For those reading my weekly commentary you will know that i have been the harbinger of doom since the start of the year. Finally i feel vindicated and relieved. The market needed this break just to add a semblance of normality to the world. Though i shall not rest on my laurels as even a broken clock is right twice a day.
By Friday morning every major equity index in the U.S. was on track to experience its worst week in two years as the U.S. 10-year Treasury yield moved over 2.8%, hitting the highest level we’ve seen in over four years, while the 30-year broke through 3%. The dollar made new lows during the week, dropping to December 2014 levels. The rout was also seen in the crypto currency world as Bitcoin dropped below $8,000.
Personally i am not particularly concerned about this correction. I don’t see any catalyst for a crash or crisis at this stage. A healthy retracement amplified by algorithms accelerating the drop. The subsequent bounce should catch as many off guard. The chart above shows a channel that has served as both support and resistance since 2009. We are merely testing support at the upper end of the channel. Only a break below 2200 would concern me. Even more telling is the chart below from PD Macro. Mean reversion is still a thing. Another channel showing the stock bond ratio since 2009. I can’t help but marvel at the beauty of these relationships. Understanding the equity market / credit market relationship is key. The equity market is responding to calls for higher interest rates. Don’t forget that the equity markets are in themselves levers to control rates. This sell off is the White House and Central Bank telling the bond market to get stuffed. Inflation is being priced in. The question becomes who blinks first and in this case the weak mom and pop retail investors blinked first and puked. Guys like me step in and start accumulating at clearance. Many will say that the market is rigged and the rich get richer however it’s the smart that get richer. The games the game.
As a defensive precaution I have increased my long position in Treasuries (TLT) and initiated another position in the S&P Utilities Sector (XLU) which having under performed the SPX index by 27% since the US election should also benefit if bond yields move lower. Interesting times ahead in this late stage of the business cycle. Vigilance advised.
Previous week: 29 January 2018 – 02 February 2018
President Trump State of the Union
The legs and palms of the Republican lawmakers must be tired from all the standing ovations.
Eurozone CPI flash estimate y/y—6pm 31 January 2018
Eurozone flash CPI for January 2018 was 1.3% (expectation was for 1.3%), a drop from the previous month of 1.4%. Mario Draghi, just a gentle reminder, 1.3% is not near 2%.
Quoting the ECB: “From January 2018 the net asset purchases are intended to continue at a monthly pace of €30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration.”
US Crude oil inventories—11.30 am 24 January 2017 Friday
US crude inventories INCREASED by +6.78 million barrels on the expectation of +0.9 million increase. This represents the first increase in 10 straight weeks of drawdowns in crude oil inventories. Baker Hughes US oil rig count increased by 6 from 759 to 765. Oil production was 9919k barrels per day for week ending 26/01/2018, an increase from 9878k barrels per day in the previous week. Oil production still remains at / near all time high and is closing the gap between USA and SAUDI ARABIA. The rise in rig count seemed to be 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:
FOMC statement, Federal funds rate (no press conference)—3am 01 February 2018 Thursday
Key points from Zerohedge:
*FED LEAVES RATES UNCHANGED IN UNANIMOUS VOTE
*FED: ECONOMY TO `WARRANT FURTHER GRADUAL INCREASES’ IN RATES
*FED: INFLATION TO RISE THIS YR, STABILIZE AROUND 2% MEDIUM-TERM
*FED: MKT-BASED INFLATION COMPENSATION GAUGES ROSE RECENT MONTHS
*FED: GAINS IN EMPLOYMENT, SPENDING, INVESTMENT HAVE BEEN SOLID
The most important change in this statement is as follows: Very hawkish
December: “Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term.”
November: “Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.”
Non-farm employment change, unemployment rate, average hourly earnings m/m, labour force participation rate—Friday 02 February 2018 9.30pm
200K jobs expected to be created in January on expectation of 181K. Unemployment rate remained at 4.1%. Average hourly earnings m/m grew +0.3%.
Quoting Zerohedge: “However, it important to note that the only reason hourly earnings rose as much as they did is because the average weekly hours worked dropped sharply from 34.5 to 34.3. Meanwhile the average weekly earnings actually declined from 2.9% to 2.6%, with the number dropping from $919.43 in December to $917.18.”
Nevertheless, President Trump, the self-declared “greatest jobs president god ever created”, took a victory lap around Mara Lago.
January jobs report—Strong 200k jobs created
|Non farm employment change||+200K||+181K||Dec: Revised from +148K to +160K (+12K)
Nov: Revised from +252K to +216K (-36K)
Net revision: -24k
|Average hourly wage m/m||+0.3%||+0.2%||Dec: Revised from +0.3% to +0.4%|
|Average hourly wage y/y||+2.9%||+2.6%||Dec: 2.7%|
Image from Zerohedge:
Coming week: 29 January 2018 – 02 February 2018
US Crude oil inventories—11.30 am 24 January 2018 Wednesday
ARE CRUDE INVENTORIES STARTING TO BUILD /RISE? (+6.78 million barrels BUILD last week) My hunch tells me that the rebalancing is about to be completed and frackers are going to ramp up production bigly now that USOIL is above $60 a barrel, well in the profitable territory.
RBA cash rate, rate statement—11:30am 6 February 2018 Tuesday
NO CHANGE IN CASH RATE (+1.50%) IS EXPECTED!!!!!
Quoting the Reserve Bank of Australia: “The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.”
Australia’s inflation numbers come out once every quarter. The inflation y/y in the quarter ending December 2017 came in at +1.9%, continuing the narrative of tepid, below-target inflation rate.
RBNZ monetary policy statement, rate statement, press conference, official cash rate—5.45am 7 February 2018
NO CHANGE IN CASH RATE (+1.75%) IS EXPECTED!!!!!
Quoting the Reserve Bank of New Zealand, “The Reserve Bank Act requires that price stability be defined in a specific and public contract, negotiated between the government and the Reserve Bank. This is called the Policy Targets Agreement (PTA). The current PTA, signed in November 2017, defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint.”
New Zealand’s inflation rate although still within the wide 1% to 3% range, is moving away from the 2% midpoint target. At 1.6% in the quarter ending in December 2017, inflation is trending away from the 2% midpoint target in a downward direction.
BOE Inflation report, MPC Official Bank Rate Votes, monetary policy summary, official bank rate—8pm 8 February 2018, Thursday
NO CHANGE IN CASH RATE (+0.50%) IS EXPECTED!!!!! All 9 members are expected to vote to hold the bank rate unchanged.
Divergent monetary policy. RBNZ intends to keep rates unchanged while the Federal Reserve is tightening their monetary policy.
Let the picture speak for itself.
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%).
ETH/USD takes support at $800
BTC/USD broke the first logarithmic trend line support and $10k horizontal weak support. Currently taking support at $8k.
Long term long position in Gold
- 62 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.