Sunday, August 26, 2012

Macro Analysis 8/24/2012

This is going to be another "mini" Macro Analysis as I'm still inundated with work and personal issues which are taking up the bulk of my time.  I hope to be able to bring full commentaries to everyone starting next weekend.

Stocks ended the week down as issues in Europe started heating up again and the market's presumption that additional quantitative easing from the FED was not a "slam dunk". 

Because of time constraints I'm not going to post any stock index charts but I'm going to post charts of the Treasury market and the US Dollar as these are "risk off" or "safe haven" trades that move inversely to stocks and commodities:

Here's the US Dollar:

(click on chart for larger image)
 

I circled the last three days price action and although the chart is a bit busy because of the two sets of Fibonacci lines you can see that both on Thursday and Friday the Dollar bounced off of Fibonacci support and the candlestick on Thursday signalled indecision with a bearish bias but Friday's candlestick bullishly engulfed Thursday's action.  Translation: more position squaring going into the Jackson Hole conference this weekend.  My personal opinion at this time is that the Dollar will strengthen going into the meeting.  I'll give my reasons why below.

Of note this past week has been the weakness in the Australian Dollar as several pundits have called the end to the commodities boom.  Australia has been a "risk on" currency as it's economy has been one of the strongest on the planet in the post crash global world we find ourselves.  But now, with China "on the ropes" the "Aussie" appears to be weakening:

 

The currency broke an uptrend line about a week ago and is now testing Fibonacci support at the 61.8% level.  If the Aussie breaks thru this level to the downside it will signal the end of the month long rally in stocks.

Here's a peek at Treasuries:


Here's a daily chart of the Dow Jones Chicago Board of Trade Treasury Index which is composed of 30-Year T-Bond, 10-Year T-Note and 5-Year T-Note futures contracts.  Treasuries were beaten up pretty badly in July as risk assets took off but as you can see the index smartly bounced off of Fibonacci support and the blue arrow points to Friday's close. 

For all the recent exuberance over "hopium" or a soft landing in China, these risk off assets are acting very resilient.

Analysis

In the headline risk market we find ourselves in the best markets to monitor are the currency and bond markets.  Why?

1.  They dwarf the equity markets in size with literally trillions of dollars flowing thru them everyday.  And because of this fact ...
2. These trillions of dollars represent the most powerful business concerns on the planet, both government and institutional.  These entities are run by some of the brightest minds in the world with the most up to date informational resources available.  They are "the smart money".

 We're seeing a consolidation in both the Dollar and Treasuries.  Many believe that this is simple position squaring before the big events that start on 8/31 when Bernanke gives his speech at Jackson Hole.  But, as I stated above, I believe the Dollar is going to strengthen going into Jackson Hole.

It's becoming more and more apparent to many on the street that the liquidity fix that everyone was hoping for is not going to come about.  More and more FED watchers concede that the economy is probably not weak enough to motivate the FED to ease further.  There might be further interest rate guidance but I feel very comfortable in saying that the type of easing we saw in QEI and QEII will not occur.  Bernanke knows he can do nothing to spur employment in the country.  His manipulation of the bond market is spurring a housing recovery but employment will not improve but for fiscal stimulus.  And I'll submit to my audience that Obama care and the threat that the Bush tax cuts will expire next January 1st has effectively put the "kibosh" on corporate America doing the type of en masse hiring that's needed to change the employment situation in this country.

Events in Europe are liable to be very supportive of the Dollar and Treasuries over the next few weeks.  Greek Prime Minister Samaris met with Germany's Merkel on Friday and France's Hollande on Saturday.  The result was a lot of rhetoric that Greece must honor its commitments but Merkel also kicked the can down the road stating that the EU would await the "troika" committee report on whether Greece was meeting its austerity commitments.  This report won't be ready until the end of September and so a decision on whether the EU will give the next tranche of aid to Greece will be deferred until October.


On 9/6 the ECB meets and all eyes were going to be on the plan that Draghi was supposedly putting together to take the pressure off of periphery debt.  But the ECB just came out yesterday stating that they are going to await the German Supreme Court's ruling on the constitutionality of the ESM (European Stability Mechanism) on 9/12.  Many believe, as I do, that the ECB cannot get all it's ruling council members on the same page as far as the plan goes.  This is not a good sign that anything substantive will come out of the ECB in September.  If the markets do not get a plan to buy periphery bonds en masse, watch out below!

As stated above, the German Supreme Court votes on the constitutionality of the ESM (European Stability Mechanism) on 9/12. Expect a positive outcome but if we're surprised by a negative decision take it as a signal that the Germans are ready to 'throw in the towel" on the Euro experiment.

On the same day the Dutch vote for a new government. The Dutch property market is starting to experience property deflation. This will put pressure on the present government.  If is voted out of office take that as a signal that the "northern periphery" is getting tired of financing the "southern periphery" and the cohesion of the European Union is weakening.

And China is not doing well.  I've posted past charts showing a possible double bottom formation.  Well, the Shanghai punched thru the double bottom to the downside last week:


Now, we'll need to see some follow thru next week to confirm this support break but here's a weekly chart of the Shanghai going back to May, 2008:


It's not pretty.  Primary and secondary (not shown) Fibonacci support has been violated.  There appears to be some support at the 2000 level.

I often here on the street that a China recovery would bolster the global economy.  But China is the "tail" that "the dog is wagging".  Without export growth to Europe China cannot grow.  And Europe is in deep recession.

I'm sorry for painting a rather bleak outlook.  If you're trading these markets you can make money whether the market goes up or down but from a global technical and even fundamental viewpoint, the situation is decidedly bearish at this time. 

Now, if I'm wrong about Bernanke and Draghi then we will see a rally into the end of the year.  But so far, all indications suggest that the FED is on hold in the near term and although some rate guidance might come out of the September FOMC meeting (9/12 - 9/13), this will not satisfy the market.    The Euro zone is murkier but unless there is an ECB led bond buying program to keep periphery interest rates in check, the path of least resistance will be down for stocks.

Finally, a point about Gold.  I posted a piece on 8/23 about the "yellow metal" but it is clear that Gold is anticipating central bank money printing.  Many make the argument to which I agree that, in order to insure the survival of the Euro zone, the EU must allow the ECB to step in and backstop southern periphery debt.  But recent info out of Brussels, Berlin and Frankfurt suggest that this is not the done deal the Gold market is suggesting.  If we don't see follow thru on Draghi's "whatever it takes will be enough" comments Gold will sell off.  The only other catalyst for Gold's behavior lately is the Israeli tough talk regarding a strike against the Iranian nuclear facilities before the US election.  But recent research out of Stratfor in Austin, Texas documents that the Israelis do not have the capability to successfully strike these facilities, let alone knock them out.  So, if we don't get any money printing from the FED or the ECB gold will drop like a rock!

That's it for now.  Have a great week!

NOTHING IN THIS COMMENTARY SHOULD BE CONSTRUED AS AN OFFER OR ADVICE TO BUY OR SELL ANY SECURITIES, OPTIONS, FUTURES OR COMMODITIES. THE OPINIONS ARTICULATED ARE ONLY THIS AUTHOR'S WHO IS NOT A REGISTERED INVESTMENT ADVISOR OR BROKER.