A tumultuous fist half of 2019 is drawing to a climax – McKenna Macro Markets Weekly

on June 23, 2019

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Key Takeaway

Fear, panic, hope.

They were all felt in some measure by traders and investors in different markets over the past week. It’s a very fluid point in time for global finance right now as we head toward a crucial G20 meeting where we can either see an escalation or relaxation of the current trade war between the world’s two biggest economies. 

At the same time, we have possible escalations between the US and Iran keeping a bid in oil and we have the promise of more central bank sugar hits keeping stocks and gold with a TINA and FOMO trade. It is no exaggeration to say that we are at a critical juncture right here and right now as we end what has been a tumultuous fist half of 2019.

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

Central bank rate cuts are coming (what that means for markets, especially gold)

I have been on the record over many months saying the central banks are not yet ready to give up the ghost on their view of what the world’s economy should look like or how it should respond to their policies. Even though there is ample evidence that at present deeply negative rates are not stimulating inflation or growth they seem determined to push rates further into negative territory. These bankers, sure they have the prescriptions to what ails the patient they’ve had on life support for the past decade seem determined to push even lower still as they throw good money after bad and in confiscating the wealth of savers try to force some sort of spending and economic activity in individual nations and across the globe.

In the space of a couple of week’s we’ve heard Mario Draghi, effectively, saying the ECB stands ready to again do whatever it takes to deliver more monetary stimulus. he’s on his way out as his term approaches its limit in the next few months so expectations are that any delivery will be soon. Indeed, so sure of his intent is Germany’s Commerzbank that they pulled forward their expectation of an ECB rate cut from Q4 2019 to July – next month!

Not everyone is on board though it seems as Mario Draghi’s promise seems to have caught some ECB members on the hop. But it’s clear even with objections from the usual suspects that monetary accommodation is again coming to Europe.

Likewise in the US as I wrote Thursday morning it is noteworthy the economic expansion has been downgraded from solid to moderate by the Fed, that they say households are saving more, the markets view of inflation has fallen, and uncertainties about the outlook have grown.

The Fed has promised to closely monitor the outlook and make changes to policy appropriate to support the expansion which I see as a low bar for a rate cut folks. I can make the case now that a rate cut would be appropriate to support what’s clearly a slowing economy – with or without the trade issue and the G20 meeting. But Powell suggested at the press conference the Fed just wants to wait for the moment.

That fits with what Robert Kaplan told us a couple of weeks back Rate cuts are coming, the market essentially has a 100% chance priced into July. The Fed is just waiting to see if the whole trade war might end in which case it will stall cuts for a little bit, otherwise rate cuts are coming very soon – and we might even get a 50 pointer.

Remember Powell said, “an ounce of prevention is worth a pound of cure”. 

Rate cuts are coming and that is important for many markets but in some ways none more so than gold. Also as I wrote Thursday after the Fed,”Lower Fed rates, lower global rates can drive TINA and FOMO is equity and other risk asset markets. But negative rates can drive a capital protection bid for gold…n a deflationary world of negative rates gold may surprise many simply because of the negative rates and peoples desire to preserve capital rather than pay for the privilege of owning Govies. 

Gold (XAUUSD) Weekly – TradingView

Gold had a powerful move Thursday Friday as a result rising $50 at its peak of $1411 from where it closed Wednesday afternoon in New York. As I highlight above on its own gold can catch a bid if for no other reason than folks – who aren’t trading bonds for capital gain – are happy to hold gold rather than pay for the privilege of holding many Govies across the globe. It’s different in the US where 2’s, 10′ and 20’s still offer a positive return (which should help the USD in time).

But when you throw in a conflict bid over the Iranian drone – even though President Trump stepped back from escalation in calling off the planned retaliatory strike –  it is easy to see why gold shot higher.   Looking now support is $1371/85 as the breakout and 38.2% FIboZone with $1480/90 the 50% retracement zone of the big fall.

Where is the system at presently with regard to positioning

Each morning subscribers get an update of changes to my system in table form at the bottom of the daily newsletter . They can see what has changed and what the system’s position is at the close of New York trade the previous day. .

I write a lot of rhetorical stuff each day and each week. But the MACD system along with the moving average cross overs, is the basis of my trading. The current positions and how they have changed this month are below. As you can see it is not always right. But it works pretty well. 

Screenshot, some of the markets I watch each day. I have a weekly version of this as well.

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Stocks at highs while trade talks hit the decision point

If there has been one theme I have been constantly pushing over the past few months it is that the trade battle seems to have become intractable because the Chinese want to be treated as equal partners and the US seems unwilling to do that. It’s a theme that China reiterated again over the weekend. Our friend Hu, EiC of the Global Times summed it up nicely on Twitter. 

Source: Twitter

That echoed the message in the CCP mouthpiece Peoples Daily newspaper which again took aim at the Trump Administration and its policy of “wielding a big stick” on tariffs.

The good news is that we know President Trump and Xi are meeting at the Osaka G20 meeting with China confirming he’ll be attending the summit on Sunday morning Beijing time. But, as usual, there is another wrinkle in the meeting with the US putting 4 more Chinese tech firms and a research institute on its blacklist Friday. 

Again, Hu had something to say on the matter.

Source: Twitter

Now, President Trump’s decision not to hit Iran with a strike last week because it was out of balance – given 150 people might die in Iran compared to one unmanned drone – suggests he really is one out of the box. And on that basis even given all of the above it’s not beyond the realms of possibility that he will find a way to do a deal with president Xi.

Source: ZeroHedge

For the moment though Goldman Sachs says the market is only ascribing odds of 20% to a deal getting done. And that is with US stocks at record highs.

What is next for stocks?

Fresh record highs for stocks in the wake of the Fed and other central bank promise of more monetary largesse. Again though it is worth reiterating what I wrote Thursday. That is: 

“There is naturally tension between an economy that needs stimulus and the fact that rates are going lower. And of course right now we still have the uncertainty about the trade war and the outcome from G20.

But, structurally if the Fed is cutting to get inflation going in an economy that it still thinks is growing at or around 2% say, then rate cuts can actually provide solid support to stocks – in the absence of a recession so many fear. This is after all all about extending the expansion.

So at the moment, my systems are pointing higher and I have no reason not to think we’ll see new all time highs. We’ll see what happens at G20 I guess now.”

S&P 500 (futures) Weekly – TradingView

Naturally we saw that record high already in the S&P and the question is whether traders run hot or sceptical into the weekend G20 meeting in Osaka. As it stands my JimmyR is pointing higher on the weeklies, and the MACD system is long on both daily and weekly time frames (or has orders to buy) on all the stock markets I watch.

But I am curious about the week’s end candles in the S&P (which of course I use as the global bellwether) and other markets. 

Stocks Daily – TradingView

Trump walks back on Iran, that’s a good thing – what’s next for oil

The conflict bid in crude oil took hold last week after the Iranians downed an unmanned US drone and the market priced US retaliation, That saw WTI rise from the previous week’s low a little more than $50.50 a barrel (and the intra-week low of $51.50) to close out the week the week at $57.60. 

That’s above the 38.2% level at $56.69 and on track for the 50% retracement level at $58.57.

WTI (futures) Weekly – TradingView

The question though is whether President Trump’s insistence he’d rather make friends than bomb Iran and whether his message over the weekend new sanctions are coming to Iran can take any of the conflict bid out of the price. With the G20 coming up that might be difficult but while $60.50 might be a possible short term target (my system is long WTI and Brent on the dailies) the overall bias remains lower unless medium/long term WTI (and Brent) can break back into the uptrend.    

95.50 looms large for the USD Index and thus forex markets

The reaction of forex traders this week’s strikes me more as a reaction to Trade Talk Glasnost than simply a reaction to the Fed’s effective promise of rate cuts to come.  I say that because with the fed’s promise comes trouble for the ECB, PBoC and other central banks as they too chase satisfaction with mandates and/or stronger economic growth. 

USD Index (daily) TradingView

To me it is as much that all the tourists were, or still are, on one side of the ferry.

Certainly overall forex positioning suggests the risk is of a wholesale USD long position liquidation should the greenback fall to appropriate levels against the Euro, Yen, in DXY, and other terms. In a rhetorical all of the above doesn’t change my structural USD bullishness. But tactically I am watching the 95.50 level closely as it is the intersection of the little uptrend (blue line) and the bottom of the recent range (red line) in the chart above.

A break of 95.00 though is likely to be the level which kicks off a wave of USD selling – or where the USD finds support. 1.1450 is the similar level in EURUSD which could open the door to a Pandora’s box of USD position squaring.  

Bonds hold key support

The dichotomy between stocks and bonds is best resolved with reference to the markets expectation that central bankers via TINA and FOMO will give investors and savers no choice but to put a bid in risk assets. In normalising these tools of QE and negative rates and in convincing themselves that the wealth effect of keeping stocks up is all that matters they have lead us down a path of increasingly negative rates and more to come.

And you can see in the lack of inflation that if that is what central banks are worried about they are making the classic mistake economics makes all the time – if the theory doesn’t work just assume it will in the long run.

But in this environment – for the moment anyway – to be structurally long of bonds remains the right trade. 

US 10 year Treasury yield weekly- TradingView

Price action wise though we can see in the US 10 year Treasury yield above and the US 2 year yield below that we are seeing important levels of medium to long term support hold on the weekly charts.

US 2 year Treasury yield weekly – TradingView

Likewise if you look at the German Bund rates (2’s and 10’s) in the chart below we can see that the bars on the 2’s and 10’s COULD be signalling a reversal in  yields. Certainly a break of the recent highs – or lows – would be the signal for the next move. Likewise US 10’s above 2.12/17 would signal a further increase with 1.90/1.94% the level to watch in the US 2 year Treasury yield.

German 2-10 spread (top), 10year (middle) and 2 year (bottom) Bunds – TradingView

It’s all very fluid at present.

The week ahead

The week kicks off with speeches from the Fed’s Harker and the RBA’s Lowe. The latter will be part of a panel at an ANU leadership forum so it may not be market moving.  We also get NZ credit card spending, Japanese leading and coincident indicators and then in the European session we get Germany’s ifo business survey results. ECB’s Lautenschlager will be giving a speech. The Chicago Fed activity index and Dallas Fed manufacturing index are out as well. 

Tuesday kicks off with NZ trade, and the minutes to the recent BoJ meeting and we get a speech from the RBA’s Bullock on Modernising the Australian Payments System which might be interesting as a follow up to the Facebook Libra initiative. ECB’s De Guindos speaks in Europe and the CBI distributive trade survey is out in the UK. In the US it’s Case Shiller house prices, new home sales, the Richmond Fed and then a raft of speeches from the Fed’s Bostic, Powell, and Bullard. API Crude is out at the end of the day.

Wednesday we get the RBNZ and the chance of another cut to kick us off and then its gfk confidence in Germany, and the non-MP meeting at the ECB. In the US it’s goods trade, durable goods, and EIA crude. 

Thursday is Japanese retail trade, Spanish CPI and EU business confidence. German CPI is out and then we have the latest read on US Q1 GDP, and PCE, as well as Kansas Fed manufacturing, and pending home sales. 

Finally Friday and its UK consumer confidence, Japanese jobs and Tokyo CPI as well as industrial production and the BoJ summary of opinions. The G20 meeting kicks off and we have private sector credit in Oz. German import prices are out, French PPI and CPI as well as Spanish trade and GDP for Q1. UK GDP is out too while Italy and the EU release CPI data. In the US it’s Personal income and expenditures, Chicago PMI. In Canada it is industrial production and monthly GDP as well as the BoC business outlook. 


Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaA tumultuous fist half of 2019 is drawing to a climax – McKenna Macro Markets Weekly