Hi folks, welcome to my weekly newsletter.
This is post is sponsored by SMARTMarkets
To sign up for this report weekly click here
Here’s a bit of feedback from a subscriber recently:
“We deal with 20 Banks globally and I get more from your note and video than all of them”
Short and sweet this week because it’s a long weekend in New South Wales and I’ve been away (I’m actually posting this while Mr 16 is driving the car – it a good distraction). But, I thought given that I’d generated a buy signal for the S&P and other indexes last week for subscribers I’d update where we are in light of hopes for a Mexican tariff break through and the dismal non-farms in the US on Friday night.
To recap, the worst week of the year for US stocks was followed by the best week of the year ending Friday. Of course it was driven by the hope of the Mexican deal, promises of Fed rate cuts, but also the reality that many markets pulled up at or around important technical support zones. That reality negated a lot of the bearishness of the previous week for the moment.
And of course the better tone in stocks helped other risk assets like the Aussie and Kiwi dollars, junk bonds, and it helped – along with some solid Russian and OPEC jawboning – WTI and Brent crude oil recover from perfect tests of Fibonacci support.
Bonds too tested and held support, gold resistance. So with President Trump announcing a deal with Mexico to avert the tariffs and the G20 meeting looming on the horizon it might be the time for the bulls to let the rabbit run.
Now for the week ahead, let’s dive in.
Key Themes driving markets
President Trump does it again. Again!!!!
The Mexican threat, as real as he probably thought it at the time he decided to impose tariffs, was a real risk to President Trump’s political standing given the two nations supply chains are so integrated and given US business and Republican Senators finally started to push back against the continued overreach.
It was a real risk also because of what it did to stock prices which President Trump continues to have as his number one KPI. He’s probably surprised that 5% tariffs on Mexico knocked stocks over in a way the China trade war had not.
But he’s got the message, found a way to agree that Mexico has done what he wants though it seems they were doing all the things anyway, and so markets – having preempted the “deal” are now likely to take this as an indication Trump may fold on China – or at least find a way to do a deal – when he meets President Xu at G20 later this month.
If that is the case, either the expectation or reality of deal, then there is a real chance we’ll see new record highs for the S&P and other US stocks. Which of course has serious positive consequences for bourses across the globe.
A BUY signal for stocks.
I alerted subscribers on Wednesday morning my time (COB NYC Tuesday) to a buy signal for the S&P 500 and a couple of other markets then and during the week. As I wrote, it was the first buy signal since May 1 and I was taking it. I also noted the DAX pulled up almost exactly in the convergence of the 200 day moving average and Fibo support and that many other indexes had fulfilled similar retracement patterns.
That’s important because if I use my weekly JimmyR indicator as the overall trend direction then the reversal off support is a signal the uptrend is still intact and I shouldn’t get too bearish.
Price has primacy in trading. Rhetoric is a luxury unless it lines up with price. Then we have a powerful synergy to harvest profits.
That’s not to say I’m convinced a deal will be done between Presidents Trump and Xi – in fact almost the opposite.
But two things are clear, price follows its own path of least resistance and President Trump is prone to whims and swings of emotion. So as he intimated with comments on Huawei this week, maybe a deal can be done.
So for the moment the weekly JimmyR still points higher, my daily MACD system was s long, and the weekly has generated a buy signal. And that means I’m running with this till price tells me otherwise.
And it’s a similar story for the DAX and other indexes where my daily and weekly systems are either long or have but orders. Here’s the daily DAX.
Bonds still suggest caution – but rally resistance held
I highlighted the long term resistance in US 2 and 10 year Treasury yields last week because they represent points of extension or exhaustion for the recent push lower in bond yields, push higher in bond prices.
Last week we did see a test of the 3 decade trend line in the 2’s and an approach to the bottom and of the range in the 10’s – both of which held.
But given the weak non-farm payrolls print of just 75,000 against expectations of an increase of 185,000 during May, even with a still robust 3.6% unemployment rate saw bets the Fed will be forced to ease and that other central banks will follow suit.
So bonds around the globe are plumbing lows in outright’s and in spreads. And as you’ll see in the CFTC data below, the market appears to getting my short 10’s. So there’s a risk of reversal if these levels in US markets continue to hold.
In the long run I expect a deep run lower in US and global bond prices. One that is eventually incompatible with higher stocks. But for now we live in a Goldilocks land of hope and she’ll be right.
Just quickly on the Fed
It is pretty clear the Fed is ready to cut rates when necessary. We heard as much this week from Powell, Clarida, Brainard, Evans, and Bullard.
But the comments I took most seriously where the ones from Dallas Fed President Robert Kaplan who provided the context around when the Fed will change both its rhetoric and actions. Kaplan effectively said there were a number of thinks to play out over the next few weeks and the the Fed could see where things land.
That is, the meeting between Presidents Xi and Trump at G20, and the implications for the trade war will decide the Fed’s reaction function.
US Dollar breaking down
For the first time in 18 weeks the US dollar index (DXY) closed below my 15 week ema. That’s an important signal of a pullback. It closed the week at 96.56 and I have 95.60/80 pencilled in as a target for this move at a minimum.
I put out a thread on Twitter which summarises my thinking – it goes along these lines.
The risk is rising of a counter trend reversal in the USD, DXY, Euro and other pairs against the USD at present.
A big part of this is weak US data with the Citibank Eco Surprise score (CESI score) continuing to be the weakest of the major markets – by a long way.
As you’ll not below the CFTC data shows overall USD positioning still very high making markets vulnerable to this reversal if it gets a wriggle on. That begs the question of what’s a wriggle on? My best guess is a break of the Euros 200 day moving average at 1.1365/70.
Euro hasn’t been above 200dma since May 2018
That means EURUSD is nearing what could be an important extension or exhaustion point at this 200 day moving average. Then we have 1.1450 is 23.6% retracement of the big fall, 1.1625/30 is 38.2%
That would be the maximum extension I’d expect from this move at present. But as ridiculous as that sounds rhetorically right now, the set up is growing for a counter trend reversal of the US dollar which could cause ructions across many markets.
And just quickly, the CFTC data
As noted above the market remains very long US dollars and US Treasuries. Both these trades are vulnerable to a thawing in the trade war – as remote as that seems. That would have implications for other shorts like those in the the Aussie and Euro – among others.
@gregorymckenna on Twitter
In collaboration with SMART Markets