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The ASX 200 broke down below its recent consolidation, signaling another test of support at 5600. There is no indication on Twiggs Money Flow of unusual selling pressure and at present I expect support to hold.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
China’s Shanghai Composite Index is approaching resistance at 3300 after respecting its new support level at 3100. Twiggs Money Flow troughs above zero indicate long-term buying pressure. Breakout would provide further confirmation of the primary up-trend.
* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400
The rising market is primarily a result of central bank stimulus so investors need to consider the result if this is withdrawn. Rising producer prices warn that underlying inflation is growing. If this continues the PBOC will be forced to retreat.
Hong Kong’s Hang Seng Index is also testing resistance, at 24000. A Twiggs Money Flow trough that respects zero would signal long-term buying pressure but that looks uncertain at present.
The FTSE 100 is consolidating below resistance at 7350. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Breakout above 7350 is likely and would signal an advance to 7500*. The long-term target is 8000.
* Target: 7100 + ( 7100 – 6700 ) = 7500
Dow Jones Euro Stoxx 50 is similarly consolidating while Twiggs Money Flow reflects long-term buying pressure. Breakout above 3330 would signal a fresh advance with a target of 3500*.
* Target: 3300 + ( 3300 – 3100 ) = 3500
India’s Sensex is again testing resistance at 29000, while rising Twiggs Money Flow indicates medium-term buying pressure. Breakout would offer a target of 32000* but the index will first have to overcome strong resistance at its 2015 high of 30000.
* Target: 29000 + ( 29000 – 26000 ) = 32000
10-Year Treasury Yields are testing support at 2.30%. Expect this to hold. Breach of the rising trendline would warn of a correction but this seems unlikely with the Fed intent on normalizing interest rates. Breakout above 2.50% would offer a target of 3.0%.
The Dollar Index rally remains muted since finding support at 100. Rising long-term yields would fuel the advance, with bearish consequences for gold.
China’s Yuan is consolidating. Resistance on USDCNY at 7 Yuan is likely to be tested soon.
The PBOC has been burning through its foreign reserves to slow the rate of depreciation against the Dollar, to create a soft landing. A sharp fall would destabilize global financial markets and fuel capital flight from China.
Spot Gold broke through resistance at $1250, signaling an advance to $1300.
RBA governor Phil Lowe recently made a speech comparing the experiences of Australia and Canada over the last decade. Both have undergone a resources and housing boom. Four charts highlight the differences and similarities between the two countries.
Australia’s spike in mining investment during the resources boom did serious damage to non-mining investment while Canada’s smaller boom had no impact.
Immigration fueled a spike in population growth in Australia, adding pressure on infrastructure and housing.
Both countries are experiencing a housing bubble, fueled by low interest rates and lately by export of China’s property bubble, with capital fleeing China and driving up house prices in the two countries.
Record levels of household debt make the situation more precarious and vulnerable to a correction.
Hat tip to David Llewellyn-Smith at Macrobusiness
Great headline from Bob Doll (Nuveen Investments) latest newsletter.
“….we think the easy gains for equities are in the rearview mirror and we are growing less positive toward the stock market. We do not believe the current bull market has ended, but the pace and magnitude of the gains we have seen over the past year are unlikely to persist.”
His key points:
We believe investors are overly complacent about the state of the global economy and the political backdrop.
We remain cautiously optimistic toward equities, but think the pace of recent gains is unlikely to persist and that risks will rise this year.
Still positive on the economy but wary of the political backdrop seems a common theme among investment managers. The timing of any reversal (Doll: 2018) will largely be determined by inflation and interest rates.
The yield curve is one of the best predictors of US economic recessions. Every time the yield curve has turned negative in the last fifty years, a recession has followed.
First of all, what is a yield curve? It is the plot of yields on bonds, normally Treasuries, against their maturities. Long maturity bonds are expected to have higher yields than short-term bills, to compensate for the increased risk (primarily of interest rate changes). If you tie your money up for longer, you would expect a higher return. Hence a rising yield curve.
A rising yield curve is a major source of profit to the banks as their funding is mostly short-term while they charge long-term rates to borrowers, pocketing a healthy interest margin.
When the Fed steps into the market, however, restricting the flow of money into the economy, then short-term rates rise faster than long-term rates and the yield curve can invert (referred to as a negative yield curve).
Bank interest margins are squeezed — it is no longer profitable to borrow short and lend long — and they restrict the flow of new credit.
Credit is the lifeblood of the economy and activity slows.
The chart below compares US recessions to the yield differential: the difference between 10-year Treasury yields and the yield on 3-month T-bills. The yield differential falls below zero when 3-month T-bills yield more than 10-year T-notes.
You can see that every time the yield differential dips below zero it is followed by a gray bar indicating a recession. There is one exception: the phantom recession of 1966 when the S&P 500 fell 22%. This was originally certified as a recession by the NBER but they later changed their mind and airbrushed it out of history.
You can also see that the yield differential is declining at present but, at 2.0%, it is a long way from a flat or negative yield curve. This supports my argument last week that current Fed rate hikes are more about normalizing interest rates than about monetary tightening.
That could change in the future but at present the bull market still appears to have plenty in the tank.
Corporate bond spreads — the yield difference between high-grade corporate bonds and the risk-free Treasury rate — are another useful indicator of the state of the economy.
Wide bond spreads indicate increased risk of corporate default. Investors are concerned about the state of the economy and demand a higher premium for taking credit risk.
Narrow spreads suggest that credit premiums are low and confidence in the economy is good.
If we examine the chart below, bond spreads are declining, indicating confidence in the US economy, with even the lowest investment grade BBB dipping below 150 basis points (or 1.50%). This is synonymous with a bull market.
Australian corporate bond spreads are higher than the US, with BBB still at 200 bps. They have also declined over the last year but seem to be trending upward from their 2013 low. This is not conclusive as the current trough is not yet complete, but a higher low would warn that credit risk is rising.
Only when the tide goes out do you discover who’s been swimming naked.
~ Warren Buffett
The FTSE 100 continues to advance after respecting its new support level at 7000/7100. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Follow-through above 7350 would signal an advance to 7500*. The long-term target is 8000.
* Target: 7100 + ( 7100 – 6700 ) = 7500
A weak correction on Dow Jones Euro Stoxx 50 over the last 6 weeks suggests buying pressure, also reflected by rising Twiggs Money Flow. Recovery above 3300 signals a fresh advance with a target of 3500*.
* Target: 3300 + ( 3300 – 3100 ) = 3500