Sive Morten
Special Consultant to the FPA
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Fundamentals
Globalisation: it’s not over yet
by Fathom Consulting
A decline in the ratio of world trade over world GDP, alongside the electoral success of isolationist politics in 2016, spurred talk about the ‘end of globalisation’. However, aided by a rebound in emerging markets (EMs), world trade growth has actually picked up in 2017. The weakness in EM trade since 2013 has partly reflected soft economic activity among commodity exporters. We think that cycle is now turning. With little desire in emerging markets for increased protectionism, and supportive demand from China, EMs will provide a tailwind to world trade this year and next.
In the near term, there are three key reasons that we expect emerging markets to support world trade growth. First, in contrast to the advanced economies, EMs enjoy political and public support for further trade integration. Second, most of the negative effect from slumping commodity prices on major exporters such as Brazil and Russia has passed. Finally, EMs stand to benefit from a rosy global backdrop, and in particular, China’s efforts to ‘double down’ on its investment-led growth model.
Globalisation remains popular in EMs
While emerging markets have contributed to the slowdown in world trade growth in recent years, there has been no sign of support for unilateral moves towards increased protectionism. Indeed, polls show that residents in the emerging economies are far more in favour of open economic policies than their Western counterparts. EMs have benefitted from freer trade in goods and services. Foreign demand and investment inflows have led to substantial increases in economic growth and average living standards, particularly in Asia.
The gains to EM economies from trade are partly a result of prior shifts in policy. The weighted average tariff rate in twelve of the largest EMs was 13% in 1999. That figure declined to 4% in 2015. While that is still more than double that in the average advanced economy, the spread between the two has been significantly reduced. Moreover, the will in emerging economies — political and public — is for further integration. The next major multilateral trade deal will probably emerge from the Asia-Pacific region, without EU or US involvement.
IN HOUSE
Commodities slump has weighed on EM trade
Emerging economies have continued to drive world GDP growth in recent years, but have nonetheless been a drag on the world trade ratio. The share of total EM exports and imports in world GDP has declined from a peak of 19.4% in 2013 to 16.1% last year. That is less severe than the equivalent 33.5% to 26.4% drop experienced by the advanced economies, but it still marks a substantial shift from the fast-rising pre-crisis trend. After staying in a 20% to 30% range from 1970 to 2000, intra-emerging market exports, as a share of total emerging market exports, jumped from 24% in 2000 to 40% in 2012. However, as the second chart below shows, that ratio has flatlined over the past few years.
The observed slowdown in emerging markets trade since 2013 is, in large part, a reflection of the slumping price of commodities, which itself was partly attributable to weakened Chinese demand. The weighted-average GDP growth rate in commodity-exporting EM economies slumped by more than three percentage points – from 3.6% in 2012 to 0.5% in 2016. Other EM economies only slowed by 0.4 percentage points over that period – from 6.0% to 5.6%. We expect the slowdown in commodity-exporting EM economies to have ended in 2016. That will support rising EM trade over the next couple of years, and lead to a return to the rising share of intra-EM exports within total EM exports.
EMs, particularly China, driving world trade
The combined EM trade balance, relative to world GDP, has dropped from a 1.0% surplus in 2006 to a 0.2% figure last year. If China is excluded, that figure has gone from being in surplus to the tune of 0.7% of world GDP in 2006 to a 0.6% deficit last year. While some of that reflects the impact of weaker commodity prices, that shift is also consistent with EMs becoming a more important source of global demand. Indeed, the share of EM imports within total world imports, increased from 37% in 2006 to 47% in 2016.
Receding trade risks have supported EM assets
We continue to expect the gap in GDP growth rates between the emerging economies and their advanced economy peers to widen. Financial markets appear to agree, and EM assets have benefitted. EM equities and EM FX are up 18% and 6% year-to-date, respectively – outperforming most of their peers.
COT Report
Currently, on gold market we do not see big changes in CFTC data. Report shows the same strong bearish sentiment as it was last week - net long position is dropping while open interest is rising. This combination tells that new shorts are coming on gold market.
Although price jumped on Friday for 15$ due poor CPI and Retail Sales data - SPDR fund shows no reaction yet and overall outflow for 1 month stands around 40 tonnes and approximately 12-15 tonnes for last week:
That's why it is difficult to say, whether these changes will put start for upside reversal on gold market, as we do not see any changes in sentiment yet. But, taking in consideration Bond market and FX market, sentiment could change...
Technical
Monthly
Monthly chart mostly was not touched by recent changes on gold market - price just has returned to the middle of July range. So, market mostly keeps chances for both scenarios, as crucial level for them is 1122 area. As we have discussed recently, upside scenario could lead market to 1330 YPR1 first and back to 1380 second, while bearish scenario you see on the chart...
As we talk about changes in sentiment last two weeks, let's take a look at alternative scenario on gold market, compares to what we've discussed previously. Scenario that we will talk about has not been formed yet and it has some degree of uncertainty as major levels that are crucial for this scenario, have not been broken yet.
In fact, our previous scenario on possible reverse H&S pattern is still valid. The breakeven point between these scenarios stands around 1120 lows. If Price will drop below it - gold siginficantly will increase chances on downside continuation.
Right now trend has turned bearish again on monthly chart. Bullish grabber, that has been formed two months ago was completed. But it has reached just minimal target that has become W&R on weekly and daily charts. Other words speaking we see gold inability to support upside trend.
From Pivot point analysis, gold also shows a bit irrational behavior. Once YPP was broken up - gold was not able to reach YPR1 and suddenly has turned down.
It means that we could get either big Butterfly "Buy" pattern with potential target around 950$ or, at least "222" Buy around 1040 area on monthly chart . Until price stands above 1122 lows - there will be some uncertainty around them as gold also could form opposite pattern, we will take a look at it below. But breaking of 1122 will erase any questions...
Weekly
The same we could say on weekly chart. In fact last week was inside one and price action was rather shy. Thus, our previous analysis here also mostly stands intact.
Weekly chart shows alternative scenario that stands in relation to the same 1122 lows. While market stands above this level - big butterfly "Sell" is possible, at least theoretically.
Still, here we should be prepared for deeper downside action. It is a bit early to talk whether price will break 1122 or not, but downside action will continue below 1222 level. Trend is bearish on weekly chart as well.
Here we also see some not quite bullish signs. First is, irrational downside reversal in area where were no barriers for upside continuation. Gold has turned down from 1295 area when it has broken all major resistance levels. Second - take a look at large AB-CD pattern. Gold was not able to reach even minor 0.618 extension around 1330 area and dropped. These moments point on weakness on the market.
Thus, gold pretty much space till 1122 while butterfly setup will be valid. If, finally 1122 area will be broken - this butterfly will be erased, and bearish setup that we've talked about on monthly chart could turn to active phase.
Daily
As long-term charts barely were touched by price action last week, we're mostly interested in short-term action and what changes here.
On daily chart trend has turned bullish and price has erased our bearish grabber. Currently it is unclear how long will this reaction last, but definitely in breaks short-term bearish sentiment and vanished any intention to go short here.
Currently, it seems that gold could rise to 1240 area. This is first strong resistance on a way up, besides, gold likes to re-test broken important trends and this level also coincides with trend line...
Also we've got nice bullish divergence here. To be honest, guys, this is still riddle for me, why gold is stopped right at 1205, after major K-support has been broken. There is no real support there and I can't find serious reasons for breakout (only AB=CD pattern down). In fact, gold is reversed, after breakout of major area, in fact, in "free space", where logically it should continue dropping... Interesting.
Anyway, we will see how durable this reversal will be. As I said, it seems that right now we could talk on 1240 area...
4-hour
Here trend stands bullish as well. Due US statistics on Fri - market has broken as our sequence of harmonic swings as downside channel. Larger reverse H&S pattern, that we've talked about 2-3 sessions ago has been formed.
Based on this pattern, we have 2 upside targets, but none of them totally coincides with daily 1240 level. First one we have slightly below, @ 1235 area, while second one stands slightly higher, around 1248 area.
Those of you, who thinks about taking long position here... as market has created upside reversal swing, i.e. now we see first swing up that is greater than previous swing down - very probable appearing of compound AB-CD retracement down. This, in turn ,could create "222" buy pattern - some kind of that we've traded on GBP last week. Of course I can't promise it for 100%, but traders talk "take first AB-CD after reversal swing".
Thus, from probability point of you, there are not bad chances to get "222" Buy pattern with acceptable risk...
Conclusion
Long term charts keep valid two opposite scenarios with thrilling scale. The separate line between them is 1122 area.
In short-term perspective, gold shows some signs of changing in sentiment and upside action could continue for awhile. Currently we treat it as retracement that could reach 1240 area, may be slightly higher.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Globalisation: it’s not over yet
by Fathom Consulting
A decline in the ratio of world trade over world GDP, alongside the electoral success of isolationist politics in 2016, spurred talk about the ‘end of globalisation’. However, aided by a rebound in emerging markets (EMs), world trade growth has actually picked up in 2017. The weakness in EM trade since 2013 has partly reflected soft economic activity among commodity exporters. We think that cycle is now turning. With little desire in emerging markets for increased protectionism, and supportive demand from China, EMs will provide a tailwind to world trade this year and next.
In the near term, there are three key reasons that we expect emerging markets to support world trade growth. First, in contrast to the advanced economies, EMs enjoy political and public support for further trade integration. Second, most of the negative effect from slumping commodity prices on major exporters such as Brazil and Russia has passed. Finally, EMs stand to benefit from a rosy global backdrop, and in particular, China’s efforts to ‘double down’ on its investment-led growth model.
Globalisation remains popular in EMs
While emerging markets have contributed to the slowdown in world trade growth in recent years, there has been no sign of support for unilateral moves towards increased protectionism. Indeed, polls show that residents in the emerging economies are far more in favour of open economic policies than their Western counterparts. EMs have benefitted from freer trade in goods and services. Foreign demand and investment inflows have led to substantial increases in economic growth and average living standards, particularly in Asia.
The gains to EM economies from trade are partly a result of prior shifts in policy. The weighted average tariff rate in twelve of the largest EMs was 13% in 1999. That figure declined to 4% in 2015. While that is still more than double that in the average advanced economy, the spread between the two has been significantly reduced. Moreover, the will in emerging economies — political and public — is for further integration. The next major multilateral trade deal will probably emerge from the Asia-Pacific region, without EU or US involvement.
IN HOUSE
Commodities slump has weighed on EM trade
Emerging economies have continued to drive world GDP growth in recent years, but have nonetheless been a drag on the world trade ratio. The share of total EM exports and imports in world GDP has declined from a peak of 19.4% in 2013 to 16.1% last year. That is less severe than the equivalent 33.5% to 26.4% drop experienced by the advanced economies, but it still marks a substantial shift from the fast-rising pre-crisis trend. After staying in a 20% to 30% range from 1970 to 2000, intra-emerging market exports, as a share of total emerging market exports, jumped from 24% in 2000 to 40% in 2012. However, as the second chart below shows, that ratio has flatlined over the past few years.
The observed slowdown in emerging markets trade since 2013 is, in large part, a reflection of the slumping price of commodities, which itself was partly attributable to weakened Chinese demand. The weighted-average GDP growth rate in commodity-exporting EM economies slumped by more than three percentage points – from 3.6% in 2012 to 0.5% in 2016. Other EM economies only slowed by 0.4 percentage points over that period – from 6.0% to 5.6%. We expect the slowdown in commodity-exporting EM economies to have ended in 2016. That will support rising EM trade over the next couple of years, and lead to a return to the rising share of intra-EM exports within total EM exports.
EMs, particularly China, driving world trade
The combined EM trade balance, relative to world GDP, has dropped from a 1.0% surplus in 2006 to a 0.2% figure last year. If China is excluded, that figure has gone from being in surplus to the tune of 0.7% of world GDP in 2006 to a 0.6% deficit last year. While some of that reflects the impact of weaker commodity prices, that shift is also consistent with EMs becoming a more important source of global demand. Indeed, the share of EM imports within total world imports, increased from 37% in 2006 to 47% in 2016.
Receding trade risks have supported EM assets
We continue to expect the gap in GDP growth rates between the emerging economies and their advanced economy peers to widen. Financial markets appear to agree, and EM assets have benefitted. EM equities and EM FX are up 18% and 6% year-to-date, respectively – outperforming most of their peers.
COT Report
Currently, on gold market we do not see big changes in CFTC data. Report shows the same strong bearish sentiment as it was last week - net long position is dropping while open interest is rising. This combination tells that new shorts are coming on gold market.
Although price jumped on Friday for 15$ due poor CPI and Retail Sales data - SPDR fund shows no reaction yet and overall outflow for 1 month stands around 40 tonnes and approximately 12-15 tonnes for last week:
That's why it is difficult to say, whether these changes will put start for upside reversal on gold market, as we do not see any changes in sentiment yet. But, taking in consideration Bond market and FX market, sentiment could change...
Technical
Monthly
Monthly chart mostly was not touched by recent changes on gold market - price just has returned to the middle of July range. So, market mostly keeps chances for both scenarios, as crucial level for them is 1122 area. As we have discussed recently, upside scenario could lead market to 1330 YPR1 first and back to 1380 second, while bearish scenario you see on the chart...
As we talk about changes in sentiment last two weeks, let's take a look at alternative scenario on gold market, compares to what we've discussed previously. Scenario that we will talk about has not been formed yet and it has some degree of uncertainty as major levels that are crucial for this scenario, have not been broken yet.
In fact, our previous scenario on possible reverse H&S pattern is still valid. The breakeven point between these scenarios stands around 1120 lows. If Price will drop below it - gold siginficantly will increase chances on downside continuation.
Right now trend has turned bearish again on monthly chart. Bullish grabber, that has been formed two months ago was completed. But it has reached just minimal target that has become W&R on weekly and daily charts. Other words speaking we see gold inability to support upside trend.
From Pivot point analysis, gold also shows a bit irrational behavior. Once YPP was broken up - gold was not able to reach YPR1 and suddenly has turned down.
It means that we could get either big Butterfly "Buy" pattern with potential target around 950$ or, at least "222" Buy around 1040 area on monthly chart . Until price stands above 1122 lows - there will be some uncertainty around them as gold also could form opposite pattern, we will take a look at it below. But breaking of 1122 will erase any questions...
Weekly
The same we could say on weekly chart. In fact last week was inside one and price action was rather shy. Thus, our previous analysis here also mostly stands intact.
Weekly chart shows alternative scenario that stands in relation to the same 1122 lows. While market stands above this level - big butterfly "Sell" is possible, at least theoretically.
Still, here we should be prepared for deeper downside action. It is a bit early to talk whether price will break 1122 or not, but downside action will continue below 1222 level. Trend is bearish on weekly chart as well.
Here we also see some not quite bullish signs. First is, irrational downside reversal in area where were no barriers for upside continuation. Gold has turned down from 1295 area when it has broken all major resistance levels. Second - take a look at large AB-CD pattern. Gold was not able to reach even minor 0.618 extension around 1330 area and dropped. These moments point on weakness on the market.
Thus, gold pretty much space till 1122 while butterfly setup will be valid. If, finally 1122 area will be broken - this butterfly will be erased, and bearish setup that we've talked about on monthly chart could turn to active phase.
Daily
As long-term charts barely were touched by price action last week, we're mostly interested in short-term action and what changes here.
On daily chart trend has turned bullish and price has erased our bearish grabber. Currently it is unclear how long will this reaction last, but definitely in breaks short-term bearish sentiment and vanished any intention to go short here.
Currently, it seems that gold could rise to 1240 area. This is first strong resistance on a way up, besides, gold likes to re-test broken important trends and this level also coincides with trend line...
Also we've got nice bullish divergence here. To be honest, guys, this is still riddle for me, why gold is stopped right at 1205, after major K-support has been broken. There is no real support there and I can't find serious reasons for breakout (only AB=CD pattern down). In fact, gold is reversed, after breakout of major area, in fact, in "free space", where logically it should continue dropping... Interesting.
Anyway, we will see how durable this reversal will be. As I said, it seems that right now we could talk on 1240 area...
4-hour
Here trend stands bullish as well. Due US statistics on Fri - market has broken as our sequence of harmonic swings as downside channel. Larger reverse H&S pattern, that we've talked about 2-3 sessions ago has been formed.
Based on this pattern, we have 2 upside targets, but none of them totally coincides with daily 1240 level. First one we have slightly below, @ 1235 area, while second one stands slightly higher, around 1248 area.
Those of you, who thinks about taking long position here... as market has created upside reversal swing, i.e. now we see first swing up that is greater than previous swing down - very probable appearing of compound AB-CD retracement down. This, in turn ,could create "222" buy pattern - some kind of that we've traded on GBP last week. Of course I can't promise it for 100%, but traders talk "take first AB-CD after reversal swing".
Thus, from probability point of you, there are not bad chances to get "222" Buy pattern with acceptable risk...
Conclusion
Long term charts keep valid two opposite scenarios with thrilling scale. The separate line between them is 1122 area.
In short-term perspective, gold shows some signs of changing in sentiment and upside action could continue for awhile. Currently we treat it as retracement that could reach 1240 area, may be slightly higher.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
