Tag: DJ-UBS Commodity Index

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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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East to West: Bonds & tariffs hurt developing markets and crude prices

10-Year Treasury yields are consolidating in a triangle below long-term resistance at 3.00 percent. Breakout above 3.00 would signal a primary advance, ending the decades-long bull market in bonds. This would have a heavy impact on developing economies, including China, with a stronger Dollar forcing higher interest rates.

10-year Treasury Yields

A Trend Index trough above zero would signal buying pressure and a likely upward breakout.

Crude oil prices, as a consequence of higher interest rates and the threat of trade tariffs, are starting to form a top. Bearish divergence on the Trend Index warns of selling pressure. Breach of support at $65/barrel would signal reversal to a primary down-trend.

Nymex Light Crude

Commodity prices are leading, breach of support at 85.50 already having signaled a primary down-trend.

DJ-UBS Commodity Index

China’s Shanghai Composite Index is in a primary down-trend. Trend Index peaks below zero warn of selling pressure. Breach of support at 2700 is likely. The long-term target is the 2014 low at 2000.

Shanghai Composite Index

Germany’s DAX is headed for a test of primary support at 11,800. Descending peaks on the Trend Index warn of secondary selling pressure. Breach of primary support is uncertain but would offer a target of 10,500.

DAX

The Footsie also shows secondary selling pressure on the Trend Index, warning of a test of primary support at 6900/7000.

FTSE 100

In stark contrast, North American tech stocks have made huge gains in the last four months, but are now retracing to test support. Breach of the rising trendline and support at 7400 would warn of a correction; a test of the long-term rising trendline at 7000 the likely target.

Nasdaq 100

The S&P 500 has also made new highs. Penetration of the rising trendline would warn of a correction to the LT trendline at 2800.

S&P 500

North America leads the global recovery, developing markets including China are falling, while Europe is sandwiched in the middle, with potential loss of trade from East and West if a trade war erupts.

From the AFR today:

President Donald Trump said he’s ready to impose tariffs on an additional $US267 billion in Chinese goods on short notice, on top of a proposed $US200 billion that his administration is putting the final touches on.

“….I will say this: the world trading system is broken.” Trump is “dead serious” in his determination to push China to reform its trade policies, [White House economic adviser Larry Kudlow] added.

Can’t say he didn’t warn us.

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Banks lift ASX 200

The ASX 300 Banks index continues to test resistance at 8000. Respect remains likely and would indicate another test of primary support at 7300.

ASX 300 Banks Index

Rising banks lifted the ASX 200. Follow-through above 6250 signals another primary advance, with a target of the October 2007 high at 6750.

ASX 200

This leaves me in a difficult position. Technical signals suggest a primary advance, while economic indicators warn of rising headwinds and a potential bear market.

Banks

The banking sector is being squeezed by higher funding costs, falling credit growth and rising default risk.

Gerard Minack from Minack Advisers warns that the current credit contraction could cause a significant fall in housing prices:

Most houses are bought on credit, so the demand for housing is a function of the supply of credit. Consequently, housing loan approvals have historically led house prices. New loan approvals have fallen by around 20% year-over-year several times over the past 25 years. If the current credit contraction is more severe – say, a decline of up to 30% – then nationwide house prices could fall high single digits over the coming year.

….All this suggests that a high single-digit decline in house prices would put a material dent in domestic demand. If prices were to fall by, say, 15%, and if consumer income growth was as tepid as it now is, there would be a good chance of recession.

Resources

A falling Chinese Yuan highlights the threat of trade tariffs to the Chinese economy.

CNY/USD

Commodity prices have responded, falling to test primary support levels.

DJ-UBS Commodity Index

Including iron ore.

Iron Ore

The ASX 300 Metals & Mining index is testing medium-term support at 3800. Breach is likely and would warn of a correction to test the rising trendline.

ASX 300 Metals & Mining

My approach is to sit with one foot either side of the fence. Focus on growth sectors. Stay away from Banks. Stay away from Resources but stay in Gold. And keep a healthy percentage of the Australian portfolio in Cash and reasonably secure interest-bearing investments. Definitely not hybrids.

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Australia: ASX rallies

Iron ore is falling.

Iron Ore

And the broader DJ-UBS Commodity Index is testing support at 82. Breach would signal a decline to test the 2015 low at 74.

DJ-UBS Commodity Index

But the Aussie Dollar rallied Friday, the large engulfing candle suggesting another test of resistance at 75 US cents.

AUDUSD

Miners finished strongly, with the ASX 300 Metals & Mining index reflecting short-term buying pressure. 13-Week Twiggs Money Flow recovered above zero.

ASX 300 Metals & Mining

The ASX 200 is testing resistance at 5800. A 21-day Twiggs Money Flow trough above zero indicates medium-term buying pressure. Breakout above 5800 is likely and would suggest another test of 5950/6000.

ASX 200

Banks also rallied, with the ASX 300 Banks index headed for a test of 8500. Expect strong resistance.

ASX 300 Banks

Perhaps this UBS report had something to do with it.

I believe that the latest rally is a secondary reaction and that the ASX is headed for a down-turn, with miners and banks leading the way. But it’s no use arguing with the (ticker) tape.

A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.

~ Jesse Livermore

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Aussie meets resistance

The Aussie Dollar met resistance at the former support level of 75 US cents, with a tall shadow on Tuesday’s shooting star candlestick pattern. Respect of resistance is likely and would warn of another test of support at 73.50. Breach of support would offer a target of 72, putting pressure on ASX stocks as international investors retreat.

AUDUSD

The Aussie tends to take its direction from commodities. At present iron ore displays a weak rally that coincides with the rally on AUDUSD. Reversal through support at 60 is likely, and would warn of a decline to 50.

Iron Ore

Broad commodity indexes like the DJ-UBS Commodity Index are consolidating in a rectangle, between 82 and 90 on the chart below. Commodities have been trending lower since 2011, as shown yesterday. Breakout above 90 is unlikely but would signal a primary up-trend. Breach of support is more likely and would indicate a decline to test support at the January 2016 low, between 72 and 74.

DJ-UBS Commodity Index

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Australia: Lean years ahead

Growth in total monthly hours worked has slowed to 1.3% for the 12 months to April 2017. In fact, growth has been pretty lean over the last 5 years, except for the period January 2015 to February 2016.

ABS: Hours Worked & GDP growth

High commodity prices in 2004 to 2008 and 2010 to 2011 coincide with periods of strong employment and GDP growth, as indicated on the chart above.

DJ-UBS Commodity Index

The current down-trend in commodity prices, depicted on the DJ-UBS Commodity Index above, and low growth in hours worked both point to anemic employment (and GDP) growth ahead.

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Gold falls despite weak Dollar

Commodities are falling, with the DJ-UBS Commodity Index testing support at 82.

DJ-UBS Commodity Index

Despite the Dollar Index breaking support at 100.

Dollar Index

Spot Gold followed, breaking medium-term support at $1240/$1250. A test of primary support at $1200/ounce is now likely.

Spot Gold

Breach of $1200 would signal a primary down-trend. Respect would confirm the primary up-trend. I still view gold stocks as a form of “Trump insurance” and am reluctant to part with exposure to this sector.

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Commodities break support

Dow Jones-UBS Commodity Index broke primary support at 136, signaling another down-swing. Target for the breakout is the 2012 low at 126. A peak below zero on 63-day Twiggs Momentum already warns of a primary down-trend.

US Dollar Index

* Target calculation: 136 – ( 144 – 136 ) = 128

A fall in commodities warns of slack global demand and a bearish outlook for stocks. The large divergence between DJ-UBS Commodity Index and the S&P 500 should be treated as a caution.
US Dollar Index

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Falling commodities: Bearish for stocks

Dow Jones-UBS Commodity Index is testing primary support at 136. Breach would signal a decline to the 2012 low at 126. The peak below zero on 63-day Twiggs Momentum already warns of a primary down-trend. Recovery above 140 is unlikely but would suggest that a bottom is forming.

US Dollar Index

A fall in commodities would warn of slack global demand and a bearish outlook for stocks.

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Commodities down

Dow Jones-UBS Commodity Index is headed for a test of primary support at 136. Breach would signal a decline to the 2012 low at 126. The peak below zero on 63-day Twiggs Momentum already warns of a primary down-trend. Recovery above 144 is unlikely but would suggest a rally to 152.

US Dollar Index

A fall in commodities would warn of slack global demand and a bearish outlook for stocks.

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