Fixed Income Archives - Page 3 of 16

February 9, 2016

Batten down the hatches

Batten down the hatches, the storm is here.

Nymex WTI Light Crude futures (March 2016) are testing support at $30 per barrel. There is no indication that this is the bottom and breach of $30 would be likely to test $20 per barrel.

* Target calculation: 30 – ( 40 – 30 ) = 20

Long-term interest rates are falling, with 10-year Treasury yields headed for another test of primary support at 1.5 percent. Breach of 1.7 percent would confirm. The flight from stocks is driving up Treasuries (and yields lower).

Flight to safety is (normally) synonymous with a strong Dollar, so the weakening Dollar Index is a surprise.

China must be selling off Dollar reserves to support the Yuan and restore confidence.

Too late, I’m afraid. That horse has bolted. Loss of confidence in the Yuan is driving demand for gold, with the spot metal rallying to $1200 per ounce. Resistance at the former support level makes retracement likely, but a trough that respects $1100 or narrow consolidation below $1200 would suggest reversal (to an up-trend). Breach of $1200 would offer a target of $1300*.

* Target calculation: 1200 + ( 1200 – 1100 ) = 1300

After forming a lower peak at 18000, Dow Jones Industrial Average is testing primary support at 16000. 13-Week Twiggs Momentum peak at zero warns of a primary down-trend. Breach of support would offer a target of 14000*.

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

The S&P 500 displays a similar pattern, testing primary support at 1850, with a 13-week Twiggs Momentum peak at zero. Breach of support would offer a target of 1500*.

* Target calculation: 1850 – ( 2150 – 1850 ) = 1550

A monthly chart shows VIX rising for another test of 30. Oscillation between 20 and 30 flags elevated market risk.

Australia’s ASX 200 retreated below primary support at 5000, signaling a primary down-trend. A 13-week Twiggs peak below zero already warns of a decline. Today’s close at 4832 confirms, offering a short-term target of 4600* and a long-term target of 4000*.

* Target calculation: 4850 – ( 5050 – 4850 ) = 4650; 5000 – ( 6000 – 5000 ) = 4000

Investors who plan to hold stocks through a possible down-turn should stop watching daily prices and listening to news reports. It will only weaken your resolve. I am comfortable with holding stocks with strong dividend streams, but wary of holding growth stocks as they normally suffer the biggest losses.

For traders this is a time of dangerous opportunity. Either shorting sectors likely to be worst hit or waiting for opportunities to buy gold stocks.

Only when the tide goes out do you discover who’s been swimming naked.

~ Warren Buffett

February 4, 2016

Gold rallies but how long?

We are witnessing a flight to safety as money flows out of stocks and into bonds, driving 10-year Treasury yields as low as 1.88 percent. Breach of support at 2.0 percent suggests that another test of primary support at 1.5 percent lies ahead.

10-Year Treasury Yields

What makes this even more significant is that it occurred while China is depleting foreign reserves — quite likely selling Treasuries — to support the Yuan. Heavy intervention in the past few weeks to prevent further CNY depreciation against the Dollar may well show recent estimates of a further $0.5 Trillion outflow in 2016 to be on the light side.

USDCNY

China is caught in a cleft stick: either deplete foreign reserves to support the Yuan, or allow the Yuan to weaken which would fuel further selling and risk a downward spiral. Regulations to restrict capital outflows may ease pressure but are unlikely to stem the flow.

Chinese sales of Dollar reserves have slowed appreciation of the Dollar Index. Cessation of support for the Yuan would cause breakout above 100 and an advance to at least 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold has also benefited from the flight to safety, rallying to $1150/ounce. The rally may well test $1200 but resistance is expected to hold. Respect would suggest a decline to $1000/ounce*; confirmed if support at $1050 is broken. Continued oscillation of 13-Week Twiggs Momentum below zero flags a strong primary down-trend.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

January 20, 2016

Dow breaks support

My newsletters on December 10th and January 14th warned of the approaching storm across global markets. The Dow Jones Industrial Average has now broken primary support at 16000, signaling a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero, indicating selling pressure, strengthens the warning. Target for the decline is 14000*.

Dow Jones Industrial Average

* Target calculation: 16000 – ( 18000 – 16000 ) = 14000

S&P 500 breach of primary support at 1870 confirms the Dow signal. The long tail on the latest candle indicates the continued presence of buyers (highlighted by rising 21-day Twiggs Money Flow). Expect retracement to test the new resistance level but respect is likely and follow-through below 1850 would be the final nail in the coffin. The medium-term target is 1700* but long-term, expect a test of 1500.

S&P 500 Index

* Target calculation: 1900 – ( 2100 – 1900 ) = 1700

CBOE Volatility Index (VIX) testing 30 suggests elevated risk.

S&P 500 VIX

Gold and Treasury Yields

Bonds have benefited from the flight to safety, with 10-year Treasury Yields closing below 2.0%. Follow-through below 1.90% would suggest a test of the 2015 low at 1.65%.

10-Year Treasury Yields

Gold likewise rallied to $1100 per ounce. But falling oil prices and low inflation are likely to undermine any long-term demand for gold as a store of value.

S&P 500 VIX

December 15, 2015

Gold unlikely to benefit as China loosens Dollar peg

Long-term interest rates remain soft despite the anticipated Fed rate hike. 10-Year Treasury yields respected support at 2.0 percent and breakout above 2.50 percent would indicate a test of primary resistance at 3.00 percent.

10-Year Treasury Yields

Two factors have been driving US interest rates lower over the last decade: Fed monetary policy and PBOC purchases of US Treasuries. China built up $4 trillion of foreign reserves, a substantial amount in US Treasuries, to suppress appreciation of the Yuan against the Dollar and maintain a trade advantage.

China Foreign Reserves

China’s foreign reserves declined over the last year as the country struggled to maintain its peg against the strengthening Dollar, with large capital outflows. The shift from a strict peg to the Dollar to a basket of currencies may take immediate pressure off the PBOC. But a weakening Yuan is likely to encourage further capital outflows. And borrowers with USD-denominated loans are likely to suffer losses, increasing capital outflows through hedging or early repayment. So relief may be temporary.

USDCNY

Retreat of the greenback is unlikely to continue now that the PBOC has announced it will loosen its peg against the Dollar. Dollar Index breakout above 100 and recovery of 13-week Twiggs Momentum above its descending trendline would both signal a fresh advance. Target for the advance is 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold’s down-trend continues. Breach of (short-term) support at $1050 per ounce would confirm a test of (long-term) support at $1000/ounce*. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. A stronger Dollar is likely to further weaken demand for gold.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

December 9, 2015

Gold muted as Dollar slides

I would have expected a gold rally in response to the falling Dollar but the response is so far muted.

The Euro leapt 3.08% last Thursday, December 3rd, in response to a weaker-than-expected stimulus package from the European Central Bank.

EURUSD

The Dollar Index, with a 57.6% weighting against the Euro, fell 2.26%.

Dollar Index

Other factors also weaken the Dollar. The Peoples Bank of China is selling off reserves to support the falling Yuan. This is likely to continue as capital outflows from China maintain pressure on the currency.

USDCNY

A weaker Dollar would boost US exports and accelerate domestic growth. Strong bearish divergence between 13-week Twiggs Momentum and the Dollar Index warns of a reversal. Breach of support at 98 would indicate a test of primary support at 93. Failure of primary support remains unlikely, but reversal of 13-week Twiggs Momentum below zero would strengthen the warning.

Dollar Index

Interest Rates

Long-term interest rates remain soft despite the anticipated Fed rate hike. 10-Year Treasury yields respected support at 2.0 percent. Breakout above 2.50 percent would indicate a test of 3.00 percent.

10-Year Treasury Yields

Gold

Gold is headed for a test of support at $1000/ounce* after breaching $1100. 13-Week Twiggs Momentum peaks below zero confirm a strong primary down-trend. A weaker Dollar would increase support for gold but there is no sign of this yet.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

November 17, 2015

Gold breaks support

Gold fell to $1070/ounce, breaching the band of primary support between $1080 and $1100 per ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. The next level of support is $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

Inflation

Core CPI is close to the Fed target of 2.0 percent but inflation expectations continue to fall, with the 5-year breakeven rate (5-year Treasury minus 5-year TIPS yield) as low as 1.2 percent.

5-Year Breakeven Rate

Interest Rates and the Dollar

Long-term interest rates are rising, anticipating a Fed rate hike. 10-Year Treasury yields retraced to test the new support level after breaking through 2.25 percent. Respect of support is likely and will signal an advance to 2.50 percent. Recovery of 13-week Twiggs Momentum above zero suggests an up-trend. Breakout above 2.50 percent would confirm.

10-Year Treasury Yields

Low inflation and a stronger Dollar are weakening demand for gold. The Dollar Index is testing resistance at 100. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 is likely and would signal an advance to 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

November 9, 2015

Gold testing $1100/ounce

Solid job numbers have boosted the prospects for an interest rate hike before the end of the year. Employment is growing steadily, having exceeded its 2008 high by more than 4.2 million new jobs.

Employment and Unemployment

Unemployment is falling as job growth holds above 2.0 percent a year.

Interest Rates and the Dollar

Long-term interest rates are rising, with 10-year Treasury yields headed for a test of resistance at 2.50 percent after breaking through 2.25 percent. Recovery of 13-week Twiggs Momentum above zero indicates an up-trend. Breakout above 2.50 percent would confirm.

10-Year Treasury Yields

The Dollar strengthened in response to rising yields, the Dollar Index breaking resistance at 98. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 would confirm another advance, with a target of 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Gold

Gold fell as the Dollar strengthened, testing primary support at $1100/ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong (primary) down-trend. Follow-through below $1080 would signal another decline, with a target of $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

October 26, 2015

Low inflation and a stronger dollar indicate weak gold

Growth in hourly manufacturing earnings has climbed above the Fed target of 2.0 percent, while core CPI continues to track near the target. But the 5-year breakeven rate (5-year Treasury minus TIPS yield) is close to 1.0 percent. The market expects inflation to fall over the next few years.

5-Year Breakeven Rate, Core CPI and Growth in Hourly Manufacturing Earnings

The reasoning is straight-forward: the end of the infrastructure boom in China and slowing economic growth means low energy and commodity prices for the foreseeable future. Slow credit growth in the West will also act as a brake on aggregate demand, maintaining downward pressure on CPI.

CPI:US and EU

Long-term interest rates are low, with 10-year Treasury yields testing support at 2.0 percent. Declining 13-week Twiggs Momentum, below zero, suggests further weakness.

10-Year Treasury Yields

The Dollar Index rallied off support at 93. A higher trough indicates buying pressure. Breakout above 98 would suggest another advance.

Dollar Index

Gold

A strong dollar and low inflation would weaken demand for gold. Spot gold is testing medium-term support at $1150/ounce. Breach would warn of a test of the primary level at $1100. 13-Week Twiggs Momentum is rising, but a peak below zero would signal continuation of the primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

October 15, 2015

Gold breaks trendline

Treasury yields remain weak, with the 10-year yield testing support at 2.0 percent. Declining interest rates improve demand for gold but a subdued inflation outlook has the opposite effect.

10-Year Treasury Yields

The Fed has stopped QE, with total assets leveling off around $4.5 Trillion. Expansion of excess bank reserves on deposit with the Fed, which softened the inflationary impact of QE, halted a little earlier.

Fed Total Assets compared to Excess Reserves

The latter is contracting at a slightly faster pace, so the net effect (change in Total Assets minus Excess Reserves) remains stimulatory. Reversal below zero on the chart below would warn of a contraction.

Fed Total Assets minus Excess Reserves

The Dollar is weakening in line with interest rates, with the Dollar Index headed for a test of support at 93. 13-Week Twiggs Momentum crossed below zero, warning of a primary down-trend. Breach of primary support at 93 would confirm.

Dollar Index

A weaker Dollar would drive up gold. Spot gold broke its long-term descending trendline and is headed for a test of resistance at $1200/ounce. Recovery of 13-week Twiggs Momentum above zero would suggest a primary up-trend, but it would be prudent to wait for confirmation from a trough above zero and breakout above $1200.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

October 8, 2015

Gold down-trend continues

Treasury yields remain weak, with the 10-year yield continuing to test support at 2.0 percent. Declining interest rates improve demand for gold but the weak inflation outlook has the opposite effect.

10-Year Treasury Yields

The Dollar Index is ranging between 93 and 98. Flight to safety could drive the Dollar up (and yields downward) but a Chinese sell-off of foreign reserves — to support the Yuan and/or stimulate their economy — would drive the Dollar down (and yields up).

Dollar Index

Spot gold is testing resistance at $1150 per ounce. Breakout would indicate a bear rally to $1200. Reversal of the primary down-trend is unlikely, however, and breach of $1100 would offer a target of $1000/ounce*. Declining 13-week Twiggs Momentum, with peaks below zero, continues to signal a strong down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000