Category: US & Canada

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Gold, rising interest rates and the falling Yuan

Interest rates are rising. Upward breakout from an ascending triangle formation on 10-year Treasury yields indicates an up-trend.

10-year Treasury Yield

A rate hike from the Fed would increase pressure on the Chinese Yuan, leaving the PBOC with a dilemma. Either allow the Yuan to slide, which could panic investors and borrowers into a rout, or sell off more of its $3.2 trillion foreign exchange reserves to slow Dollar appreciation against the Yuan.

USDCNY

Long tails on USDCNY indicate buying at the 6.60 support level. Breakout above 6.70 would warn of another advance (decline for the Yuan).

Rising interest rates increase downward pressure on gold but a falling Yuan would boost demand as a store of value. Spot Gold is above the rising trendline on a weekly chart but expect a test of support at $1300/ounce. Momentum holding above zero continues to indicate a healthy primary up-trend. Respect of support at $1300 would confirm. Breach of support remains unlikely but would signal trend weakness and a test of primary support at $1200.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

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How to Counter the Putin Playbook | The New York Times

Michael A. McFaul, director of the Freeman Spogli Institute and a senior fellow at the Hoover Institution, both at Stanford, served as United States ambassador to the Russian Federation from 2012 to 2014:

…We will not find security in isolationism. No missile defense shield, cybersecurity program, tariff or border wall can protect us if we disengage. Menacing autocracies, illiberal ideas, and antidemocratic and terrorist movements will not just leave us alone or wither away. The threats will grow and eventually endanger our peace, as we saw in Europe and Japan in the 1930s, and Afghanistan in the 1990s.

Conversely, the growth of democracy around the world serves American interests. Democracies do not threaten us; autocracies do. Democratic allies also vote with us at the United Nations, go to war with us, support international treaties and norms, and stand with us against tyranny.

So we must push back, in new ways. Just as the Kremlin has become more sophisticated at exporting its ideas and supporting its friends, so must we.

We should think of advancing democratic ideas abroad primarily as an educational project, almost never as a military campaign. Universities, books and websites are the best tools, not the 82nd Airborne. The United States can expand resources for learning about democracy……

I agree with the sentiment but not the execution. Win friends by promoting education and building infrastructure abroad. These have practical, tangible benefits to citizens of developing nations. Democracy can come later. In many parts of the world it is as foreign a concept as gay marriage.

Source: How to Counter the Putin Playbook – The New York Times

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Defensive PE at a dangerous high

Low interest rates and the accompanying search for yield have driven the forward Price-Earnings ratio for Defensives to a 20-year high. This is likely to reverse when (not if) rates eventually rise. Cyclicals and Growth, however, still look reasonable.

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Elon Musk’s Next Plan | Inc.com

By Kevin J. Ryan:

During Tuesday’s SolarCity earnings call, Elon Musk hopped in to let the world know what the company he co-founded plans to do next: create solar roofs. Not solar panels–entire roofs.

….”The point of all this was, and remains, accelerating the advent of sustainable energy,” Musk wrote in his recent Tesla “Master Plan Part Deux” blog post, “so that we can imagine far into the future and life is still good.”

Now, that plan is beginning to crystallize a bit more. Should Tesla close its $2.6 billion deal to buy SolarCity, it will bring Musk’s vision a little closer to reality–especially the part that entails creating cars that get their energy from solar-powered batteries.

A home that powers itself and perhaps the cars parked in its garage–and in the process, helps the world lessen its dependency on fossil fuels in a very big way–might not be that far off. And it might not look that bad, either.

Source: Elon Musk’s Next Plan: Do for Roofs What He Did for Cars | Inc.com

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How Global Elites Forsake Their Countrymen | WSJ

Great column by Peggy Noonan in the Wall Street Journal on the growing detachment between political and cultural elites and the problems facing ordinary citizens on the lower rungs of society. There is plenty of evidence of out-of-touch elites, including Brexit and Angela Merkel’s unilateral decision to allow 800,000 migrants and refugees from Muslim countries.

Nothing in their lives will get worse. The challenge of integrating different cultures, negotiating daily tensions, dealing with crime and extremism and fearfulness on the street — that was put on those with comparatively little, whom I’ve called the unprotected. They were left to struggle, not gradually and over the years but suddenly and in an air of ongoing crisis that shows no signs of ending — because nobody cares about them enough to stop it.

The powerful show no particular sign of worrying about any of this. When the working and middle class pushed back in shocked indignation, the people on top called them “xenophobic,” “narrow-minded,” “racist.” The detached, who made the decisions and bore none of the costs, got to be called “humanist,” “compassionate,” and “hero of human rights.”

Surprising support for Donald Trump and Bernie Sanders also reflect the disillusionment of the bottom half with leadership by the 1 percent. They feel they have been taken for granted — if not shafted — and their anger will be reflected at the ballot box. Hopefully we can avoid the rise of tyranny as in the 1930s — after the last financial crisis — but these are dangerous times.

Source: How Global Elites Forsake Their Countrymen – WSJ

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Gold shudders on strong jobs numbers

Long-term interest rates surged on strong jobs numbers, well above the estimate of 180,000. From the WSJ:

Nonfarm payrolls rose by a seasonally adjusted 255,000 last month, the Labor Department said Friday. Revisions showed U.S. employers added 18,000 more jobs in May and June than previously estimated.

10-Year Treasury yields strengthened to 1.58 percent in response, from a record low of 1.33 percent four weeks ago. Expect a test of the descending trendline at 1.66 percent.

10-Year Treasury Yields

Gold fell to $1335/ounce on expectations of higher interest rates. Penetration of the rising trendline would suggest a correction to test primary support at $1200/ounce. Follow-through below $1300 would confirm.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

At present I don’t see much threat to support between $1300 and $1310. Especially with safe-haven demand for gold enhanced by European uncertainty over Brexit, the dilemma of US November elections (a choice between two equally undesirable alternatives), and a declining Yuan encouraging capital flight from China.

USDCNY

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Crude testing $40

Light Crude (September contract) is testing medium-term support at $40/barrel. Breach of support would signal a test of primary support at $33 to $34. Respect of support, on the other hand, would indicate another test of resistance at $50. And breakout above $50 would signal a primary up-trend.

WTI Light Crude September Contract

The long tail and strong volume at $40 suggest that support may hold. But I wouldn’t bet the house on it. Especially when gasoline inventories have surged, the US rig count is rising …..and demand is set to fall.

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