The two week correction ended as quickly as it began with a one week rally that was the strongest since 2011. The dollar is still under pressure and rates failed to rise despite increasing inflation. We are back to “bad news is good news” and “good news is great news”. I cant help feeling this is the new paradigm that all the crypto enthusiasts keep harping on about. Energy has been the weakest sector, down 12.5% from it’s highs whilst financials are 4.5% below their highs and tech being 2.8% below it’s highs.
Put/call ratios are at lower than average levels which shows that investor sentiment is more bullish than bearish. The weaker dollar makes US exports cheaper which should translate to higher earnings per share among US firms and eventually will be reflected as a tail wind to US equity markets. Historically the dollar index falls when we reach the latter stages of the business cycle and contributes to a blow off top in equity markets.
The TED Spread is a fairly accurate gauge of systemic risk and i have yet to see any systemic issue on the horizon. A TED reading above one indicates risk and we are currently sitting at 0.3 which means Risk On! Buy the dips.
Previous week: 12 February 2018 – 16 February 2018
UK CPI y/y—5.30pm Tuesday 13 February 2018
January’s CPI was 3.0%, higher than what was expected (2.9%). Nevertheless, it seemed pretty apparent that the ceiling for CPI is 3%. Wage growth continues to lag inflation.
Image from The Guardian:
US CPI—9.30pm Wednesday 14 February 2018
Core CPI y/y at +1.8% is still under 2% and have been since May 2017.
|Core CPI m/m||+0.3%||+0.2%||+0.2%|
|Core CPI y/y||+1.8%||+1.7%||+1.8%|
US Retail Sales—9.30pm Wednesday 14 February 2018
Retail Sales took a big drop in January.
|Retail Sales m/m||-0.3%||+0.2%||Revised from +0.4% to +0.0%|
|Core Retail Sales m/m||+0.0%||+0.5%||Revised from +0.4% to +0.1%|
|Retail Sales y/y||+3.6%||+5.2%||+5.2%|
US Crude oil inventories—11.30 am 14 February 2018 Wednesday
US crude inventories INCREASED by +1.84 million barrels on the expectation of +3.1 million increase. Baker Hughes US oil rig count increased by 7 from 791 to 798. Oil production was 10271k barrels per day for week ending 09/02/2018, an increase from 10251k barrels per day in the previous week. US Oil production still remains at / near all time and have just overtaken Saudi Arabia and is expected to overtake Russia in due time. The rise in rig count is attributed to the strong correlation to the price of oil. The head on battle between US and OPEC continues. Frackers are churning out their rigs while OPEC is keeping a lid on production.
Image taken from Zerohedge:
Coming week: 12 February 2018 – 16 February 2018
RBA Monetary Policy Meeting Minutes—8.30am 20 February 2018 Tuesday
Nonevent. As shown last week, the projections of inflation and GDP stayed relatively constant.
FOMC Meeting Minutes—3am 22 February 2018 Thursday
There was no hike in the January meeting. Nothing is to be expected from this meeting apart from the discussion from the number of hikes expected in 2018.
US Crude oil inventories—12:00 am 23 February 2018 Wednesday
Inventories will continue to build up and crude prices will consequently fall.
USD/JPY broke a key support at 108 last week. Retracement back up to 108 will give a good opportunity to go short with potential target at 101.
Long EUR/USD (wait)
Having broken strong resistance at 1.20 – 1.21 decisively, patiently waiting for a retracement back down to support will be wise in getting an entry to go long this pair.
European Central Bank’s Quantitative Easing Programme:
Economists surveyed by Bloomberg are now more hawkish on the pace of removal of Quantitative Easing. This ought to be the case and this shrinks the divergence in monetary policy between the ECB and Fed that had been ongoing for the past years.
- Although the Eurozone’s inflation is not at 2.0% (last 1.4%), it has gone a long way from experiencing deflation in Q1 2016.
- Although Eurozone’s unemployment rate is still pretty high (last 8.7%), it has gone a long way from the high of 12.1% in Q1 2013 and is still falling at a steady clip.
- Eurozone’s annual growth rate has stay positive since Q3 2013 and increasing in pace (last 2.6%).
Long term long position in Gold
- 71 basis points. That is the difference between the yield of the 10 year and 2 year US Treasury bonds. Every time the yield curve inverts, it recession occurs soon after. Interest rate is also the opportunity cost of holding onto gold. The lower the opportunity cost, the more attractive gold gets.
- Russia and China continues to sell oil to North Korea which are in opposition to USA’s (Trump) stance of strangling the living daylight out of DPRK. When an animal is cornered with no way out, it has no other choice but to attack.
- The heart of the Israel – Palestine conflict is about Jerusalem. For decades, USA have played the mediator in this conflict. However, President Trump, the spokesperson representing the most powerful nation in the world, picked a side over the other by recognizing Jerusalem as Israel’s capital. Jerusalem is the line in the sand that cannot be crossed. Yet, it was. The two state solution is no more. It is now a one state solution and more Zionism. Escalation of conflict through a third intifada (Uprising) is highly likely.