9, 2020.

Moreover, the stock market plunged again. The futures on S&P 500 went down 4.5 percent on Sunday evening in North America, and closed 7.5% lower (that’s over 225 points down). It’s not surprising that investors are fleeing equity and oil markets and increasing their safe-haven demand for gold.

Another positive factor for the gold prices is the collapse in the bond yields. The 10-year interest rates have plunged below 50 basis points on Sunday. As a reminder, in December 2019, the yield was slightly below 2 percent. It means a huge change. The bond market action implies that investors are expecting recession and the Fed’s accommodative response. It would be hard to imagine better conditions for gold to shine.

Chart 4: US 10-year Bond Yields from March 3 to March 9, 2020.

Implications for Gold

What does it all mean for the gold market? Well, I am of the opinion that the prospects for gold are positive. We have not yet reached the full-on panic. The epidemiological peak is still ahead of us. With Italy rolling out a massive quarantine, the fears over the COVID-19 impact on the supply chains and the global economy will intensify. Moreover, the biggest headwind to the gold market, i.e. strong US dollar, has been removed. As the Fed’s interest rates cut worked to soften the greenback, gold can now benefit from both the safe-haven demand and the weak US dollar.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though 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.

 

Italy’s Economy Proves Extremely Vulnerable to Coronavirus Epidemic

Governments around the world are in a quandary over Covid-19: how to counter the economic disruption caused by the outbreak when public-health measures to contain the disease require often severe restrictions on people’s ability to travel and work.

Italy has reported the largest number of cases of coronavirus in Europe, standing at more than 9,100 now, with at least 463 deaths to date, leading the government to take drastic measures to slow the spread of the disease. Schools closed on 5 March for a minimum 10 days and sporting matches will be played behind closed doors for the next month, if they haven’t already been cancelled. The authorities have expanded a quarantine to all of Italy, restricting public gatherings and encouraging “social distancing”.

The public health challenge the Italian government faces is very serious. But on top of the disruption to millions of ordinary people’s lives and the distress for those worst affected, the Italian economy is experiencing a triple shock.

Export Sector Risks

First, Italy’s export-oriented industry is relatively heavily exposed to the disruption to global supply chains caused by the initial outbreak of the disease in China. As Europe’s most-important manufacturing powerhouse after Germany, Italy is the EU’s third biggest exporter of goods to China and third biggest importer from China after Germany and France.

The particularly virulent outbreak of the disease in Italy is taking place in the country’s northern industrial heartland. The region of Lombardy alone counts for around 27% of exports and 22% of Italy’s GDP, with the total share of the economy attributed to severely impacted regions rising to 40% once Veneto and Emilia-Romagna are included.

Significant Impact on Tourism Industry

Secondly, the impact on Italy’s treasured tourism sector is significant. The international spread of the virus is discouraging visitors to some of Europe’s most popular holiday destinations such as Milan, Venice and Florence. Tourism accounts for 13% of Italy’s economic output by itself. Even after the global and Italian manufacturing sectors start to recover, Italy’s tourism exports might well lag behind should travellers remain reluctant about voyaging too far from home.

Vulnerable Economy and Public Finances

Thirdly, the Italian economy and public finances were already in a vulnerable position in comparison with those of other European countries even before the coronavirus struck. GDP shrank in the fourth quarter. Public debt remains high. We expect gradually rising debt to GDP in the future. In addition, we undertook an exercise a month ago to stress test the public finances of EU countries. Italy scored weakly in terms of its fiscal vulnerability to a severe economic shock and capacity to weather such a crisis without significant increases in public debt.

Conclusion

Our conclusion is that Italy is facing a very difficult year as the epidemic has brought widespread disruption to many communities in addition to the distress they are suffering as the death toll has mounted. We estimate that the economy may shrink in 2020 by at least 0.3%; we had previously forecasted growth of 0.25%. The sometimes-shaky coalition government of Prime Minister Giuseppe Conte has limited room for fiscal manoeuvre to offset the economic shock absent endangering debt sustainability.

The government has opened up its fiscal first-aid kit amid the public health emergency to help businesses, workers and those on the front-line dealing with the health crisis. Measures include doubling a “shock therapy” fiscal stimulus package to EUR 7.5bn (0.4% of GDP) on 5 March, including tax credits for companies hardest hit, bolstering a national wage-supplement fund and extra cash for health services and the civil protection and security forces. There are now discussions about further raising the size of the stimulus.

Weaker-than-expected growth and extra-governmental spending suggest that Italy’s budget deficit will widen significantly this year, if only temporarily, after narrowing to 1.6% of GDP last year. The government recently estimated a deficit of 2.5% of GDP in 2020.

In normal times, that would put Rome at loggerheads with Brussels as Italy has repeatedly brushed up against EU fiscal limits. However, this time is different: in recognition of the gravity of the situation in Italy and in the rest of Europe, the European Commission has indicated maximum flexibility around its fiscal rules in 2020 if spending is clearly linked to the epidemic mitigation. Still, Rome’s approach needs to recognise the government’s budgetary constraints and still-elevated public debt of 135% of GDP at end-2019, second highest in the EU after Greece’s.

There are concerns that public debt may rise towards 140% of GDP in coming years, which could adversely impact on investor confidence particularly as a pronounced slowdown in global growth now appears definite this year. After all, an economic downturn can increase debt via multiple channels.

One is by curtailing tax revenue flows and raising counter-cyclical spending by governments, both driving budget balances downwards. Another is the reduction in nominal economic output, raising debt-to-GDP ratios via a denominator effect. Yet another is the possibility that the cost of servicing the debt rises as investors lose faith in governments with greater fiscal vulnerabilities.

One metric of investor concerns is the widening in the spread in yields between Italian and benchmark 10-year German government bonds to around 200 basis points, up from 130bps in mid-February. The last thing Italy needs presently is any deeper market sell-off and financial instability.

Even so, we recognise that Italy has significant institutional and financial strengths, among them a large and diversified economy, a long record of primary fiscal surpluses and moderate levels of non-financial private sector debt. Moreover, the government’s success in raising revenues supported the lower-than-anticipated budget deficit in 2019, which has given Rome greater leeway to release funds in responding to the crisis.

Crucially, Italy is a main beneficiary of the euro area’s ultra-accommodative monetary policy and lender-of-last-resort facilities. Italy can borrow over 10 years at very low rates still of just over 1%. Indeed, the BBB+ sovereign ratings we assign to Italy – itself 1-2 notches above the assessment from US credit rating agencies – reflects our unchanged view of Italy’s systemic importance within the euro area and associated likelihood of receiving multilateral support in worst-case scenarios.

Dennis Shen is a Director in Public Finance at Scope Ratings GmbH.

Fear Reaches A Level Seen Only 4 Times Since 2008 – Signature Pattern

Since 2009 the stock market has had for major waves of investor fear (volatility) take place which was in 2010, 2011, 2015, and 2018. Each time the market corrected we saw a drop anywhere from 12% – 18% and both traders and investors became emotional and started selling assets in fear of lower prices. What we are experiencing right now is the same sort of setup once again.

These waves of panic selling are a signature pattern of a mini-crash and they have similar outcomes each time which I will share with you here so you know what to expect and how to trade this rare market condition.

It takes a lot to convince the masses to reach this level of fear. Each of these mini-market crashes there has been some catalysts to further induce fear/selling. This time its Covid-19 that is tipping the scales.

Only two assets have acted as a safe haven which is bonds, and gold. Once again everyone has been piling into these over the past week, and even more so on Friday with Bonds surging 6.5% at one point during the session.

What does it mean when everyone is buying bonds and gold like this?

Where should you put your money to work going forward?
If you are thinking of buying bonds or gold you may want to think again.

Take a look at the charts for gold and bonds below when fear and the volatility index (VIX) have reached the level we experienced last week.

Weekly Chart of Gold, and the VIX Performance

The chart below is straight forward. The bottom yellow section is the level of fear (VIX), while the top candlestick chart is the price of gold.

This chart shows what happens to the price of gold when everyone becomes fearful. Gold tends to rally as fear rises and the VIX spikes. But once the VIX has spiked the price of gold will trade sideways for many weeks and eventually have a deeper correction.

While gold could see more fear-based buying in the next week or two I feel most of the upside potential has always been realized and your money will be stuck in an underperforming asset when it could be deployed elsewhere in the market.

Weekly Chart of Bonds (TLT), and the VIX Performance

The below chart of bonds is a little different in how it reacts to extreme broad-based fear. Bonds tend to trade sideways or higher for a few several weeks and this is because bonds are really the core safe-haven play amount investors and financial advisors.

When extreme fear hits the market and spooks the masses it can take weeks for all those buy and hold investors recognize the market weakness and take action selling their stocks and moving their money into bonds. This buying pressure on bonds is a slow trickle-in effect as advisors have clients call them and demand they put their money into a low-risk investment like bonds.

Bonds do have another interesting twist for last week’s particular price action. Only three times since 2008 have I seen bonds move 20% in value within a short period of time which is what they reached last week. Within  1-3 weeks from a 20%+ gain, the price of bonds has corrected on average 11.5%.

Concluding Thoughts:

In short, my 23 years of technical analysis experience in reading charts, and statistical analysis is telling me we should be looking at different asset classes to trade over the next couple of months.

On Friday at the opening bell subscribers and I closed our TLT bond trade for a 20.07% gain. During that time the stock market crashed 14.5% which we avoided because of our technical analysis which closed our long SP500 position before the big drop.

As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for short-term swing traders.

Visit my ETF Wealth Building Newsletter and if you like what I offer, and ride my coattails as I navigate these financial markets and build wealth while others lose nearly everything they own during the next financial crisis.

Chris Vermeulen
www.TheTechnicalTraders.com

 

WHO, The Markets New Grim Reaper

Markets

After an up and down session with trader vacillating on the economic impact, the coronavirus will have on global growth, S&P500 was more or less flat heading into the close, having spent most of the session in slightly positive territory. Most European bourses saw very modest gains, though Asia was weaker. US fixed income rallied further, however, US10Y yields down a further 3bps to 1.33%. Oil down another 2.4%.

But for risk concerns, the bearer of the truth was WHO reporting that 427 new cases of the virus were confirmed Tuesday outside China, compared with 411 in mainland China: the first time that new case numbers outside China were higher than those from within. Of course, the spread beyond China borders has been at the core of the market’s worries since the weekend news flow pointed to a potential supper spreader around the globe and saw risk U-turn lower.

Previous crisis playbooks have all revolved around buying the dip in equities, so I wonder just how much further the fire sale will go before the market at least starts to scale in again. We saw an attempt at a bounce in the New York session before the markets new Grim Reaper, the WHO, raised its ugly head again.

But based on last night’s price action, it does appear that any bounce in stocks is likely to be short-lived. And eventually, the markets could fall deeper as investors start to think what’s the point of trying to pick the bottom in the short term.

Looking further down the line in 2020, the market continues to price in more significant haircuts to large parts of the global economy. At the same time, the idea of a v-shaped recovery seems to be the new castle in the sky. Admittedly things can pivot quickly, but if you believed in the narrative, that easy monetary policy was mainly fuelling the risk rally. Then arguably, you are going to want to see definitive signs of a Fed pivot, primarily as the fundamentals are pointing the other way before feeling confident about buying equities. But on that front, the Fed messaging continues to signal “still too soon.”

On the G-20 coordinated stimulus front and for those looking for shock and awe fiscal delivery from Europe was always likely to be disappointed. News about Germany intending to pause its debt brake sparked a recovery in stocks and a sell-off in Bunds, but it was short-lived. Still, ultimately, the cumulative effect of similarly measured responses around the world might be enough to grease the wheels of the global economy.

Oil Markets 

Traders remain hyper skittish, and oil rallies short-lived as self first ask questions later will be the theme if there is still even the slightest concern over the virus outbreak becoming a pandemic. There has been another big hit to oil on renewed super spreader coronavirus fears.

And as expected, the EIA inventory data which under normal conditions would have been bullish for oil price fell through the cracks as uncertainty over coronavirus will take its toll on oil demand sentiment until its impact can be adequately quantified.

Next week’s OPEC+ meeting should be a positive catalyst, but the fear here is that the outcome might be consigned to oblivion with the market singular focused on virus spread, which has unceremoniously shown up on the doorsteps of the US market. Still, OPEC + has enough weight, and with a hefty production cut at a minimum, it should offer a backstop, and with a problem G-20 concerted stimulus effort surely the bottom can’t be too far from here. In addition, with WTI below $ 48 it could also trigger the self-correcting US supply mechanism as more shale wells go offline due to breakeven concerns.

The Straw that could break the Oil market back?

The biggest concern and the straw that could possibly break the oil markets back is the susceptibility of the US market to this insidious virus, which from a risk perspective needs to rank beyond all other. If the virus spread rapidly in the US, you can’t unscramble that egg.

The most glaring problem is that the US has only tested 426 people, while South Korea has tested 35,000. The US guidelines were only to check those who displayed respiratory symptoms and had recently traveled to China or had close contact with an infected person. The problem is that coronavirus is asymptomatic — it is contagious before the symptoms show.

China had come in for some criticism over the handling of the outbreak. However, as the virus spreads global, those “harsh” measures appear to have been the right thing to do and arguably its Europe and US efforts that could be too complacent and porous. And not surprisingly, any excuse to sell still feels like the sentiment in the market right now.

Gold Markets

It’s too early to cap gold prices as we are not in business as usual market conditions. But of course, there is no denying gold’s safe-haven credentials have been questioned in light of a gold decline as Treasury yields also fell precipitously this week, which should have been extremely positive for gold.

But since we’re only into day three of demand depletion and given the position build of late, this week’s washout still fits into the “healthy correction” category although we might revise that view on a break of $1600.

However, as profit-taking and selling to cover margin calls in the equity markets is decreasing, so the chances of gold rebounding increase propelled by ongoing COVID-19 concerns amid volatile financial conditions.

Beyond the constant stream of buying the dip analysts banter and for investors that have sizable gold positions. there are some concerns

Government spending commitments to contain the virus and e might push bond yields higher and weigh on gold appeal, especially from the fiscal side of the equation. While the Fed advocating for patience doesn’t provide a significant impulse to push gold through $1700. But with yields so low suggesting gold downside should be limited a delayed policy market response could funnel more buying of gold as the longer the Fed sits on their hand, the worse stock market conditions could get

Currency Markets 

The US Dollar

The US dollar has lost its safe-haven status with the coronavirus arriving on the US doorstep. With Fed rate cut probabilities on the rise US bond yields sliding ,fortunately for the global risk markets, the US dollar has started to weaken as reverse Yankee mania sets in.

Asia FX

Outside of the KRW and THB, which remains high beta to further jumps on coronavirus cases withing ASEAN proxies. Asia FX has remained fairly rangebound despite all the coronavirus upheaval around the globe. To no small degree, much of the sell-off Asia FX were priced into the curve ahead of the global equity market meltdown, and at the same time, the Yuan has remained tethered to the PBoC policy anchor by maintaining a stable policy fixing.

The Ringgit

Foreign investors sidestepped Fitch warning (seldom have lasting legs) and have resumed their demand for Malaysia bonds as the BNM rate cut expectations get to move forward. Its a small but positive move in these politically charged times, which continues to weigh on the Ringgit despite the succession scrim looking a bit less messy than at the start of the week. But when it comes to Malaysia politics, all bets are off.

Is Pandemic Pandemonium Setting In?

Risk-off extended further overnight. S&P500 down a further 2½% heading into the close. Selling intensified in the afternoon after the US Centers for Disease Control and Prevention indicated they expect a sustained spread of COVID-19 in the US and advised communities to prepare: “it’s more a question of when.”

Fixed income rallied again, as the preferred hedge of choice with US 10Y yields slipping a further 5bps to 1.33%; 30yrs set a fresh record low of 1.8%. Oil down an additional 2.8%, gold lower into the close. GOLD LOWER?? Are gold markets selling to cover more equity margin calls?

To suggest the market is a tad skittish over the coronavirus becoming a pandemic could very well be the understatement of the century with the virus morphing into the market’s biggest macro worry of the decade.

Given the lack of testing facilities, “As of Monday, only five US states – California, Illinois, Nebraska, Nevada, and Tennessee – can test for the virus, according to the Association of Public Health Laboratories (APHL).” ( Reuters ) it’s feared that there are far more cases than what is currently reported.

And since the containment strategy in the US is initially more penetrable owing to looser enforcement, and greater reliance on voluntary cooperation suggest a clustered super spreader virus crisis could accelerate in an exponential manner.

Every few minutes, I see another travel ban headline while corporations and government agencies are stepping up efforts to stop travel to infected or suspected countries. Supply chain disruptions are coming, and if we were struggling to determine which particular straw broke the market’s back, its the susceptibility of the US market to this insidious virus that needs to rank beyond all other. And you can’t unscramble this egg. And without question, it seems to be the bearer of the truth.

The global habitat, let alone the market is ill-prepared to deal with an epidemic of these proportions as the porous containment strategies outside China could lead to an exponential flurry in new cases reported. God helps us if, as suggested by some medical experts, 40-70% of the world’s population becomes infected over the next 12 months.

Wasn’t this supposed to be over by now??

And only a week ago, it would still have been considered scaremongering to talk of a COVID-19 in pandemic terms. But now the markets must deal with the harsh reality that the COVID-19’s global footprint is likely to grow.

Gold and cross-assets 

Renewed concerns about the depth and duration of the coronavirus impact on global growth were triggered by Apple‘s lower revenue guidance and exacerbated by US PMI data. But the outbreak of cases in the US has seen risk pricing jump to December 2018 levels.

So far, the market sell-off has been reasonably well controlled in US markets. Still, the SPX is now nearly 8% below its 19-Feb intraday high, and the VIX breached 30.

Cross-asset moves were also plentiful with the US 10-year below 1.4% for the first time since July 2016, rates markets pricing 2.5 cuts over the next year, but gold is lower?

I don’t have a particularly salient answer for that, but I’m wondering just how much of a factor a consorted shift to global fiscal stimulus shift rather than monetary impulse might be altering the market safe haven view of gold above $1700.

Modeling for gold fair value indicates the following are consistent: Treasury 10y yields plummet by 80 bps, S&P falls by 20%, inflation break-even drop to 1.35% or below, and gold rises to USD 2000/oz. Indeed we are a long way from paydirt in the fair value analysis, especially is a fiscal impulse kicks in.

I guess the big question today is with correlations pointing higher why we did have back to back daily price gaps lower in gold as surely these moves are beyond just a healthy market correction after all its raining rate cuts.

Raining rate cuts

A total of 13 EM central banks have cut rates in response to the threat of an economic slowdown so far this year with the market convinced the Fed would start cutting deep, and we are even back to discussing rate cuts in Europe. Which should be positive for gold

Equity market margin call-related sell-off?

But the back to back late NY afternoon gold liquidation has the hallmarks suggesting the sell-off could be related to equity margin calls rather than any underlying market weakness, given the overtly risk-off tone dominating the markets. So as was the case yesterday, once these margin obligations are covered, gold could rebound a touch.

The facts

As most gold traders will tell you, it’s virtually impossible to understand where the supply and demand factors will drive gold on a daily basis. But given the real possibility of pandemic pandemonium setting which will cripple the financial market, and could cause a run on the banks Similar to the toilet paper hoarding mentality in Asia, only people want to store cash under their mattress rather than toilet paper under the bathroom sink( poor analogy but you get the picture). Bullion should continue to find more support from accommodative monetary policy worldwide, a rapidly shrinking pool of risk-free assets, and lower beta of traditional risk-off currencies even without triggering worst-case pandemic fears.

Oil markets

The oil market at the best of time isn’t known for measured thinking tending to adopt the approach of “shoot first, ask questions later.” But Oil traders have called this one right from the get-go as they were never buying into the G20 view or the idea of a v-shaped recovery in China and limited impact on the rest of the world.

But for immediate concerns, the shift in focus from just an external demand shock from China to an overwhelming US economic blow could send oil prices into a faster tailspin.

The reality is that the coronavirus has not been contained and is now spreading like wildfire across the world, and you can’t put that smoke back in the wood.

Although I expect the API inventory report to fall through the cracks at least, there was one bulb working on a broken string of lights as WTI regained the $50 handle on a smaller than expected crude inventory build.

Currency Markets

I might be excused this morning; it is 5 AM in Bangkok after all, as I don’t have a blueprint prepared for a rapid spreader scenario across the US markets, which from a Federal Reserve Board perspective makes this flu situation different. We have to admit the Federal Reserve is the only Central Bank that matters. And with global supply chains grinding to a halt, what the world most desperately needs is a deluge of US dollars.

Sure the ECB and BoJ can cut further, but that is unlikely to happen, and another rate cut from a smaller central bank like RBA might prop up the domestic housing market, but what is that going to do in the bigger global scheme of things.

So, it will be up to the Federal Reserve Board to do the heavy market lifting. As such, we could be on the precipice of an emergency inter meeting rate cut as the world is in dire straits and in need of a massive helicopter drop to buttress the virus crisis.

The US dollar has lost its Teflon status as the coronavirus arriving on the US doorstep. With Rate Fat rate cut probabilities on the rise US bond yields sliding fortunately for the global risk market, the US dollar has started to weaken as reverse Yankee mania sets in. But will it be enough before risk aversion crushes commodity markets as what was perceived as a supply shock from the COVID-19 outbreak is morphing into an unknown

A negative US demand shock would represent an essential change for markets. However, before jumping into trades this morning, it might be time to catch our breath as I still think its to early to start fading the currency moves at the epicenter of the crisis wall of worry CNH and KRW as well as the G-10 China proxies AUD and NZD.

 

How Low Can US Bond Yields Go?

The US 10-year yield until Monday was hovering near the 1.5% level but has broken down to 100-year lows. Concerns over the spread of the coronavirus into the US, which could weigh on economic growth, has generated tailwinds for bond prices. Recall, the price of bond moves in the opposite direction of its yield. Additionally, the front end of the interest rate curve in the US is now inverted. This means that 3-month US treasury bill yields are higher than the 2-year and 10-year yield. This generally foreshadows a recession. With all of this in mind, the question for investors is how low can treasury yields go?

The Fed said it plans on taking a wait and see approach to interest rates. The market is now pricing in approximately two 25-basis point rate reduction by the Fed during the next 12-months. Additionally, it also appears that options traders are lining up to purchase US bond ETF. The strike of pain for the TLT was $150 per share and as it crossed through this level, the seller of those calls needed to cover. The next target price on the ETF is $153, which would push the US Treasurytreas yields even lower.

Technicals

The weekly chart of the US 10-year yield shows new historic lows for the 10-year bond. Resistance is seen near the 10-week moving average at 1.65. Support is likely near the 1.25% level.  Momentum has turned negative as the MACD (moving average convergence divergence) index generated a crossover sell signal. This occurs as the MACD line (the 12-day moving average minus the 26-week moving average) crosses below the MACD signal line (the 9-week moving average of the MACD line). The MACD histogram also generated a crossover sell signal, piercing through the zero-index level. The trajectory of the MACD histogram is downward sloping which points to lower yields.

While the weekly RSI is yet to fall into oversold territory, it is printing a reading of 31, just above the oversold trigger level of 30. The fast stochastic generated a sell signal in oversold territory, and the current reading of 7, is well below the oversold trigger level of 20 which could foreshadow a correction.

Bottom Line

Sentiment remains negative and it’s hard to determine what will change this sentiment. The spread of the coronavirus has changed the view of global economic growth which is now weighing on bond yields. Look for the 10-year to drop another 6-7-basis points down to 1.25 before consolidating and then refreshing lower.

Global Stock Markets Plunge As The Virus Arrives In Europe

Global markets tanked as with the COVID 19 arriving on Europe’s doorstep; it has magnified investors’ attention to the single most significant global risk of the virus crisis, the fear of clustering cases outside of China.

Risk-off sentiment intensified Monday as the S&P500 is down around 2½% heading into the close with European equities falling almost 4% and smaller losses through Asia as Covid 19 mushrooms from an Asia centric concern to a global nightmare.

US 10Y yields fell a further 9bps to 1.38%, the lowest since July 2016, while 30-year yields set another record low of 1.84%, having fallen ~20bps in the past week.

Oil is down more than 4%, and copper fell 1.5%. Even as the number of new cases in China is declining and the WHO indicates that the virus there has peaked, the market has reacted to growing evidence of spreading infections outside China: notably Italy, Iran, and Korea.

The risk-off tone overnight has seen the US2s10s curve at its flattest since October, and as the interest rate and growth, differentials continue to support capital flows into the US.

And absent a more dovish Fed, these tenacious structural trends are showing little signs of abating as global investors seek safe harbor under the umbrella of US bond yields, creating a supercharged USD dollar. However, its the dollar strength that the Fed might not be able -even if willing – to tolerate as the strong USD both tightens financial conditions and depress oil and commodity prices sufficiently enough for the Fed to miss their inflation targets. The irony here for gold investors is that a weaker dollar could lessen the chances of a Fed rate cut.

There has been very little data flow do divert attention away from the coronavirus. Still, Fed speak, both hawk and dove didn’t sound off any rate cut alarm bells as Cleveland Fed’s Loretta Mester (voter /hawk) and Minneapolis Fed’s Neel Kashkari (voter/dove) both advocated policy prudence.

The WHO director-general called the outbreaks “deeply concerning,” though he also noted that the WHO was “encouraged by the continued decline in cases in China.

Even as the market focusses on recent outbreaks outside China, Chinese activities are starting to recover.; if the Chinese labor force activities recover quickly, then PBoC stimulus effort will start paying dividends via ramped up domestic production.

Admittedly with many unknows surrounding the impact. But there are a few knows. China is coming back on the grid while governments and global central banks aren’t about to let this insidious virus snatch defeat from the jaws of victory.

Oil markets

With the virus arriving in Europe, it has magnified the oil market’s attention to the single most colossal risk of the virus crisis, the fear of a “super spreader” outside of China.

This appears to have materialized over the weekend, with a considerable number of cases reported in South Korea and Italy.

And using China as a template, the most immediate economic impact is likely to be aggressive containment measures and travel bans. So similarly, to the primary containment measures in China, traders went into sell first ask questions later mode for fear of more evidence that the outbreak is spreading in Europe or even to the United States.

From a technical perspective, the so-called OPEC+ straddle implied price bottom between $50-50.25 is holding as the thought of a move below $50 makes a more massive OPEC + production cut response more likely.

WTI continues to respect his level, but with thoughts of “disease X “keeping investors awake at night, China teapot refinery activities need to come roaring back with a vengeance.

And with China workers appearing abler and willing to come back online, it could go a long way to stabilizing regional risk sentiment.

Gold markets

On the back of a colossal position build over the past week, gold investors found themselves a bit too far over their skies and absent a decisive shift in Fed speak, the markets insatiable demand for gold has temporarily abated as profit-taking has set in.

From a technical perspective after yesterday’s launchpad on the back of a massive parabolic rally, the failure to break $ 1700 was a touch disappointing and likely caused some technical unwinds.

However, the afternoon gold liquidation could be related to equity margin calls rather than any underlying market weakness, given the overtly risk-off tone dominating the markets The steep declines in stocks may have triggered the need to meet margin requirements by some investors and necessitate the sale of liquid assets such as gold. So, if this is indeed the case once these margin obligations are covered, gold could rebound a touch.

But with a possible recentring of risk on a more favorable Asia centric theme, the slower rate of infection in China has eased demand for hedges, so gold price action may not be as robust today.

Currency Markets

Asia FX

The turning point for the Asia FX remains less clear as global risk aversion comes to the fore as Covid19 cases are getting reported abroad, redoubling the global fear factor.

In this environment, foreign investors have gone cold on riskier assets in favor of the umbrella of US treasuries, which is creating USD demand as investors favor the USD over more China sensitivity Asia currency growth proxies.

Until we see a significant increase in people going back to work in China and the PBoC stimulus paying dividends via ramped up domestic production, Asia FX could languish.

The Malaysian Ringgit 

Political uncertainty on the back of PM Mahathir resignation and as the power struggle intensifies leaves the government in a state of gridlock at a time when policy inputs are most needed to ward off the economic tumult from a protracted USD-China trade war and the double whammy effect from the coronavirus.

The Australian Dollar

FX markets look to be moving from “Asia is the epicenter of COVID” and with the lights starting to flicker across China’s industrial heartland decent support is beginning to build around AUDUS .6600 as Asia key currency barometer the Yuan remains on an even keel on anticipation of the ramp-up in production

The Euro 

Better PMIs out of Europe at the end of last week helped to put a stop to the EUR’s slide, though in an environment where the USD still looks to be the safe haven of choice, it may be hard for the EUR to recoup too much ground. Germany’s IFO index saw both current conditions and business expectations improve slightly in February, despite market expectations of a modest decline.

With the coronavirus spreading in Europe, immediate EURUSD weakness may not be a foregone conclusion on the back of the virus crisis. The primary driver of recent euro weakness has been carry trade-related funding. If the virus were to spread across Europe, the negative growth impact could be offset by an unwind of carry trades amidst risk-aversion. What’s more, a severe economic impact is likely to see a more significant monetary policy response from the Fed rather than the ECB given available monetary policy space.

The Swiss Franc

The European outbreak of the virus should make the Swiss franc an even more popular safe haven. It is the only European currency with a negative beta to growth. As the SNB appears resigned to staying on the sidelines, funding carry trades in francs has been far less prevalent than in euros or yen.

The Japanese Yen

An epic debate is raging behind the scenes over whether or not we are witnessing a regime shift USDJPY. Is it or isn’t it losing its safe-haven status? But overnight, the JPY was clearly a safe-haven bet as the focus has shifted from China to Europe. JPY loses its haven appeal when the exogenic shock comes from China but not from global risk aversion.

With virus fear spreading in Europe, the JPY should, in theory, also benefit from the squeeze on its funding shorts.

 The World Is Getting Spooky En Route To The Risk-Off Vortex

Markets

The yield on the bellwether 30-year US Treasury hit a record low, and Wall Street posted its first weekly drop in three on Friday as renewed fears about the economic fallout of the coronavirus and as disappointing US PMI data rustled concerns about the outlook for the US economy.

As well the benchmark 10-year yield fell for the 5th straight Fridays while US equities have retreated on three of the four Fridays since the coronavirus scare kicked into overdrive late last month. Nobody wants to carry risk into a “virus weekend.”

The world is getting spooky with virus clusters breaking out all over Korea with Japan not far behind, the asymptomatic positive tests in Omaha from cruise passengers, and now an outbreak in Italy postponing a top-level football much. But of all the alarming aspects of the rapidly spreading virus out Wuhan is that it’s showing up in patients with no connection to China or the city of Wuhan, ground zero for the outbreak. Suggesting things are about to get extremely problematic, and market conditions could get exponentially worse this week.

Adding a few bricks to China’s Great Wall of Worry, consider the global economic snowballing effect of 40 % + (nearly 10 billion USD according to BBG data) of China offshore bond from stressed issuers due in 2020, it difficult to see this ending well.

That asymmetry means it’s very hard not to stay hedged if not back the truck up into more “safe havens assets.”

Gold markets

Gold remains by far the preferred ‘virus protection’ as COVID-19 concerns are galvanizing the yellow metals perpendicular velocity vector.

Gold put in a virulent rally as risk sentiment remains frighteningly nervous amid reports of more COVID-19 virus is exponentially spreading in Korea, is showing up around the globe and now even in patients with no connection to China or Wuhan.

Should worry over the virus impact rattle the financial markets further, or god forbid that coronavirus is the dreaded disease X, a placeholder name for any new unknown pathogen that could cause a pandemic, gold demand will surge.

While there is no way to trivialize the virus shock that’s dominating all other macro factors, and while Hubei + Henan GDP at ~ $1.3trilllion is a little larger than Mexico, and a little smaller than the state of New York and these fat tails need to be hedged. But if coronavirus morphs into a global pandemic (disease X), we could bear witness to the start of 80 trillion in global GDP going up in flames. Other than gold, I’m not sure what the hedge is for that scenario.

As for the surging US dollar effect, gold investors continue to look through. The strong dollar carries a significantly negative tail risk beyond impacting the Feds inflation target by depressing hard commodity and oil prices. However, that is bullish for gold in its own right. But the fact, “The King Dollar” will move through global bond markets like a wrecking ball is a massive buy gold signal. With a staggering $15trillion dollar-denominated debt floating in a sea of red. It’s putting more pressure on the Fed to cut rates, and the market is increasingly pricing in that fact, which is hugely bullish for gold.

But gold is not exclusively dependent on how the disruption of travel and global supply chains plays out alone. The COVID-19 story overshadows other developments that under different circumstances may have impacted gold positively. For example, last week, Federal Reserve Governor Lael Brainard said Fed policymakers would need to act quickly to counter future downturns.

So, to sum all this up, the prominent driver of gold upside is and will continue to be the accommodative and responsive nature of the Federal Reserve’s monetary policy stance. 

Oil markets 

Containing the virus is going to be a Herculean task. And not surprisingly, any excuse to sell still feels like the sentiment in the market right now and hedge funds predictably increased short positions by 11 % to the highest in four months during the week ended February 18, almost tripling short-bets against WTI this year.

But with reports of more travel linked cases confirmed in California and asymptomatic positive tests in Omaha, I think we are moving well past the weak Chinese recovery scenario. (Even though the market is inherently suspicious of any data coming out of China). Still, we’ve probably severely underpriced China’s economic fallout based on real-time metrics (traffic congestion, coal usage, and return to work metrics) as the PBoC tries to gloss things over with ten basis point cuts to the key lending rates which will probably provide little more than band-aid effects.

Beyond the regrettable and inconceivable human cost, we should not underestimate the economic disruption as a super spreader could trigger a massive drop-in business activity around the globe of proportions the world has never dealt with before. So far backwardation in Brent has held up, but this week we could be whistling a different tune.

Proxies like the Korean markets are signaling massive risk-off moves, which should be enough to spook oil investors out of the gates this morning. And when coupled with the exodus out of Tokyo last week as signaled by Yen outflows at a time when year-end repatriation flows are customarily expected. We could be en-route to a jarring vortex hazard or, at minimum, a significant economic air pocket.

As for the OPEC + compliance saga, it feels like things are dancing to the sound of a broken record again. Sure, Russia’s non-committal is providing poor optics. Still, eventually, they will bring something to the table in March, and if nothing but lip service, Saudi Arabia (OPEC) will again end up carrying the bulk of the weight. But with Covid-19 morphing into, the markets macro worry of the decade obviously traders will have bigger fish to fry.

Currency markets

Asia FX

On the whole, the relative performance of Asian currencies over the past month reflects the potential economic impact of the coronavirus outbreak on their respective economies (i.e., sensitivity towards China’s growth and reliance on tourism). And there have been some idiosyncratic factors like the sharp depreciation of the SGD was due to rising expectations that the MAS will ease its monetary policy in its upcoming April meeting. Similarly, the THB’s weakness is, in part, due to policymakers’ outbound capital account liberalization.

Meanwhile, the TWD‘s resilience can be partly attributed to the production and investment “reshoring” (reverse of “offshoring”) policies of the government. As for the RMB, a reduction in outbound tourism and long-term foreign portfolio inflows have partially offset the negative impact on exports for the RMB. The PBoC’s daily fixings have exerted a counter-cyclical influence. From here on, a lot would depend on how fast China can resume production and contain negative implications for supply chains and global economic growth.

The Ringgit

It’s being dubbed Malaysia’s night of the long knives and even “The Silence of the Backstabbing Lamb.” Political uncertainty is sure to weigh heavy on the Ringgit today as Datuk Seri Anwar Ibrahim succession march gets scuttled by reports that Prime Minister Tun Dr. Mahathir Mohamad, who is Bersatu chairman, was executing a plan to form a new coalition government with Anwar’s rival

As for the economic impact of a coalition government and besides the usual gridlock to get polices through. It’s a sell signal, the current situation will likely mean there will be horse-trading going on and that may be more likely to boost spending rather than fiscal prudence and, perhaps, the risk here is for more massive deficits. But the more parties involved, the more complicated the horse-trading.

G-10 FX

EUR and JPY

This is a bit tricky as traders are up to their eyeballs in the long dollar, and given the Federal Reserves policy reaction function might not be so eager to put on more high dollar risk outside of the visible China proxies that will continue to burden the brunt of China economic fallout.

The most interest feature on Friday FX trading has been the EUR has finally traded like a funder, i.e., it has strengthened versus the USD, as EM has taken a hit, not least to one of the most popular trades out there – a squeeze on the short EUR/MXN trade. The EUR funding status should offer DXY protection just shy of 100 for now.

The JPY should, in theory, also benefit from the squeeze on its funding shorts. Still, here the dynamic is different, as locals have tended to goal post ranges like 107-112 for over a year, so that should encourage top side selling in a risk-off environment.

But if the recent EURUSD weakness reflects downside risks to global growth from China, rather than a hunt for carry, then the EM currencies which have held up well so far could weaken abruptly if China data comes out worse than expected. For EURUSD itself, global growth concerns could overwhelm any short-covering of long EM carry positions. That, in turn, could drive further weakness in EURUSD and return EURUSD-ADXY correlations to pre-summer 2019 levels.

What to watch out for

  • Given that the virus was thought to be a sever short-term problem and expectations were for a quick recovery to what degree does the weekend news flow alter that view will be critical
  •  The convexity of global PMI data to the level of secondary cluster outbreaks and how fast China’s economy struggles to comes back online should not be underestimated.  China manufacturing PMI data will undoubtedly be weak, but how deep of a print into 40 levels will be a crucial sentiment driver. Currently, expectations are coming in around 43-45 mark.
  •  On Friday, the market received is a first wake-up call when a big sell program went through the S& P 500from 3390 to 3340 in precisely 30 minutes from s 11:00 to 11:30 am EST knocking the stuffing out of the market’s bravado. Traders were not so keen to buy the dip, and the S&P500 closed 1.1% lower and US10Y yields falling through 1.5%, closing 4bps lower at 1.47%, the lowest level since September 4 last year. The risk-off tone came with growing evidence that the coronavirus is hitting global activity: in the US, the services PMI was much weaker than expected in February, down 4pts (more on this below.
  •  The Yuan is never off the radar, but so far, the Yuan resilience stands out despite the low-spirited PBoC policy measure; the countercyclical factor is at work for sure, but its also hard to ignore the shrinking tourism deficit. Moreover, importers are not at work, so there is very little real $ demand on the mainland But with China bracing for and unavoidable economic knockdown, the weaker Yuan could offer a suitable self-correcting mechanism for the mainland regulators to lean on. However, a lower Yuan fix might not be the risk-off Yuan bomb as it was during the height of a trade war when the PBoC opened gates to further weakness, especially in light of massive sell-off on its hyperactive beta the Korean Won. EM FX risk light has already been turned off.   Markets could enter risk-off vortex this week or, at minimum, hit a large air pocket, ultimately to the degree investors can navigate through this turbulence will be the key.