US & Canada Archives - Page 105 of 177

May 13, 2013

Forex: Aussie breaks support while Yen soars

The Aussie Dollar broke primary support at $1.015 and is testing parity against the greenback. Parity is not expected to hold and we are likely to see a test of the next major support level at $0.95/$0.96. Narrow fluctuation of 63-day Twiggs Momentum around zero continues to suggest a ranging market.

Aussie Dollar/USD

The euro is retreating, headed for another test of $1.2750. Respect would signal another attempt at $1.37, while failure would indicate a primary down-trend — testing long-term support at $1.20. The failed advance to $1.50 would be bearish; and breach of $1.20 would offer a target of $1.05*.

Euro/USD

* Target calculation: 1.20 – ( 1.35 – 1.20 ) = 1.05

Rapid expansion of the monetary base by the Bank of Japan is fueling inflation fears and weakening the yen. Lars Christensen points out that, with competitive devaluation from all quarters, exports are not likely to play a major part in a Japanese recovery. What is more likely is a consumption and investment boom as households invest in real assets as a hedge against inflation.

The greenback broke resistance at ¥100 against the Japanese Yen — a one-third appreciation from the lows of 2011/2012. Expect retracement to test the new support level, but breach of the long-term declining trendline indicates the 30-year secular bear trend is over. Long-term target for the advance is the 2007 high at ¥125*.

USD/JPY

* Target calculation: 100 – ( 100 – 75 ) = 125

May 12, 2013

The monetary policy revolution

James Alexander, head of Equity Research at UK-based M&G Equities, sums up the evolution of central bank thinking. He describes the traditional problem of inadequate response by central banks to market shocks like the collapse of Lehman Brothers:

Although wages hold steady when nominal income falls, unemployment tends to rise as companies scramble to cut costs. In the wake of the crash, rising joblessness created a vicious circle of declining consumption and investment that proved very difficult to reverse, particularly as central banks remained preoccupied with inflation.

Failure of both austerity and quantitative easing has left central bankers looking for new alternatives:

…..Economist Michael Woodford presented a paper [at Jackson Hole last August] suggesting that the US Federal Reserve (Fed) should give markets and businesses a bigger steer about where the economy was headed by adopting a nominal economic growth target. In September, the Fed announced its third round of QE, which it has indicated will continue until unemployment falls below 6.5% – the first time US monetary policy has been explicitly tied to an unemployment rate. US stocks have since soared, shrugging off continued inaction surrounding the country’s ongoing debt crisis.

While targeting unemployment is preferable to targeting inflation, it is still a subjective measure that can be influenced by rises or falls in labor participation rates and exclusion of casual workers seeking full-time employment. Market Monetarists such as Scott Sumner and Lars Christensen advocate targeting nominal GDP growth instead — a hard, objective number that can be forecast with greater accuracy. Mark Carney, due to take over as governor of the BOE in July, seems to be on a similar path:

Echoing Michael Woodford’s comments at Jackson Hole, he advocated dropping inflation targets if economies were struggling to grow. He has since proposed easing UK monetary policy, adopting a nominal growth target and boosting recovery by convincing households and businesses that rates will remain low until growth resumes.

While NGDP targeting has been criticized as a “recipe for runaway inflation”, experiences so far have not borne this out. In fact NGDP targeting would have the opposite effect when growth has resumed, curbing inflation and credit growth and preventing a repeat of recent housing and stock bubbles.

May 9, 2013

Gold rally falters, while bond yields rise

Gold’s bear rally has run out of steam, with continued tests of support at $1440/$1450. Breach would penetrate the rising trendline, indicating another test of primary support at $1320. Target for the decline would be $1200*. Breakout above $1500 is unlikely, but would test $1550.

Spot Gold

* Target calculation: 1350 – ( 1500 – 1350 ) = 1200

The Gold Bugs Index, representing un-hedged gold stocks, behaves like a leveraged gold instrument. So far there is no sign of a bounce. Breach of support at 260 would warn of another decline.

My bullish outlook for gold is fading in the face of stubborn deflationary pressures faced by central banks.

Treasury Yields

Ten-year treasury yields rallied sharply at the end of last week and are now testing resistance at 1.80%. Respect of resistance remains likely — after all this is a down-trend — and would suggest another test of the all-time low at 1.40%. Breakout above 1.80% would signal a test of resistance at 2.00/2.05%, while breach of that level would signal a primary up-trend. The thirty year secular bear trend (in yields) remains downward and would only be reversed by a rise above 4.00%.

Dollar Index

Crude Oil

Brent Crude is testing its former support level at $106/barrel. Respect is likely and would offer a target of $92*. Nymex WTI broke out of its trend channel, but the trend remains downward until resistance at $98 is broken. A classic pair trade, the spread between the two is likely to narrow as the European economy under-performs.

Brent Crude and Nymex Crude

Commodities

Commodity prices continue to diverge from stocks, with the S&P 500 advancing while Dow Jones – UBS Commodity Index is headed for primary support at 125.

Dow Jones UBS Commodities Index

Reason for the disconnect is evident on the next chart. Demand from China has been driving commodities for most of the last decade. A slowing Chinese economy more than offset rising demand from the USA.

Dow Jones UBS Commodities Index

May 6, 2013

What happened to the liquidity trap?

Mark A Sadowski comments:

In November 2012 the CBO estimated that the maximum level employment effect would be a decrease of about 200,000 jobs, 640,000 jobs (80% 0f combined payroll and UI effect of 800,000 jobs lost) and 800,000 jobs for the high income tax increase, payroll tax increase, and sequester respectively: http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

In other words, according to these estimates, the sequester should already have decreased employment by over 500,000 jobs relative to baseline, and the tax increases should decrease employment over 400,000 relative to baseline by the next employment report at the latest.

What happened to the liquidity trap?

May 5, 2013

Gold and crude bear market rally

Gold is testing resistance at $1500. There has been much discussion in the media of strong buying of physical gold, but this is not confirmed by the chart. Gold now presents a strong setup for a short trade. After a reasonable bear market rally, price is now consolidating below resistance at $1500. Breakout below $1450 and the rising trendline would signal another primary decline, testing primary support at $1320 but with a target of $1150*.

Spot Gold

* Target calculation: 1325 – ( 1500 – 1325 ) = 1150

Crude Oil

Nymex WTI rallied sharply on Thursday — ahead of stocks and bond yields — but is likely to encounter resistance at $100/barrel. Respect of resistance would signal a decline to $85. Breakout is less likely, but would suggest an advance to the 2012 high at $110/barrel.

Brent Crude and Nymex Crude

* Target calculation: 99 – ( 106 – 99 ) = 92

May 5, 2013

S&P 500 and Treasury yields surge

10-Year Treasury yields rallied sharply on Friday, breaking the new resistance level at 1.70%. Follow-through above 1.80% would confirm the decline is over, signaling another test of resistance at 2.00%/2.10%.

On the monthly chart we can see that breakout above resistance at 2.00%/2.10% would signal a primary up-trend and possible test of 4.00% in the next few years. Only a breakout above 4.00%, however, would end the secular bear-trend of the last three decades.
10-Year Treasury Yields

Last week Treasury yields were falling while stocks were rising. That changed on Friday, with the S&P 500 breaking through resistance at 1600, suggesting an advance to 1650. The index has exceeded its target of 1600* and seems overdue for a correction, but bullish sentiment is rising and the market can stay irrational longer than you can stay solvent (attributed to John Maynard Keynes). Oscillation above zero on 13-week Twiggs Money Flow indicates a healthy primary up-trend. A June quarter-end below 1500 now looks unlikely, but would present a long-term bear signal.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

Bellwether transport stock Fedex is testing support at $90. Respect of the rising trendline would signal the primary up-trend is intact. Recovery above $100 would confirm.
Fedex

Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values on the VIX. House prices are rising, largely due to institutional buying, but the overhang of shadow inventory is expected to delay recovery of housing construction. Mamta Badkar at Business Insider reports:

Shadow inventory fell 18 per cent year-over-year in January to 2.2 million units, according to CoreLogic’s latest report. This represents nine months’ supply.
…..down 28 per cent from its 2010 peak of 3 million units.

As traders we have to follow the trend, but in times like this it is important to remain vigilant.

May 4, 2013

The insufferable conceit | MacroBusiness

Sell on News at Macrobusiness observes:

Columbia University economist Jeffrey Sachs recently commented that the financial system is plagued by large scale fraud. He blamed it on a docile president, a docile White House and docile regulators……..

Sachs is right in his observations, of course. But I am not sure he is right to imply that it is new. I think Greed and Wall Street have been bedfellows as long as Wall Street has existed.

May 4, 2013

Is China Carelessly Overextending Itself? | Flashpoints

Robert Farley writes:

Over the past two weeks, Indian media has reported several border incursions along the two states’ disputed Himalayan border . While the Indian government has downplayed the incidents, Indian strategic commentators have suggested that China is moving to leverage its logistical advantages in the region.

At nearly the same time, China has upped the ante with respect to the Senkaku/Diaoyus…..

May 4, 2013

How Bureaucrats and Politicians Conspire to Rip Off Taxpayers | International Liberty

Dan Mitchell discusses a new National Bureau of Economic Research working paper entitled “Shrouded Costs of Government: The Political Economy of State and Local Public Pensions.”

….The politicians give the bureaucrats excessive compensation. But they make it difficult for taxpayers to figure out how they’re getting robbed by concentrating a big share of the excess in harder-to-measure fringe benefits.

Another advantage of that approach, by the way, is that the bill for all the retiree benefits doesn’t come due until some point in the future, by which time the politicians who put taxpayers on the hook often have retired or moved on to some other position.

Generous benefits for government employees are a neat way for politicians to avoid accountability. They do not appear in the budget and are a hidden liability of the government. For a start we need to prevent politicians from creating unfunded future liabilities not just for government employee benefits, but for Social Security, Medicare and Medicaid funding. At present these are a hidden iceberg as they do not appear on the government balance sheet. It is too easy for politicians to kick the can down the road, failing to address any future funding shortfall. These unfunded future liabilities should be reflected on the balance sheet in order to improve accountability. If the actual liability is uncertain, then actuarial estimates can be used — in much the same way as used by insurance companies.

May 2, 2013

As honey bee population dwindles, U.S. sees threat to food supply

By Ian Simpson reports:

Honey bees, which play a key role in pollinating a wide variety of food crops, are in sharp decline in the United States, due to parasites, disease and pesticides, said a federal report released on Thursday……..

Honey bee colonies have been dying and the number of colonies has more than halved since 1947, said the report by the Environmental Protection Agency and the Agriculture Department.