Further to last week’s post on the US-Asia trade imbalance, here is the impact on the US current account (seasonally adjusted annual rate) over the last two decades. The last quarter shows reversal to an annual deficit greater than $500 billion.
The deficit remains at 3 percent of nominal GDP. This is clearly unsustainable.
Stewart Thomson on SafeHaven suggests that Barrick Gold is about to break its 4-year down-trend and that spot gold is likely to follow.
Barrick Gold (ABX) has been ranging between 10.00 and 13.50 for the last 6 months. The long-term descending trendline is penetrated, but movement is more sideways than upward. 13-Week Twiggs Money Flow recovery to above zero is a recurring pattern suggesting a secondary, bear rally rather than a primary reversal; only a significant trough above zero would indicate otherwise. Breakout above 13.50 would indicate a rally, but is likely to encounter resistance between 16.00 and 21.00. A correction that respects the new support level (at 13.50) is unlikely, but would signal a primary reversal.
Gold has similarly consolidated between $1140 and $1300, shown here on a monthly chart. Recovery above $1200/ounce suggests a test of $1300, but 13-week Twiggs Momentum remains negative and we are unlikely to see a reversal with current low inflation. Breach of primary support at $1140 remains a stronger possibility and would signal a decline to $1000/ounce*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
March CPI readings were much as expected, with the annual rate at zero but core CPI (excluding food and energy) close to the Fed target of 2 percent.
Ten-year Treasury Note yields continue to consolidate in a narrow band between 1.85% and 2.00%. Breakout above resistance is more likely and would offer a target of 2.25%. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Recovery of long-term yields is likely to be gradual for two reasons:
A stable inflation rate and low interest rate outlook have kept the Dollar Index range-bound between 96 and 100. Rising 13-week Twiggs Momentum continues to indicate a strong primary up-trend. Breakout above 100 would signal an advance to 110*. Failure of support at 96 is unlikely.
* Target calculation: 100 + ( 100 – 90 ) = 110
Gold retreated below support at $1200/ounce. Follow-through below $1180 would indicate another test of primary support at $1140/$1150. Breakout above $1220/ounce is now unlikely. A 13-week Twiggs Momentum peak below zero warns of a primary down-trend. Breach of primary support would signal a decline to $1000/ounce.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Interesting graph from RBA governor Glenn Stevens.
A striking feature of the global economy, according to World Bank and OECD data, is the low rate of capital investment spending by businesses. In fact, the rate of investment to GDP seems to have had a downward trend for a long time.
One potential explanation is that there is a dearth of profitable investment opportunities. But another feature that catches one’s eye is that, post-crisis, the earnings yield on listed companies seems to have remained where it has historically been for a long time, even as the return on safe assets has collapsed to be close to zero …..
Perhaps this is partly explained by more sense of risk attached to future earnings, and/or a lower expected growth rate of future earnings.
Or it might be explained simply by stickiness in the sorts of “hurdle rates” that decision makers expect investments to clear. I cannot speak about US corporates, but this would seem to be consistent with the observation that we tend to hear from Australian liaison contacts that the hurdle rates of return that boards of directors apply to investment propositions have not shifted, despite the exceptionally low returns available on low-risk assets.
What this illustrates is the limits of monetary policy to restore economic growth.
Such [monetary] policies are, then, working through the channels available to them to support demand. But these channels are financial in nature. They don’t directly create demand in the way that, for example, government fiscal actions do……
Westpac produce a very detailed chart pack on the US economy called Northern Exposure. One item that stands out like a sore thumb is the trade imbalance between the US and Asia:
The trade balance between most countries and the US is close to equilibrium, where imports match exports:
But there are three notable exceptions:
Any large trade imbalance should cause the exchange rate between the two countries to rise or fall, making the exports of the net exporter more expensive and imports from the net importer cheaper, until balance is restored. But this has not happened with China and Japan. They are manipulating the system: investing a large portion of their trade surplus back in the US through the financial account, so that trade flows in one direction are offset by capital flows in the other. Their actions are clearly visible in the growth of Rest of World investment in US Treasury securities.
That is the reason why the US consistently runs massive trade deficits and why the manufacturing sector has been shedding jobs for the last two decades. This could be prevented if the US was willing to regulate capital flows on the financial account: “we will open our capital markets to you if you open yours to US investors”.
Canada’s TSX 60 index has followed the Footsie bull signal of last week, breaking long-term resistance at 900 to signal a fresh advance and long-term target of 1000*. A 13-week Twiggs Momentum trough above zero strengthens the signal. Expect retracement to test the new support level, but respect is likely.
* Target calculation: 900 + ( 900 – 800 ) = 1000
Global stocks are generally recovering and appear set for another advance.
The S&P 500 recovered above 2100; follow-through above 2120 would confirm an advance to 2200*. 13-Week Twiggs Money Flow oscillating above zero reflects long-term buying pressure. Breach of support at 2040/2050 remains unlikely, but would test primary support at 1980/2000.
* Target calculation: 2120 + ( 2120 – 2040 ) = 2200
Declining CBOE Volatility Index (VIX) is close to its lows of 2013, indicating low risk typical of a bull market.
Germany’s DAX encountered resistance at Deutsche Bank’s long-term target of 12500. Expect retracement to test support at 12000. Respect of support, and a short retracement, would be a bullish sign, suggesting an advance to 13000. Reversal below 12000 is unlikely, but would warn of a correction to the primary trendline at 11000.
* Target calculation: 12500 + ( 12500 – 12000 ) = 13000
Initial retracement of the Footsie respected new support at 7000. Declining 13-week Twiggs Money Flow indicates medium-term selling pressure. Expect further retracement, but reversal below 6950/7000 is unlikely.
* Target calculation: 7000 + ( 7000 – 6000 ) = 8000
Patrick Chovanec’s tweet on China sums up my ambivalent attitude towards Chinese stocks:
People saying "buy China cuz it's out of favor" don't appreciate the depth of China's difficulties. This correction is just getting starred.
— Patrick Chovanec (@prchovanec) April 15, 2015
The Shanghai Composite Index broke resistance at 4000 and is now retracing to test the new support level. Rising 13-week Twiggs Money Flow continues to indicate long-term buying pressure.
* Target calculation: 3400 + ( 3400 – 2400 ) = 4400
Japan’s Nikkei 225 Index continues to test resistance at 20000. Rising 13-week Twiggs Momentum indicates long-term buying pressure. Breach of support at 19000 is unlikely. Breakout above 20000 would offer a long-term target of 22000*.
* Target calculation: 20000 + ( 20000 – 18000 ) = 22000
India’s Sensex is approaching a watershed moment, having encountered resistance at 29000. Breakout would test 30000 and suggest an advance to 33000. Respect of resistance, however, would be a strong bear signal: reversal below 27000 would warn of a primary down-trend. 13-Week Twiggs Momentum has been slowing for the past 9 months and decline of 13-week Twiggs Money Flow to zero reinforces this. Recovery would indicate a false alarm while reversal below zero would reflect further selling.
The ASX 200 appears set for another test of resistance at 6000, the upper border of a bullish ascending triangle. Breakout above 6000 would signal an advance to 6250*. Declining 21-day Twiggs Money Flow, however, warns of medium-term selling pressure. Reversal below 5900 and the lower border of the triangle would warn of another correction.
* Target calculation: 6000 + ( 6000 – 5750 ) = 6250
Don’t be afraid of missing opportunities. Behind every failure is an opportunity somebody wishes they had missed.
~ Lily Tomlin
Long-term Treasury yields remain in a bear trend, with 10-year yields holding below resistance at 2.00%. Breach of support at 1.85% would signal another test of the primary level at 1.65%. A lower inflation outlook is translating into lower interest rate expectations.
The Dollar Index is likewise encountering resistance at 100. Breakout would signal an advance to 104*. Reversal below 96, however, would test primary support at 94.
* Target calculation: 100 + ( 100 – 96 ) = 104
Gold is also consolidating, ranging between $1180 and $1220/ounce. Reversal below $1180 would signal a decline to $1000/ounce*, while breakout above $1220 would indicate a rally to $1300/ounce.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Nymex Light Crude broke resistance at $55/barrel, signaling the end of the narrow consolidation of the past few months. Some have heralded this as the end of the bear trend and start of a bull market.
If we examine the recent consolidation — shown here on June 2015 Light Crude futures — it is clear that it is broadening, with the second trough below the first, rather than rectangular. Peaks are likely to follow a similar pattern; so a higher peak does not necessarily mean a breakout. Broadening wedges tend to be unreliable reversal signals and I would wait for retracement that respects the new support level at $55 to confirm the breakout.
March consumer price index (CPI) is due for release on Friday. Producer prices, released Tuesday, ticked upwards after a sharp December/January fall on the back of plunging crude oil prices.
Average hourly earnings growth (non-supervisory manufacturing jobs), however, retreated below 1.0%.
CPI is likely to remain heavily affected by oil prices, but core CPI (excluding food and energy) is expected to remain close to the Fed’s target of 2.0%.
