Category: India & Singapore

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In Gold we Trust

Rising demand for gold and silver reflect the failure of central banks to maintain price stability and efficient functioning of credit markets. Private investor mistrust of fiat currencies was historically an emerging market problem, with countries like India and China holding large private savings in the form of precious metals or real estate.  But now growing US fiscal problems have caused mistrust to spread to the global reserve currency as central banks reduce exposure to the Dollar and increase purchases of gold bullion.

Stocks & Treasuries

The S&P 500 respected support at 5250, the short harami candle indicating uncertainty. Breakout above Thursday’s high would confirm our target of 5500.

S&P 500

Ten-year Treasury yields are testing resistance at 4.5% but the short candle and weak close look tentative and respect is likely.

10-Year Treasury Yield

Gold & Silver

Gold is likely to test support at $2,300 per ounce. Respect is likely and would confirm that the up-trend is intact.

Spot Gold

Silver is similarly poised to test support between $29 and $30 per ounce. Respect of support is again likely to confirm the up-trend.

Spot Silver

Gold Demand from the East

Ronnie Stoeferle — managing director of Liechtenstein-based asset manager Incrementum AG and author of the annual In Gold We Trust report — says that 70% of gold demand is now from the East. Mainly China and India but supported by buying in Vietnam, Thailand and lately Japan.

De-Dollarization

Jeff Currie — chief energy strategist at the Carlyle Group and former Global Head of Commodities Research at Goldman Sachs — says that central banks are now recycling commodity surpluses into Gold, not Dollars. When prices are high, crude oil producers generate trade surpluses which they historically have invested in Dollar-based assets — mainly US Treasuries — but are now investing in gold.

The Saudis and Russia are increasingly selling crude oil and gas in Yuan and Rupees which they then use to import goods from China and India. Any remaining surplus is then used to purchase gold as they do not want to hold the currencies in their official reserves. Physical gold is flowing from West to East, to meet increased demand, and driving up prices.

The change has caused a dramatic divergence between gold (brown below) and real long-term interest rates, represented by the TIPS yield (blue) below.

Gold & TIPS Yield

Source: Gainesville Coins

The scale of increased demand and its impact on gold prices is not hard to imagine when one considers that global crude oil production is more than 13 times the Dollar value of total gold output.

USD Value of Gold & Crude Oil Production

Source: FFTT

Central Bank Purchases

China and India are ranked among the top 10 countries in terms of official gold holdings.

Official Gold Reserves by Country - Top 10 Holdings

Source: Gold.org

But many purchases are not made through official channels and go unreported. Jan Nieuwenhuijs estimates that the PBOC actually held close to 5,550 metric tons1 at the end of Q1 2024.

Quarterly Central Bank Gold Buying

Source: Gainesville Coins

Private Purchases

Private gold holdings in China and India dwarf official reserves.

China’s private sector holds approximately 25,700 metric tons2 at the end of Q1 2024, according to Nieuwenhuijs.

India’s gold market is similar in size, with private investors holding between 24,000 and 27,000 metric tons of gold jewellery and bullion according to Blue Hill Research.

Conclusion

Gold demand is driven by a lack of faith in fiat currencies — whether it be US Dollars, Chinese Yuan or Indian Rupees — to maintain their value. Private investors are buying gold as a store of value while central banks are recycling trade surpluses into gold, rather than holding fiat currencies.

Silver and Copper are becoming the “poor man’s gold”, with price-sensitive buyers switching from gold into silver and copper as they grow relatively cheaper.

Countries with high private gold investment are likely to experience low rates of growth. Keyne’s Paradox of Thrift illustrates how savings parked in assets like gold and silver crowd out investment in productive assets, leading to lower growth in output.

Savings invested in debt and equity markets, by comparison, are largely channeled into investment in productive assets3 that contribute to GDP growth.

Efficient credit markets are the lifeblood of the economy, ensuring the transfer of savings into productive investment. Demand for speculative assets — such as precious metals and much real estate — reflect the failure of central banks to maintain price stability. Inflation increases investment risk in debt markets, leading to higher interest rates and increased demand for speculative assets, lowering economic growth. Inflation also accentuates the boom-bust cycle as central banks flip-flop between restrictive and stimulative monetary policy in an attempt to undo the consequences of their failed monetary policies.

The world is edging back towards a “gold standard” of sorts, where trade surpluses are converted to gold — or some other commodity like silver, copper or crude oil — rather than held as currency reserves. While not a perfect system, this would impose greater fiscal discipline on sovereigns, including the US, and contribute to increased price stability. It would also reduce the role of the US Dollar as global reserve currency and help to stem the damage done to the US economy over the past forty years by this “exorbitant privilege”.

Notes

  1. Estimated total PBOC gold holdings are 5,358 metric tons at the end of 2023 plus 189 tons in Q1 of 2024.
  2. Estimated total private gold holdings in China are 23,745 metric tons at the end of 2022 plus 1,411 tons in 2023 and 543 tons in Q1 of 2024.
  3. Debt that finances investment in speculative assets — producing low returns, like many real estate investments — does not contribute much to economic growth.

Acknowledgements

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Gold & Oil – a new paradigm

The expanding BRICS bloc is moving away from the PetroDollar, looking to settle oil imports in their domestic currencies. But that is unlikely to be achieved without the use of an alternative reserve asset that can be used to settle trade imbalances. The only likely candidate is Gold.

But first let’s start with a review of financial markets.

Financial Markets

The Chicago Fed Financial Conditions Index fell to -0.53, signaling further monetary easing.

Chicago Fed Financial Conditions Index

Bitcoin found support above $60K and recovery above $68K would signal a re-test of resistance at $72K, indicating ample liquidity in financial markets.

Bitcoin

10-Year Treasury yields respected resistance at 4.35%. Breach of support at 4.20% would signal another test of 4.05%.

10-Year Treasury Yield

Janet Yellen at Treasury is doing her best to keep a lid on long-term Treasury yields in order to ensure a smooth run-up to the November elections. This includes limiting the supply of long-term Treasuries by issuing short-term T-Bills in their place.

Keeping long-term yields low helps to support stock prices. High stock prices in turn boost tax revenues which reduce the deficit and new issuance of USTs.

The S&P 500 weekly chart shows how the index has been rising since late-2023. Shallow corrections, of less than 3%, indicate exceptional buying pressure. That and a strong rise in the Trend Index (above zero) suggest that stocks are getting overheated.

S&P 500

The magnificent 7 technology stocks have been leading the advance but now two — Apple (AAPL) and Tesla (TSLA) — are falling behind. A stumble in more key stocks would be cause for concern.

Top 7 Technology Stocks

The Dollar

The Dollar Index, shown on the weekly chart below, is headed for a test of resistance at 105. Breakout would signal an advance to 107. The sharp rise on Friday is attributed to a surprise rate cut by the Swiss central bank.

Dollar Index - Weekly

The PBOC also relaxed its managed float, allowing the exchange rate to rise above 7.2 Yuan to the Dollar.

USDCNY

It is unusual to see the Dollar strengthening while long-term Treasury yields are falling. We need to monitor this closely.

Crude Oil

Brent crude is retracing to test support at $84 per barrel. But respect is likely and would confirm our target of $94 per barrel. If that occurs, we expect upward pressure on inflation in the months ahead.

Brent Crude

Gold

Spot Gold in London is retracing to again test support at $2150 per ounce. Respect would signal another advance and follow-through above $2200 would confirm our target of $2400.

Spot Gold

A New Paradigm

The global crude oil market dwarfs other commodities, with production of more than 100 million barrels per day (EIA). Gold production is only 5000 metric tonnes per year — a fraction of the crude market — but the two have close historic links.

High crude prices often coincided with high gold prices. It was believed that oil producers increased purchases of gold when they made excess profits but in the last decade, there has been greater divergence between Gold and Crude.

10-Year Treasury Yield minus CPI & Gold 12-Month Percentage Gain

Another historic factor was the relationship between gold and real interest rates. The chart below shows how gold made large 12-month gains (orange) whenever the real 10-year Treasury yield (adjusted for CPI) fell below zero.

Negative real yields were the perfect signal to go long Gold, in expectation of rising inflation, funded by negative real interest rates. But that relationship too broke down, with negative real yields of -5.0% accompanied by falling Gold prices after August 2020.

10-Year Treasury Yield minus CPI & Gold 12-Month Percentage Gain

Gold bulls have long accused the Fed/Treasury of manipulating the gold price. In the 1960s, it was done openly by the London Gold Pool, a consortium of 8 major central banks, led by the Fed, who collaborated to maintain a fixed gold price of $35 per ounce. The Gold Pool collapsed in 1968, allowing gold to appreciate above the fixed exchange rate. This led to Richard Nixon to end US Dollar convertibility to gold in 1971.

It makes sense for central banks to suppress the price of Gold — this would increase demand for US Treasuries and other sovereign debt as reserve assets.

We have also observed unusual activity on Comex futures, with heavy selling into rallies. Any rational seller would sell in smaller quantities and avoid off-peak times — when bids are thin — in order not to interrupt the trend and maximize prices achieved. Large sellers generally take pains to avoid alerting the market as to their intentions. The opposite of some of the “shock and awe” selling in futures markets that we suspect is intended to destroy momentum built up in preceding days.

Gold Futures - Dump

Typical Gold Dump in Futures Market, February 2nd 12:36 PM to 12:45 PM

These are merely suspicions. We have no definitive proof. But those suspicions are now being put to the test.

BRICS+

China and Russia have been uncomfortable with US dominance of the global financial system and have long been making efforts to establish an independent reserve currency as an alternative to the Dollar. Their efforts failed to gain much traction until Russia’s full-scale invasion of Ukraine in 2022. US and European sanctions — blocking Russian assets held by European banks and removing Russian banks from the SWIFT payments system — alerted non-aligned countries to their vulnerability should they ever offend the US or its European allies.

The response has been an expansion of the BRICS bloc, with Iran, Saudi Arabia, the United Arab Emirates, Argentina, Egypt and Ethiopia invited to join in August 2023. Argentina has since declined the invitation — after the election of Javier Millei — and the Saudis are “still considering”. The shift is motivated by a desire to reduce dependence on the US Dollar for trade — and US Treasuries as a reserve asset.

Central bank (CB) gold purchases are growing.

Central Bank Gold Purchases

Jan Nieuwenhuijs recently suggested that CB purchases may be far higher than official declarations (red below). He estimates that 80% of unreported purchases are made indirectly on behalf of CBs.

Central Bank Gold Purchases including estimates of Undisclosed Purchases

PBOC purchases account for a large percentage of unofficial buying.

PBOC Gold Purchases & Holdings

Crude Oil Payments

Major oil importers like India and China have signed agreements to pay for oil in their own currencies but that is likely to leave exporters like Russia and the Saudis holding excess Rupees and Yuan that they do not need and are unlikely to want to hold as reserves.

Non-USD trade in oil would only be viable if net trade imbalances are settled by transfer of gold between trading partners, with surplus countries like the Saudis purchasing gold from the Chinese with Yuan that are surplus to their needs. Demand for gold is expected to rise exponentially as the BRICS bloc expands and oil trades are increasingly settled in domestic currencies. Major oil importers like India and China are likely to require larger gold holdings in order to settle trade imbalances with oil exporters like the Saudis and Russians. Oil exporters are expected to recycle gold to fund purchases of goods and services from non-BRICS trading partners but the total “float” of gold in the system is likely to increase.

We continue to see a growing pile of evidence that gold is re-becoming an oil currency, which by virtue of the oil market alone being some 12-15x the size of the global physical gold market annually, suggests a continued relentless bid for gold in coming quarters and years that will puzzle many on Wall Street. ~ Luke Gromen

Physical Gold Flows

Physical gold is flowing out of London and Zurich as Asian buyers bid up prices.

A recent Doomberg interview pointed out that Gold quoted on the Shanghai Gold Exchange is at a premium of between $20 and $40 per ounce above the London Gold price. Friday’s PM Benchmark of CNY 511.40 per gram converts to $2200 per troy ounce, compared to the London spot price of $2165 per ounce — a premium of $35.

Arbitrage will ensure a steady flow of physical gold out of London and Zurich for as long as that premium is maintained.

Shanghai Gold Exchange: Yuan/Gram of Gold

Gold in CNY/gram as quoted on Shanghai Gold Exchange
(red = AM, blue = PM benchmark price).

Conclusion

Stocks continue their bull run, supported by strong liquidity in financial markets and weakening long-term Treasury yields.

The Dollar has diverged, however, rising sharply against the Euro and China’s Yuan. Dollar Index breakout above 105 would warn of an up-trend with an immediate target of 107.

Gold is retracing to test support at $2150 per ounce. Respect would signal another advance. But we need to be careful of the rising Dollar. Breakout above 105 would be likely to weaken demand for Gold.

Brent crude is testing support at $84 per barrel. Respect is likely and would confirm our target of $94. High crude oil prices would be expected to increase inflationary pressures in the months ahead and force the Fed to delay rate cuts. The resultant rise in long-term Treasury yields would be bearish for stocks.

We expect a new paradigm to emerge, where the Gold price is no longer determined by Western buyers seeking an inflation hedge to protect against erosion of currency purchasing power and as a safe haven when risk is high. Marginal buyers are likely to be BRICS+ (the expanded BRICS bloc) central banks, seeking to use gold to settle trade imbalances from oil and gas imports paid for in non-USD currencies. The supply of Gold is inelastic, so the price is expected to rise steeply until a new equilibrium is reached.

Acknowledgements

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Global stock market correction

Strong red candles across major market indices warn of a global correction.

Breach of 3650 on the S&P 500 would warn of a test of the strong band of support between 3250 and 3400. Bearish divergence on Twiggs Money Flow continues to warn of long-term selling pressure.

S&P 500

The European Stoxx 600 threatens a similar secondary correction with a test of support at 375.

DJ Euro Stoxx 600

The Footsie is testing support between 6300 and 6500, while Money Flow reversal below zero warns of strong selling pressure. Breach of 6300 is likely and would indicate a strong correction, with primary support at 5500.

FTSE 100

The reaction on China’s Shanghai Composite is of similar weight to the S&P and STOXX. Breach of medium-term support at 3400 would warn of a test of primary support at 3200.

Shanghai Composite

The reaction on Japan’s Nikkei 225 appears secondary and likely to test the rising trendline at 26000.

Nikkei 225

The Seoul Composite is similar, with a rising trendline at 2700.

Seoul Composite

Selling on India’s Nifty 50 is heavier, flagged by a sharp fall in Money Flow over the past three weeks. Support at the rising trendline is unlikely to hold — which would mean a test of support at 12500.

Nifty 50

Conclusion

The correction across global stock markets appears secondary at this stage and likely to test medium-term support levels. Selling is heaviest on the FTSE 100 and India’s Nifty 50. These are the canary in the coal mine and should be monitored for unusual activity. Further falls on strong volume would indicate that sellers are overwhelming support.

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Markets that are likely to outperform in 2021

There is no reliable benchmark for assessing performance of different markets (stocks, bonds, precious metals, commodities, etc.) since central banks have flooded financial markets with more than $8 trillion in freshly printed currency since the start of 2020. The chart below from Ed Yardeni shows total assets of the five major central banks (Fed, ECB, BOC, BOE and BOJ) expanded to $27.9T at the end of November 2020, from below $20T at the start of the year.

Central Banks: Total Assets

With no convenient benchmark, the best way to measure performance is using relative strength between two prices/indices.

Measured in Gold (rather than Dollars) the S&P 500 iShares ETF (IVV) has underperformed since mid-2019. Respect of the red descending trendline would confirm further weakness ahead (or outperformance for Gold).

S&P 500 iShares ETF/Gold

But if we take a broad basket of commodities, stocks are still outperforming. Reversal of the current up-trend would signal that he global economy is recovering, with rising demand for commodities as manufacturing output increases. Breach of the latest, sharply rising trendline would warn of a correction to the long-term rising trendline and, most likely, even further.

S&P 500 iShares ETF/DJ-UBS Commodity Index

Commodities

There are pockets of rising prices in commodities but the broader indices remain weak.

Copper shows signs of a recovery. Breakout above -0.5 would signal outperformance relative to Gold.

Copper/Gold

Brent crude shows a similar rally. Breakout above the declining red trendline would suggest outperformance ahead.

Brent Crude/Gold

But the broad basket of commodities measured by the DJ-UBS Commodity Index is still in a down-trend.

DJ-UBS Commodity Index/Gold

Precious Metals

Silver broke out of its downward trend channel relative to Gold. Completion of the recent pullback (at zero) confirms the breakout and signals future outperformance.

Silver/Gold

Stock Markets

Comparing major stock indices, the S&P 500 has outperformed the DJ Stoxx Euro 600 since 2010. Lately the up-trend has accelerated and breach of the latest rising trendline would warn of reversion to at least the long-term trendline. More likely even further.

S&P 500 iShares ETF/Euro Stoxx 600

The S&P 500 shows a similar accelerating up-trend relative to the ASX 200. Breach of the latest trendline would similarly signal reversion to the LT trendline and most likely further.

S&P 500 iShares ETF/ASX 200

Reversion is already under way with India’s Nifty 50 (NSX), now outperforming the S&P 500.

S&P 500 iShares ETF/Nifty 50

S&P 500 performance relative to the Shanghai Composite plateaued at around +0.4. Breakout would signal further gains but respect of resistance is as likely.

S&P 500 iShares ETF/Shanghai Composite

Growth/Value

Looking within the Russell 1000 large caps index, Growth stocks (IWF) have clearly outperformed Value (IWD) since 2006. Breach of the latest, incredibly steep trendline, however, warns of reversion to the mean. We are likely to see Value outperform Growth in 2021.

Russell 1000 Value/Growth

Bonds

The S&P 500 has made strong gains against Treasury bonds since March (iShares 20+ Year Treasury Bond ETF [TLT]) but is expected to run into resistance between 1.3 and 1.4. Rising inflation fears, however, may lower bond prices, spurring further outperformance by stocks.

S&P 500 iShares ETF/Long_term Bond ETF (TLT)

Currencies

The US Dollar is weakening against a basket of major currencies. Euro breakout above resistance at $1.25 would signal a long-term up-trend.

Euro/Dollar

China’s Yuan has already broken resistance at 14.6 US cents, signaling a long-term up-trend.

Yuan/Dollar

India’s Rupee remains sluggish.

Indian Rupee/Dollar

But the Australian Dollar is surging. The recent correction that respected support at 70 US cents suggests an advance to at least 80 cents.

Australian Dollar/Dollar

Gold, surprisingly, retraced over the last few months despite the weakening US Dollar. But respect of support at $1800/ounce would signal another primary advance.

Spot Gold/Dollar

Conclusion

Silver is expected to outperform Gold.
Gold is expected to outperform stocks.
Value stocks are expected to outperform Growth.
India’s Nifty 50 is expected to outperform other major indices. This is likely to be followed by the Stoxx Euro 600 and ASX 200 but only if they break their latest, sharply rising trendlines. That leaves the S&P 500 and Shanghai Composite filling the minor placings.
Copper and Crude show signs of a recovery but the broad basket of currencies is expected to underperform stocks and precious metals.
The Greenback is expected to weaken against most major currencies, while rising inflation is likely to leave bond investors holding the wooden spoon.

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COVID19: The new normal

COVID19 looks like it will be with us for some time. The US has to guard against a second wave, destroying any hard-won gains.

Daily Cases

Especially with the upsurge in daily cases in Mexico.

Daily Cases

Australia has been fortunate to catch the outbreak early.

Daily Cases

But international travel is likely to remain restricted for a long time. When you have new outbreak hotspots like Brazil….

Daily Cases

and Pakistan appearing on the radar.

Daily Cases

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S&P 500: Flight to safety

10-Year Treasury yields are near record lows after Donald Trump’s announcement of further tariffs on China. The fall reflects the flight to safety, with rising demand for Treasuries as a safe haven.

10-Year Treasury Yield

Crude found support at $50/barrel. Breach would warn of a new down-trend, with a target of $40/barrel. Declining crude prices reflect a pessimistic outlook for the global economy.

10-Year 3-Month Treasury Spread

The S&P 500 found support at 2850. Rising volatility warns of increased market risk. A test of support at 2750 remains likely.

S&P 500

Declining Money Flow on the Nasdaq 100 reflects rising selling pressure. Expect a test of 7000.

Nasdaq 100

The Shanghai Composite Index broke support at 2850. A Trend Index peak at zero warns of strong selling pressure. Expect a test of support at 2500.

Shanghai Composite Index

India’s Nifty is testing support at 11,000. Breach would offer a target of 10,000.

Nifty Index

Dow Jones Euro Stoxx 600, reflecting large cap stocks in the European Union, is testing primary support at 368. Strong bearish divergence on the Trend Index warns of a double-top reversal, with a target of 330.

DJ Euro Stoxx 600

The Footsie is similarly testing support at 7150. Breach would offer a target of 6600.

FTSE 100

I have warned clients to cut exposure to the market. It’s a good time to be cautious.

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.”

~ Jesse Livermore

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The eye of the storm

“On Wednesday, the US Department of Commerce added Huawei – and 70 other companies – to its “Entity List.” …. Huawei cannot buy parts or components from US companies without the explicit approval of the US government.” (Trivium China)

We are sliding towards a fully-fledged trade war. Following straight after the imposition of tariffs by both the US and China, US action against Huawei will be taken as a direct attack on Chinese industry.

The CCP is already stoking nationalist sentiment to bolster public support.

“Last night and today, CCTV replaced regularly scheduled programming with two films about the Chinese army fighting the US in the Korean War.” (Trivium China)

Market response is so far muted. On the daily chart, the S&P 500 correction is modest. Expect another test of 2800. Breach would offer a target of 2600.

S&P 500

The Nasdaq 100 retreated below its new support level at 7700 but Money Flow remains strong.

Nasdaq 100

China’s Shanghai Composite found support at 2900.

Shanghai Composite Index

Japan’s Nikkei 225 is ranging between 20000 and 24000. Expect another test of primary support at 20000.

Nikkei 225

India’s Nifty is testing support at 11000. Respect would confirm the primary up-trend.

Nifty Index

In Europe, The DJ Euro Stoxx 600 is undergoing a correction that is likely to test support at 365. But Trend Index above zero continues to signal buying support.

DJ Euro Stoxx 600

The Footsie found support at 7200, with Trend Index again signaling buying support.

FTSE 100

10-Year Treasury yields are testing support at 2.40%. One of the few clear signs that markets are growing increasingly risk averse, as demand for bonds drives down yields.

10-Year Treasury Yields

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Robust US employment but global bear market warning

The US economy remains robust, with hours worked (non-farm) ticking up 2.2% in January, despite the government shutdown. Real GDP growth is expected to follow a similar path.

Real GDP and Hours Worked

Average hourly earnings growth increased to 3.4% p.a. for production and non-supervisory employees (3.2% for all employees). The Fed has limited wiggle room to hold back on further rate hikes if underlying inflationary pressures continue to rise.

Average Wage Rate Growth

History shows that the Fed lifts short-term interest rates more in response to hourly wage rates than core CPI.

Average Wage Rate Growth, Core CPI and 3-Month T-Bills

The Leading Index from the Philadelphia Fed ticked down below 1% (0.98%) for November 2018. While not yet cause for concern, it does warn that the economy is slowing. Further falls, to below 0.5%, would warn of a recession.

Leading Index

Markets are anticipating a slow-down, triggered by falling demand in China more than in the US.

S&P 500 volatility remains high and a large (Twiggs Volatility 21-day) trough above 1.0% (not zero as stated in last week’s newsletter) on the current  rally would signal a bear market. Retreat below 2600 would strengthen the signal.

S&P 500

Crude prices have plummeted, anticipatiing falling global (mainly Chinese) demand. Another test of primary support at $42/barrel is likely.

Light Crude

Dow Jones-UBS Commodity Index breached primary support at 79, signaling a primary decline with a target of 70.

DJ-UBS Commodity Index

China’s Shanghai Composite Index is in a bear market. Respect of resistance at 2700 would confirm.

Shanghai Composite Index

Bearish divergence on India’s Nifty also warns of selling pressure. Retreat below 10,000 would complete a classic head-and-shoulders top but don’t anticipate the signal.

Nifty Index

DJ Stoxx Euro 600 rallied but is likely to respect resistance at 365/370, confirming a bear market.

DJ Stoxx Euro 600 Index

The UK’s Footsie also rallied but is likely to respect resistance at 7000. Declining Trend Index peaks indicate selling pressure, warning of a bear market.

FTSE 100 Index

My conclusion is the same as last week. This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.

Concessions to adversaries only end in self reproach, and the more strictly they are avoided the greater will be the chance of security.

~ Thucydides (460 – 400 B.C.)

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Deal or no deal

Brexit

No one knows what the outcome of Brexit will be but, whatever the outcome, it is unlikely to send global markets into a tail-spin. There is bound to be short-term pain on both sides but the long-term costs and benefits are unclear.

China

Far more likely to send investors scuttling for shelter is a ‘no deal’ outcome on US trade negotiations with China. I would be happy to be proved wrong but I believe that a deal is highly unlikely. There may be press photos with beaming officials shaking hands and tweets from the White House promising a rosy future for all (with or without a wall). But what we are witnessing is not straight-forward negotiations between trading partners, which normally take years to resolve, but a hegemonic power struggle between two super-powers, straight out of Thucydides.

Thucydides wrote “When one great power threatens to displace another, war is almost always the result.” In his day it was Athens and Sparta but in the modern era, war between great powers, with mutually assured destruction (MAD), is most unlikely. Absent the willingness to use military force, the country with the greatest economic power is in the strongest position.

One of the key battlefronts is technology.

“China is now almost wholly dependent on foreign chipsets. And that makes leaders nervous, especially given a series of actions by foreign governments to limit the ability of Huawei and ZTE to operate internationally and acquire Western technology.” ~ Trivium China

“To address this risk, President Xi Jinping aims to increase China’s semiconductor self-sufficiency to 40% in 2020 and 70% in 2025 as part of his ‘Made in China 2025’ initiative to modernize domestic industry.” ~ Nikkei

Xi is unlikely to abandon his ‘Made in China 2025’ plans and the US is unlikely to settle for anything less.

USA

The US economy remains robust despite the extended government shutdown and concerns about Fed tightening.

“Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they had expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.” ~ The Wall Street Journal

This is just spin. As I explained last week. Fed run-down of assets is more than compensated by repayment of liabilities (excess reserves on deposit) on the other side of the balance sheet. Liquidity is unaffected.

Charts remain bearish as the market views global risks.

Volatility is high and a large (Twiggs Volatility 21-day) trough above zero on the current S&P 500 rally would signal a bear market. Retreat below 2600 would strengthen the signal.

S&P 500

Asia

Hong Kong’s Hang Seng Index is in a bear market but shows a bullish divergence on the Trend Index. Breakout above 27,000 would signal a primary up-trend. This seems premature but needs to be monitored.

Hang Seng Index

India’s Nifty has run into stubborn resistance at 11,000. Declining peaks on the Trend Index warn of selling pressure. Retreat below 10,000 would complete a classic head-and-shoulders top but don’t anticipate the signal.

Nifty Index

Europe

DJ Stoxx Euro 600 is in a primary down-trend. Reversal below 350 would warn of another decline.

DJ Stoxx Euro 600 Index

The UK’s Footsie has retreated below primary support at 6900. Declining Trend Index peaks warn of selling pressure. This is a bear market.

FTSE 100 Index

This is a bear market. Recovery hinges on an unlikely resolution of the US-China ‘trade dispute’.

War is a matter not so much of arms as of money.

~ Thucydides (460 – 400 B.C.)

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Risk averse rather than fearful

The S&P 500 is again testing the band of primary support between 2600 and 2550. Follow-through below this level would warn of a bear market. Volatility (21-day) is in the amber zone between 1% and 2%. A real test of market resilience will be the next sizable rally or advance. If declining volatility remains above 1%, that would warn of an imminent market sell-off.

S&P 500

The Nasdaq 100 is in a similar position, with declining Money Flow warning of medium-term selling pressure.

Nasdaq 100

Of the big five tech stocks, only Microsoft looks strong. Facebook is in a primary down-trend but Apple and Google are testing primary support. Apple’s exposure to China is obviously a concern. China accounts for roughly 25% of Apple’s global market but Apple estimates that it is responsible for 4.8 million jobs in China which gives them some negotiating clout.

Big Five tech stocks

If two more of the big five broke primary support, that would in my opinion signal a bear market.

Asia

The Shanghai Composite Index is consolidating in a narrow band below 2700. Downward breakout is likely and would signal another decline, with a target of 2300.

Shanghai Composite Index

India’s Nifty is testing resistance at 11,000. Respect would be bearish, warning of another test of primary support at 10,000. Declining peaks on the Trend Index warn of long-term selling pressure.

NSX Nifty

Europe

Dow Jones Euro Stoxx is in a primary down-trend. Follow-through below 350 confirms a bear market, warn of a decline to test 305/310.

DJ Euro Stoxx 600

The Footsie also broke primary support at 6900. Retracement is testing the new resistance level but respect of 7000 is likely and would confirm a bear market, with a target between 5600 and 6000.

FTSE 100

There is a high level of uncertainty in global markets at present. Europe has Brexit and Italy. The US has investigations into Donald Trump’s election campaign. China has the threat of a trade war with the US. But my sense is that the market has become risk averse rather than fearful. There is no sign of panic selling as yet. But investors are clearly on the defensive and prepared to sell off vulnerable stocks.

Adopt the pace of nature: her secret is patience.

~ Ralph Waldo Emerson

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