Capitalsynthesis

The guys are back from their holidays but with a shortened report here.

They pick up on the renewal of the commodity bull story which is the headline story in asset markets for me. Note GL, Anto, BHP (all of which i hold again). Commodity producer charts have surged over the last few months. Aside from Asia basing the inflation story is starting to emerge here albeit still at very low nominal levels, using the official data.  Also the the positive gold pattern in US$s which again is likely an asset market indicator for inflation. (I should mention other gold fx patterns are also showing potential longs here in the jpy gold).

US indexes the problems with the cyclicals do remain or especially for the banks and transports. Its worth reiterating here that the market breadth on the latest index price breakouts ie SP500, Dow and Nas100 the tech breadth was extremely low and non confirming. I wont run through the various breadth charts as hopefully you have them but it was a clear signal for at least some sort of mild retrace here tactically and certainly not worth chasing if you are late to the recent moves.

Europe wise, the breakout Dax (a cyclical index) is a key market to have broken out not yet joined by periphery euro markets and not yet propelled by the eurusd pair. The ftse100 likely to soon breakout of her key resistance long term level due to the combination of commodity strength and gbp debasement. The team fail to pick up a few key instruments on this week due to their shortened time back. The two or three key markets to mention are the eurusd and usdjpy pair. These two define much in terms of global liquidity now as well as asset price inflation. Technically speaking of the two the usdjpy is at the key 100 level. A break down below this might send the pair into a new extreme volatility and this may present a fairly strategic macro trade allocation (with wide stop) short the jpy and possibly long gold listed in jpy.

Getting a pin point entry on this trade will likely be near impossible as it’s success will be all about the policy response. The team don’t mention the nik225 which is struggling here given the jpy strength. Asian markets are the recent out performers and the hsi has an excellent pattern. As mentioned last week oil based and the entries were nice and clear so we have to suppose some big allocators are back in the oil markets, long.

Without delay here the Swiss team’s latest to hit the wires an hour ago or so:

wklytech-16-8-16

Here Fitzpatrick’s latest two reports:

cb1

cb2

A quick point on the gbpusd. As mentioned on FX pages in the forum the cftc was at record levels short the gbp. You had to know if you are in the trade short the gbp that given the mere slightest whiff of positive uk news or rather better than the dismal expectations then those late to the trade would be forced to cover and the gbp could add significant strength on a tactical basis just from those late covering. If you have been knocked out the latest inflation data is hardly strength and it will hardly prevent the BOE from debasing the GBP. It merely presents a better entry short the gbp. Patience to wait for the better level and the trade will whipsaw back down soon enough. Ftse100 entries will also show soon enough.

As a thought if we are on the cusp of seeing higher nominal inflation numbers start to feed through there will be a blood bath in the fixed income markets. I suppose the initial contagion wont be bad but given the compression in rates has been so dramatic many large funds and particularly pension funds will bleed an awful lot of capital in the coming reflationary period. Many of these providers have locked themselves in at the long end to huge losses for their clients. Liquidity is extremely poor in long end credit so any exist will be hugely expensive. There will be some contagion but much later I suppose.  Clearly there is no exist strategy for the central banks buying at negative rates other than let the bonds time expire. Shrinkage in central bank’s balance sheets will clearly take a while therefore.

Well i’m still on a partial long European holiday myself but i’ll try and update this if i can as reports come through.

All the best to all for now.

Rich

Another week has gone by but right across international risk there is very little new evidence from price here. We can look across US sectors like the small caps or russel2000 or transports or banking or tech sector or high yield or whatever you chose and there is no meaningful new evidence from price. Internationally inc europe and japan we have come up to some key levels. We are at Dax30 and Nik225 down trend lines but certainly no confirmation of breakouts as yet.

Fx is a little more interesting with the slow continuation of the eurusd in play ie weak euro. Certainly as commented here the only way, it seems, to send euro equities upward is a massive debasement more than already occurred of the euro. For those carrying Jpy and Euros, Super Mario and Kuroda will hopefully not disappoint to totally destroy their respective currencies. Both their financial sectors still have poor balance sheets and need nominally higher asset prices. Negative rates are certainly not helping but more money supply might i suppose short term. It would certainly help speculators.

Across key indexes we remain within a percent of where we were a week ago. Seasonally we have drifted into holiday period and volatility is starting to die as seasonally it usually does (last year aside). Summer months are usually – beta months for risk with September statistically a nominally negative month.

Rather than comment on the indexes and levels that we already know so well i want to mention the HSI here. The Hong Kong index has made a little more progress forward and is above key levels here. There is growing technical evidence that China may have based here and commodities and commodity currencies are showing relative strength on that basis. She is trading on the lowest pe ratio of any developed market at approximately 10. I have entered this trade long via the etf 2800 tracker, carrying HK$s given rates are so low and as the peg is questionable given the Yuan debasement and US$ continued strength as the Eur and Jpy slide (entered the jpy carry long nik225 some weeks ago at the lows).

In terms of breadth both Sp500, Nas100, Dow are showing non confirmation at their recent new highs. Dow at a std of +2 which is reasonably strong breadth nonetheless but on the short term non confirming. Sp500 Nas100 a little weaker and suggesting near term weakness.

Reports:

This week the swiss team are on a richly deserved holiday so lets cut to Fitzpatrick, GS, MS, LC etc..

Here Citi’s tech guru Fitzpatrick:

cb-wklytech-15-7-16

Another bullish tone from Fitzpatrick. Dollar bull alongside equity strength and commodity strength. Another 2007 nominal melt up for risk appears to be Fitzpatrick scenario. Nominally i tend to agree once we can establish a change in leader ship across risk ie cyclicals need to lead this and nominal rates, different to real rates of course, need to starting leading this.

And here GS’s charts and trade recommendations:

gs-2016-07-10

And here:

gs-2016-07-17

Conviction 3 longs on the major US indexes. Correct so far. Text book i would disagree in terms of correlating instruments but so tactically and individually technically looking good. Nice to see continued longs on commodities.

Here LCapital:

LC-180716

And here Barclays equities with their H2 report:

Barc-h2

And here MS on the fx side:

ms-fxtech-18-7-16

And here StandardC:

sc-fx-strategy-18-july-2016

And here Scotia with their reading of the cftc report:

s-cftc

Of the two major fx trades at present i am involved in, the euro shorts are accumulating but nothing like where they have they been historically. Has room to run and certainly plenty of room depending on Thursday’s “action” from Draghi. Secondly the Jpy vs USD. The market is still positioned positively for the Jpy from this report although i strongly suspect its a fairly even market as of today. If Kuroda acts there is a lot of room still to run on this pair hence i’m remaining with the carry for now on the entry from jpyusd at the 100 level.

Final comment from me to summarize. Across risk we still have some technical problems in spite of the apparent sp500 and Dow bullishness. Weak seasonal months ahead suggest weakness should emerge to allow over the coming weeks to allow the shift in leadership to occur. On this tactical weakness a good strategic entry long should emerge. Europe still needs to resolve its banking issues and over come plenty of resistance levels. Asia based and looking stronger. Divergent monetary policy between dm markets likely to drive the US$ higher in the medium term though against a medium term positive background across all risk assets.

All the best to all and welcome all the new joiners in the last few weeks.

Rich

Another good week for risk assets across the world but lead again by the strong US equity indexes of the sp500 and Dow Jones.

The sp500 has made new record highs but lead by utilities, consumer discretionary and housing indexes. The cyclical sectors of soxx and nasdaq100, Russel 2000 have not yet confirmed the move and to the negative side the key banking index (BKX or IYF) (inc broker index XBD) and transports (IYT) have not yet broken out of the bear trends.

As the team rightly say

“A breakout without cyclicals leading the move cannot be real and sustainable!”

As unconventional measures are being employed all around us it is worth revisiting whether this market saying still holds true in current mkt conditions.

A good question to ask is have the nirp policies nullified this old truisms. Ie can the consumer lead this recovery based on appreciating house prices and consumer cyclical stocks? Maybe banks and brokerage cos have been taken out of this cycle due to the central banks implementing zirp and so crushing their margins? This would imo be a reasonable assumption if the FED were busy increasing money supply herself via helicopter means or other. Ie its something to watch as we move forward. Theoretically banks and brokerage cos were the agents for money supply growth. With zirp their margins are destroyed and they are struggle to expand balance sheets quickly. The FED via helicopter type policies can directly expand money supply to the consumer herself but she is not doing this yet and until she does the old market adage holds true today just as she did 100 years ago. As i say though its worth saving this issue to the trading memory as if super unconventional measures are taken banks could be bypassed entirely from the ms increase process. (Not withstanding the above transports should theoretically join the party in either case).

Europe clearly remains within her bear market trends. The UK is bouncing nicely due in great part to relative commodity strength and the GBP recent debasement. Euro banks have bounced but no clear evidence of much more than a corrective move.

For my own book i have been long US small cap 600 (SLY), Russel2000 (IWM), US Banks (IYF), commodity producers (PICK) Ftse100 (ISF). I have taken profit on all these positions today. The rational on all these positions was that given a high level of cash i needed to be positioned in the cyclical confirmation assets as these would provide the beta, in case i was wrong. I will come to these assets on dips to keep testing the case and being open to be proved wrong by price.

For now we have a stand off situation across risk with the weight of evidence still pointing to the downside in terms of near term weakness. The nik225 remains the most likely candidate for a helicopter money test case. Needless to say that’s a one way trade which scored a good entry on both sides of the trade ie fx and equity, for the moment.

For what its worth I am in line with the Swiss guys that there is underlying strength in this market and higher highs do beckon at least for US indexes in Q4 and alongside US$ strength but as a part of great global reflation trade.

Here the Swiss team:

wklytech-12-7-16

I agree with all their points

Here Fitzpatrick from Citi who is looking good on his road map aside from a weaker reading in the inflation take off. He discusses in this copy the surprising strength (low rates) across fixed income which would feed into the weakness in price of some key commodities. Copper has not taken off in the way he anticipated yet although many copper producers are showing constructive patterns. It could be read that the smart insider money have been accumulating a position here. Glencore is up 30% in under 10 trading sessions, only 8% of this due to sterling. (The underlying commodities have not moved in anything like the same way).

CB-Weekly_Roundup-12-7-16

Louis Capital here:

LC-11-7-16

They have similar charts and note the bearishness for so long as the transports remain within their bear channel.

Ill update this as a v2 shortly.

Rich

Another week roles by and pricing of risk assets continues to diverge between US risk and world risk. US risk continues to be well bid vs the rest of the world.  With the sp500 still close to record highs. Within the US markets breadth remains a key issue with some important cyclical sectors showing bad technical signals inc transports and banking. Japan remains very weak and Europe continues to be trapped in clear cyclical and secular bear markets.

Of notable mention must be the international banking sector which continues to displays yet more price weakness and especially Europe’s banks. Clearly the nirp policies are not assisting the bank’s which were already weak from the credit crisis of 2008 and subsequent recession. Rates have continued to fall and with it bank’s margins.

The cyclical bear market for bullion since 2011 appears to have ended allowing the secular bull trend to resume.  Whether its a prelude to the ending of the 5yr commodities bear market we cannot say yet but there are some very positive price signals and the agriculture bull market has of course already resumed.

The Swiss team below offer some evidence of an impending ending of the 30yr (plus) secular bond bull market. I’d prefer to view it from the inflationary perspective. Ie that it appears core inflation is start to rise again and given levels of employment in the US and skills shortages in any DM markets (Germany, UK, America & even Spain) the seeds for inflation are already in place. Any additional stimulus or assistance for the banking sector via increases in the ms will likely result in increases in inflation. Rates must rise in response to this. Doubtless policy makers would like to sustain nirp for ever as nirp funds our policy maker’s deficits.

Here the guys:

wklytech-5-7-16

Here GS:

gs-wklytech-04-07-16

Note the conviction 3 rating long for Silver. Its been 6 years or so since i last saw this.

Here Fitzpatrick:

cb-Weekly_Roundup-30-7-16

You start to see the scenario for convergence between Fitzpatrick and the Swiss team. Coming US$ strength mainly vs euro fx, US index strength, Euro indexes being supported by debasement in h2, rates and inflation moving higher supporting commodities and bullion. The pieces are likely starting to fall into place save any black swan events, ie euro banking or china becoming a full blown crisis.

Here MS on the fx side:

ms-fx-

Fascinating to hear the other side of the eurusd trade. The bank’s carry unwind trade is of course a great danger with the euro. The answer remains a technical one. Price will show the way and for now the eurusd chart is weak with near term resistances at 1.115.

Here the most recent CFTC care of scotia:

IMM-4-7-16

Participants are adding to euro shorts but not a contrarian level yet at all.

Gold positioning at extremes but as the market saying goes: “there is no fever like gold fever” once it starts.

All the best

Rich