For this week’s market outlook I cover a lot of ground and I’m going in all kinds of different directions with all tradeable markets — Forex, commodities, equities, bonds, but I’m going to finish it off with a few basics we traders need to keep in the forefront of our minds as we navigate our way through all the fundamentals, geo-politics, and manipulations that effect moves in the markets.
There are many complicated factors at play right now and the best way we can combat all the “noise” is to keep it simple, stay focused on the underlying fundamentals that move markets, and not forget the core basics for how and why we take a trade…
The cousins of Forex:
The final two days last week while I was trading the yen crosses I noticed an interesting correlation shift between the yens and their majors, specifically between the EUR/JPY and its cousin, the EUR/USD and the GBP/JPY and its cousin, the GBP/USD. I’ll get to that part in a moment, but before we dissect that potential correlation shift we need to put some things in perspective in regards to the Japanese yen.
Overall, the JPY put in a rather strong week, especially against the USD, even in the face of equities that were able to rally after selling-off earlier in the week. Under “normal” market conditions, the exact opposite would have been the case as riskier appetites send their money-flows into equities and out of the yen, and based on that fairly solid and steady market correlation, the yen crosses would have been driven higher as the S&P 500 and Dow made back their losses.
That wasn’t exactly the case for one of the two yen crosses… earlier in the week I gave a GJ support level of 141.50 which did manage to hold solid all week, but there was a definite shift in the correlation between the GU, GJ, and equities… both the EUR/USD and GBP/USD managed to put in a rather strong performance on Thursday and Friday, however, the GBP/JPY sold-off to a much larger degree than the EUR/JPY even though they generally follow each other when equities are strong and their cousins remain well supported, which was the case at the end of last week.
On Friday the EUR/JPY made its high for the day and remained well supported to the upside just as the EUR/USD was putting in the same exact performance. The GBP/USD also remained fairly supported yet the GBP/JPY was sold-off with conviction. As the euro was testing the 1.3300 level its cousin was testing the 129.00 level, which were their top of the range highs, correspondingly, while the pound sterling was testing its highs at the 1.4770 level and was able to remain supported above 1.4700, the GJ was plummeting down to the 142.50 level which was 200-points lower than its high. Within the GJ’s price action it showed zero signs it should be bought and was screaming “sell me” from the time NY opened and right through the close.
So why would the EU and EJ maintain its positive correlation and maintain its ability to move in tandem with equities while the GU and GJ went in opposite directions? Now before we go any further, let me just say this is my own theory and opinion, so take it for what it’s worth…
As technical as the GBP/JPY may be, the markets were hit with some massively negative fundamental data out of the UK and even though the GBP/USD found a way to recover back above the 1.4750 level on Friday, I think it’s possible the pound sterling/yen correlation is showing risk aversion towards the UK economy, based on the UK’s fundamentals which are growing alarmingly negative.
The dollars fundamentals were bad last week and the yen gained a lot of ground on dollar. The euro’s fundamentals were great last week and the euro gained on yen. The pound sterling’s fundamentals were abysmal and the yen gained on the pound… are you seeing a pattern here? I am. As risk aversion still remains the order of the day, to me it’s obvious that the yen was the weakest against the currency which had the strongest fundamentals, and that currency was clearly the euro, not the dollar or the pound sterling.
So, what exactly is putting the pound at such risk? Read on…
UK sovereign debt risk:
Last week Chancellor Darling announced the UK’s need to borrow and print more money, grow the debt-to-GDP ratio, and to raise taxes. I won’t waste time re-capping those issues, I already wrote a commentary on this on 22-April which you can read here.
Not only do those debt and budgetary issues put the GBP at risk, the potential for a ratings downgrade on UK sovereign debt adds a tremendous amount of risk. Just like Treasuries and Bunds, Gilts are AAA rated but it’s my opinion their rating is now at risk. With UK government expenses running almost 125% higher than revenues, how can their sovereign debt rating not be at risk?
The way the UK is dealing with the staggering expense-to-revenue situation is by printing more money but anybody with half a brain cell in their head knows that’s not an answer to the problem. In a perfect and honest world the UK’s debt rating would have already been reduced to at least emerging market levels (BBB) even though their budget, expense-to-revenue, and debt-to-GDP ratios rival that of any third world country. At this point Great Britain’s monetary and fiscal situation reminds me of another island, Haiti.
According to the latest UK debt figures, the DMO will need to raise an additional £197 billion in public debt in 2010, £154 billion in 2012 and 2013, and £125 billion in 2013 and 2014. So, what does all this mean for us as Forex traders, especially for those that trade the pound? It’s very simple, and it won’t matter what your chart or your techs say, should Standard and Poors, Moodys, or Fitch drop the triple-A rating on Gilts, the pound sterling will be brutalized, end of story.
I don’t care what any chart or tech indicator is showing or what any trader thinks they are seeing on their charts… Fibonacci doesn’t stand a chance against S&P, Moodys, and Fitch… those ratings agencies will crush any chart and will crush Fibonacci and all indicators any day of the week. My point — if you trade the GBP you better keep your eyes and ears open for this potential risk on the pound.
Treasury bull bubble ready to burst:
This week the Treasury is set to auction $101 billion worth of new debt. I’m not even sure why they are referring to these events that involve the Fed buying US debt as a “Treasury auction”… it would be the equivalent of me listing a product on ebay, borrowing money from a bank at 0% interest, bidding up my own product, and then buying it myself with the bank’s money and promising the bank I’ll repay them when I re-sell my product again sometime in the future.
There’s not even any logical sense in this sham the Fed and Treasury are running and it’s going to end up backfiring on them because this type of manipulation will burst the bull bubble in Treasuries, it will send the yield on the 10-year far above the 3.00% level and that will put downside pressure on mortgage lending rates making it even harder for potential homeowners to borrow which will even further cap home prices and prevent them from rising. Yeah, that sounds like a great plan to me… and then we have the whole issue for how this sham floods the money-supply which I don’t even have time to get in to right now.
In my view, the days of the great Treasury bull run should be officially over. Treasury prices should be starting their march back down while yields should be starting their march back up. Treasury supply should far exceed demand and all of those factors are nothing but bearish for Treasuries. But, with $101 billion worth of fresh US debt flooding the markets this week, I believe equities will be one of the beneficiaries…
Wall St. rally to continue:
What’s going to make Wall St. keep pressing on northward? One of the main factors should be exactly I was talking about in the above commentary, the Fed buying Treasuries. There’s more to it than just that and a lot of it has to do with overall market sentiment in addition to what we know about human behavior; what I’ve been teaching about human behavior in relation to price action and price patterns…
Last Friday Ford was the main catalyst that helped power the Dow and S&P 500 over their respective resistance levels by announcing they only took a $1.4 billion loss in Q1. So you want another good reason why I’m not calling an end to the Wall St. rally? Because when we’re in an environment where a $1+ billion loss is viewed as a bright spot for the economy and a bullish sign for equities, what in the world is going to take to bring the Dow and S&P 500 tumbling back down below support levels?
Oh, and if you’re an American taxpayer, you just lent GM another $2 billion on Friday and that too was viewed positively by Wall St. and even GM’s stock went up after that news. I suppose all those threats by the government to take GM into bankruptcy were just that, empty threats… and according to my numbers GM’s now received $15 billion worth of taxpayer bailouts yet they still remain insolvent and on a sinking ship but Wall St. is choosing to ignore the situation in Detroit and look the other way.
And while we’re on the subject of the automakers, be advised there’s a good probability Chrysler will file for bankruptcy as early as this coming Friday. There’s still time for Fiat and Chrysler to pull a deal together, but time is running very short and the last we heard from DC is that they will not re-bailout Chrysler as they have been doing with GM.
I was able to forecast the start of Wall St.’s rally nine days before it took hold and I feel confident at this point in calling a continuation of the rally for at least the short-term. As long we stay focused on the underlying fundamentals of the market and properly gauge overall market sentiment, it should be fairly clear when the rally will fizzle out, but for now I see it continuing right into May unless we get a major fundamental set-back or unforeseen geo-political event.
Stress test reveals unconstitutional powers seized by Fed & Treasury:
What is acting?
My definition: acting, in its purest essence, is simply convincing your audience of something that is not true.
To me, this whole stress-test is nothing more than an act… an act put on by the Fed and Treasury to convince their audience they are regulating the banking system and backstopping financial institutions. Their audience are market participants and politicians. The reason for the act is to appease both sides in order to convince them they need the Fed and Treasury, with the ultimate goal of getting more taxpayer money and wielding more control over the banking system, but to do it in a way that eludes the appearance of nationalization.
The US banking system, by way of legislation from congress, makes no provision for the Treasury or Fed to take the roles they have since the banking and financial system firstfractured in March of 2008 with Bear Stearns. According to congressional legislation and US federal banking law, the Office of Currency Comptroller and the FDIC are the two regulatory agencies assigned the tasks of supervising and regulating the entire US banking system, not the Fed or Treasury. The Fed and Treasury are clearly on a major power-grab mission.
In just the past 12-months the Fed and Treasury have seized remarkable authorities of power; powers that are not granted to them by congress and are actually unconstitutional. The scariest thing about this stress test is not what the results will reveal but how much power and control the Fed and Treasury have snatched away from Wall St. and Washington DC.
Just some food for thought…
Oh, and while we’re at it, time for a failed bank update… last Friday four more US banks failed bringing the total number of bank failures to 29 in 2009. In the year 2008 a total of 25 banks failed, so we’re well on pace for a strong year of bank failures. And here’s a little bit of trivia… there’s only be one industrialized G10 nation that hasn’t had a bank failure so far during the global financial turmoil. Can you guess which one? I’ll give you the answer at the end of this update…
Gold and crude:
Despite some alarming disinflationary fundamentals out of the US and Europe, spot gold has managed to stay well supported above that key $865 level we talked about earlier this month. Remember, that level has been tested over and over and over again since the start of the year and has proved resilient, and just like anything else, if it can’t go down, there’s only one other way it can go…
Spot gold and the USD Index remains slightly disjointed but as we saw on Friday, it was like old times again with the euro rising, the dollar falling, and spot gold, crude, and equities all gaining. That is a very fundamental correlation for the markets and was certainly a welcomed sign of some normalcy.
Most of gold’s losses a few weeks ago are easily traced back to the fact that we know central banks like the ECB, BOE, plus the IMF were unloading gold on the market to raise cash. In fact, the IMF was quite clear on this and didn’t make any attempts to hide what they were doing, and that’s why I never took my bullish bias off of gold because there’s only so much selling they can do. And just as with equities, once the surge in US M3 money-supply and the monetary base begins pressuring prices, gold should have no problem continuing to the upside. But, this may take some time to play out, so be patient.
The key for this week is to keep an eye on how spot gold responds to the fundamentals and any possible fear or risk aversion plays that happen in the markets. As far as crude is concerned, I think traders will have to take a bullish tone on this commodity as well.
Last week we saw that Crude Inventories showed their biggest builds in almost 20-years yet crude was able to rally below the $50 level and end the week on a stronger bullish tone. Here again we have another scenario where even bad news isn’t quite enough to knock this commodity down. Should equities continue their rally and break through some upside resistance, I see spot crude having no trouble doing the same.
Forex:
A few times last week I gave a the 1.2901 price as a mega key level for the EUR/USD and it did hold and we saw the euro end the week higher than where it started. At the start of this week I would expect the same type of market sentiment to prevail as long as the euro and all its correlated markets stay on course. Obviously we’ve had the G7 and IMF meetings in DC which could cause some shifts in money-flows, but I’m not expecting any major shocks here.
Fundamentally, it’s another monumental week as we have very key inflation, growth, consumer, manufacturing, and production data for the euro and dollar. In addition, we have the FOMC on Wednesday and a European banking holiday on Friday. There’s so many fundamentals on the books this week I don’t have the time and space to cover them all in this outlook, but we’ll break them down in the daily updates.
Keep a close eye on the USD Index. Last week it showed some signs it was fracturing and should the trend continue, you know exactly what’s going to happen, it’s not rocket science and you don’t need any techs to make sense of it all and to figure out what the end result will be for pairs like the EUR/USD, USD/CHF, and AUD/USD…
Lastly, I want to give traders a few reminders; back to basics kind of stuff. As you’re trading this week I want to encourage you to keep it simple and stay on top of the underlying fundamentals that move markets. It doesn’t matter if you’re a tech trader or you pray to the Greek god of Ploutos to find your trades, be mindful of the basics of price action and how human behavior determines price patterns:
- Fear and greed
- Path of least resistance
- Over-extension and over-exhaustion
- Price action of correlated markets
- Central bank rhetoric; geo-politics
- Risk sentiment of market participants
That’s all for now. We covered a lot of territory today but as you know there’s a lot of madness in the markets. Re-read this update a few times if you have to, I don’t want any traders getting caught by surprise or depending on techs too much to show them the way… I’ll post EUR/USD key levels before Wall St. opens on Monday and we’ll do a live audio Q and A session in the chat at 1000 EST / 1500 GMT.
-David
Answer to trivia: Canada
