Sive Morten
Special Consultant to the FPA
- Messages
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Fundamentals
At the eve of last week, market sentiment suggested US Dollar retracement as it was seemed overvalued due fundamental background and outstanding liquidity injections from the Fed. The whole week gold was keeping bullish context, preparing to upside continuation and accurately followed to our trading plan.
The Labor Department reported the U.S. unemployment rate rose to 14.7% last month, up from 3.5% in February, demonstrating the speed with which the workforce collapsed after stay-at-home orders meant to curb the outbreak were imposed across most of the country. Worse economic news may be yet to come. White House economic adviser Kevin Hassett said the unemployment rate was likely to climb to around 20% this month. The jobless rate for April already shattered the post-World War Two record of 10.8% set in November 1982.
Still, the NFP data that we've got on Friday is not simple to analyze as it has a lot of components - partial-time workers, people on unpaid vacation, those who despair to find the job, those who intentionally sit on the high $4K instead of common $1.5K dole till July etc. In fact, unemployment components is so sophisticated that even in good times, when major unemployment rate showed 3.5-4%, real (U6) unemployment was around 12%. Definitely situation now is worsen. And how the structure of jobless army will mutate next month or, better to say in IIQ is difficult to predict. This subject we've analyzed in our FX report yesterday.
But the one thing we could say definitely. US takes unprecedented spending to support national economy. Six trillions are injected already and it is more to come, I suggest. US trillioned national debt is an ever subject of mockery for a long time already. But now it becomes not funny. Markets become of a real worries on this bubble that is growing with a huge tempo. National debt is greater than 100% yearly GDP and it is more to come, but what about corporate, public debt? All these stuff is financed by Treasuries issue but their potential also has the bottom.
Two-year Treasury yields hit record lows on Friday and fed fund futures implied the Federal Reserve could cut rates into negative territory, though analysts said the move was likely technical as investors betting on higher rates were squeezed out of their positions. The move came after data on Friday showed the U.S. economy lost a staggering 20.5 million jobs in April, the steepest plunge in payrolls since the Great Depression and the starkest sign yet of how the novel coronavirus pandemic is battering the world's biggest economy. The rally faded in afternoon trading as investors re-positioned ahead of the weekend. Investors are evaluating how long it will take for the economy to recover, and how much more fiscal and monetary stimulus will be needed to spur growth.
The Fed in March cut rates to zero and has launched numerous lending programs meant to blunt the economic impact of business shutdowns. But U.S. central bank officials including Chairman Jerome Powell have talked down the likelihood of adopting a negative rate policy.
“The Fed has consistently said they’re not interested in negative rates,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
Optimism that the economy is closer to reopening has boosted risk assets this week and led some investors to bet that yields could rise from historic lows. The sharp price rally in short-dated debt, however, is likely due to these investors having to cover their positions as the market moved against them.
“What can happen is when rates get lower and lower, and the Fed is flooding the markets with liquidity, is you can get people that are forced to take those trades off … they’re ripped out of them and forced to put on bullish trades," Tipp said.
Two-year yields dropped to as low as 0.105%, before rising back to 0.1508%. The yields hit their lows after White House economic adviser Larry Kudlow said the White House will not consider any further stimulus legislation this month as it watches the economic impact from reopening U.S. states.
Fed fund futures earlier on Friday showed that the U.S. central bank could be forced to cut rates into negative territory by December, but the probability moved back to April 2021 in afternoon trading.
The Fed is reluctant to adopt negative rates due to concerns such a move may not be effective in stimulating growth, and because it may disrupt the banking system and U.S. money markets.
“We have a money market fund industry whose business model would come under severe strain if rates were negative,” UBS strategists led by Michael Cloherty said in a report. The Fed could face pressure to either adopt negative rates or guide the market away from the possibility, however, if markets continue to price for the scenario.
"The risk from the Fed’s perspective is that this price action starts to become cemented, and so it becomes a bit of a self-fulfilling loop. Or they’re going to effectively have to implement a hawkish forward guidance,” said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.
Benchmark 10-year note yields were last 0.680%, after falling to 0.607% earlier on Friday. The yields have held in a tight band between 0.543% and 0.785% since the beginning of April.
Here is more details about this subject. Good article, by the way...
Investors should ask who will buy all of this new US government debt
"However, as investors ponder the future, they should (re)read a remarkable letter that Wall Street banks wrote to the Treasury last year — well before the pandemic hit — which warned of “an increased need for this [US] debt to be financed domestically”, since the proportion of foreign purchases of US Treasuries was falling. The banks suggested then that US households could be natural future buyers, since their holdings were relatively low.
Such calls are likely to intensify, with or without explicit war bonds, particularly if protectionism rises. “I think you will see a much bigger focus on the question of who is owning US debt — are they an ally, or not?” predicts one former senior central banker. "
So, we do know how all this stuff is working - Fed buys out the major part of US debt and, using it as collateral, prints new money. Fed could turn to direct US yield curve control, to keep rates at necessary level. But, no other in the world will buy it. Would you invest in bonds with near zero interest rate and real credit risk of much greater than indicated AAA. I have real doubts about it. Now the worry on the real value of US debt is becoming real.
Another side of this story - Why we can’t “cancel” U.S. debt held by China — The Washington Post ran a story suggesting that President Donald Trump and some of his advisers want to retaliate against China over claims the Chinese withheld critical information about Covid-19. The story included this completely insane threat: “Some administration officials have also discussed having the United States cancel part of its debt obligations to China, two people with knowledge of internal conversations said.”
This is the factor, that, as we suggest should support gold price in long-term. It not necessary will lead to explosive growth, but it is definitely gold supportive moment.
In EU we have shyer scale of money printing, but still it is significant. Germany will have to work on another supplementary budget to help the state’s social security system cushion the effects of the coronavirus pandemic, Chancellor Angela Merkel’s chief budget lawmaker said on Saturday.
“If the five years to 2024 are summed up, there will probably be a minus in the middle three-digit billion euro range,” Rehberg said, adding that the federal government therefore had to work on another supplementary budget. Germany has already approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013. Europe’s biggest economy is braced for its deepest recession since World War Two due to the coronavirus lockdown.
"Gold in the short-term could struggle, but the macro driver continues to point to a rally to record high territory (in dollar terms) later this year," Edward Moya, a senior market analyst at broker OANDA, said in a note. Economic activity is expected to have a much slower rebound this quarter and that should continue to support expectations that global monetary and fiscal stimulus efforts will only intensify, Moya added.
"In the near-term gold may come in for some further pressure. But with interest rates so low, there is probably a limit to how far gold can fall, even in the case of an end to lockdowns," said Stephen Innes, chief market strategist at financial services firm AxiCorp.
However, "the primary drivers for strength in gold - interest rates at zero, massive spending and deep concerns about a second wave of infection - remain powerful so gold's prospects remain strong over the medium term," said Tai Wong, head of base and precious metals derivatives trading at BMO.
Second topic are developments surrounding U.S.-China trade as President Donald Trump's administration is weighing punitive actions against Beijing over its early handling of the outbreak. This story already gets continuation - Australia on Sunday raised concern that China is considering imposing hefty tariffs on imports of Australian barley, just as tensions rise between the world’s second-biggest economy and one of its biggest suppliers of farm products.
Australia is by far China’s top supplier of barley, exporting about A$1.5 billion to A$2 billion ($980 million to $1.3 billion) worth of the grain a year. China takes more than half of Australia’s barley exports.
China’s exports rebound has been quickly overshadowed by dire predictions of Trade War II between the world’s two biggest economies.
Markets are hoping Donald Trump’s threats to penalise China for COVID-19 are pandering to Americans’ fear of China during an election year. After all, neither side can afford to further knock business confidence at a time when the world faces the worst economic contraction on record.
In response to U.S. talk of slapping on more tarriffs, stopping U.S. pension money from investing in China and even stripping it of sovereign immunity, China has only offered verbal rejoinders so far. But could it decide to renege on its trade deal commitments to purchase U.S. agricultural products?
Beijing has been courting American companies such as Tesla and Starbucks, but it’s also looking more inwards for growth. While there were some signs the two countries’ trade negotiators were making progress, should Trump’s threats continue, trade war might take over from coronavirus as the main worry for markets.
COT Report
Recent CFTC data indeed shows some chilling to gold among investors as Open Interest has dropped due closing of long positions. This agrees with reasons that we've discussed last week and mentioned in the beginning of this report. Speculators have closed 10.2K longs, while hedgers closed shorts means rising of bearish expectations on gold in short-term a well. Still, reserves of SPDR fund has risen this week approx. for 15 tonnes - from 1067 to 1081.
As a bottom line we could say that it is very interesting time that we're living in. It is definitely seen the breakout between real economy sector, production, manufacturing and financial sector that is mostly driven by investors' desires and dreams. This divergence should stop some day, but back action, convergence will be very painful for financial markets as they stay off the reality. Here is the gold/copper chart that shows no bullish reaction on global supportive measures:
(FLI - is Fathom leading indicator, showing forecast of this chart)
While everybody knows on massive bounce of stock market, more than for 30%. This bounce stands only due liquidity injections. This is "easy money" action - all pumped liquidity is sent to stocks by transnational financial corporations, because it is much easier than put it into real economy sector via loans, direct credit or supportive programmes etc. Why? It is much simplier just buy stocks and do nothing. Stocks are growing because a lot of free money injection, but not because of improvement in companies' performance. This is inflation guys, hidden inflation.
As Fathom consulting said - "Overall, preliminary evidence would suggest that the sharp market rebound from the March lows has been driven primarily by central banks’ swift actions in averting a liquidity crunch. If true, there remains a question about whether central bank actions will be enough to completely discount an economic reality that is still at best uncertain, or whether economic fundamentals will eventually reassert themselves in equity markets. The jury is still very much out, but the pace and the overall shape of the recovery will be the key factors to watch. "
Our suggestion that big whales are drunk by huge liquidity that dropped on their heads that they put into stocks, force them to rise. Once they out of this "heat of greed passion", common sense should return and artificial balloon should blow to set correct balance of stock value and real economy conditions. Through all these coming turmoil gold, as usual, becomes a safe haven and demand should remain at good level.
Technicals
Monthly
Despite the real storm that stands in fundamental sphere, technical picture has not changed a lot. May range stands small by far.
Trend here stands bullish on monthly chart. Gold unfortunately was not able to show most optimistic performance and close above doji's top, showing pullback right in final days of the month. Still the was a technical reasons for that as well - strong weekly overbought condition. Despite that challenge was not successful by far, gold keeps turning near the top, that could be treated as bullish sign. It is not typical for fake upside breakout, when price usually turns down sharp.
Standing above YPR1 also tells that gold is not in retracement mode, but in longer-term trend continuation. Downside target mostly stands the same - YPS1 and major 5/8 Fib level around 1300 area. But now it is unclear what events should happen to make us consider this scenario.
Pay attention guys, that YPR1 level coincides with our major daily K-support area...
Weekly
Trend on weekly chart stands bullish as well. And recent performance gives us two important moments. First is, market shows upside action, ignoring weekly overbought level. This is definitely sign of strength and growing demand on gold. Currently OB level moves higher and price has the room to complete 1770 target.
We suggest that on weekly chart gold shows the sign of bullish sentiment, despite that we have clear bullish patterns. Although price hits OB level, no meaningful retracement has happened and price starts to form triangle consolidation right around the top. This is the sign of preparation to upside breakout. Multiple inside weeks tell the same:
Daily
Here, on daily chart we have minor changes. Almost everything we've discussed in updates through the week. The reaction that we've expected on Friday has happened, as market bounced up from support area. The bullish dynamic pressure still stands on the market. Next week we will keep an eye on two things - upward continuation and holding intraday support levels.
Intraday
First thing that we keep an eye on is support area of 1700 level. This level is vital for short-term bullish context as this is conjunction of important levels - daily triangle border, 4H upside channel and K-support. Market has to hold it to keep short-term bullish context.
Second thing, if market holds above the K-area, we keep an eye on reaching our targets, mostly 1770 level.
At the eve of last week, market sentiment suggested US Dollar retracement as it was seemed overvalued due fundamental background and outstanding liquidity injections from the Fed. The whole week gold was keeping bullish context, preparing to upside continuation and accurately followed to our trading plan.
The Labor Department reported the U.S. unemployment rate rose to 14.7% last month, up from 3.5% in February, demonstrating the speed with which the workforce collapsed after stay-at-home orders meant to curb the outbreak were imposed across most of the country. Worse economic news may be yet to come. White House economic adviser Kevin Hassett said the unemployment rate was likely to climb to around 20% this month. The jobless rate for April already shattered the post-World War Two record of 10.8% set in November 1982.
Still, the NFP data that we've got on Friday is not simple to analyze as it has a lot of components - partial-time workers, people on unpaid vacation, those who despair to find the job, those who intentionally sit on the high $4K instead of common $1.5K dole till July etc. In fact, unemployment components is so sophisticated that even in good times, when major unemployment rate showed 3.5-4%, real (U6) unemployment was around 12%. Definitely situation now is worsen. And how the structure of jobless army will mutate next month or, better to say in IIQ is difficult to predict. This subject we've analyzed in our FX report yesterday.
But the one thing we could say definitely. US takes unprecedented spending to support national economy. Six trillions are injected already and it is more to come, I suggest. US trillioned national debt is an ever subject of mockery for a long time already. But now it becomes not funny. Markets become of a real worries on this bubble that is growing with a huge tempo. National debt is greater than 100% yearly GDP and it is more to come, but what about corporate, public debt? All these stuff is financed by Treasuries issue but their potential also has the bottom.
Two-year Treasury yields hit record lows on Friday and fed fund futures implied the Federal Reserve could cut rates into negative territory, though analysts said the move was likely technical as investors betting on higher rates were squeezed out of their positions. The move came after data on Friday showed the U.S. economy lost a staggering 20.5 million jobs in April, the steepest plunge in payrolls since the Great Depression and the starkest sign yet of how the novel coronavirus pandemic is battering the world's biggest economy. The rally faded in afternoon trading as investors re-positioned ahead of the weekend. Investors are evaluating how long it will take for the economy to recover, and how much more fiscal and monetary stimulus will be needed to spur growth.
The Fed in March cut rates to zero and has launched numerous lending programs meant to blunt the economic impact of business shutdowns. But U.S. central bank officials including Chairman Jerome Powell have talked down the likelihood of adopting a negative rate policy.
“The Fed has consistently said they’re not interested in negative rates,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
Optimism that the economy is closer to reopening has boosted risk assets this week and led some investors to bet that yields could rise from historic lows. The sharp price rally in short-dated debt, however, is likely due to these investors having to cover their positions as the market moved against them.
“What can happen is when rates get lower and lower, and the Fed is flooding the markets with liquidity, is you can get people that are forced to take those trades off … they’re ripped out of them and forced to put on bullish trades," Tipp said.
Two-year yields dropped to as low as 0.105%, before rising back to 0.1508%. The yields hit their lows after White House economic adviser Larry Kudlow said the White House will not consider any further stimulus legislation this month as it watches the economic impact from reopening U.S. states.
Fed fund futures earlier on Friday showed that the U.S. central bank could be forced to cut rates into negative territory by December, but the probability moved back to April 2021 in afternoon trading.
The Fed is reluctant to adopt negative rates due to concerns such a move may not be effective in stimulating growth, and because it may disrupt the banking system and U.S. money markets.
“We have a money market fund industry whose business model would come under severe strain if rates were negative,” UBS strategists led by Michael Cloherty said in a report. The Fed could face pressure to either adopt negative rates or guide the market away from the possibility, however, if markets continue to price for the scenario.
"The risk from the Fed’s perspective is that this price action starts to become cemented, and so it becomes a bit of a self-fulfilling loop. Or they’re going to effectively have to implement a hawkish forward guidance,” said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.
Benchmark 10-year note yields were last 0.680%, after falling to 0.607% earlier on Friday. The yields have held in a tight band between 0.543% and 0.785% since the beginning of April.
Here is more details about this subject. Good article, by the way...
Investors should ask who will buy all of this new US government debt
"However, as investors ponder the future, they should (re)read a remarkable letter that Wall Street banks wrote to the Treasury last year — well before the pandemic hit — which warned of “an increased need for this [US] debt to be financed domestically”, since the proportion of foreign purchases of US Treasuries was falling. The banks suggested then that US households could be natural future buyers, since their holdings were relatively low.
Such calls are likely to intensify, with or without explicit war bonds, particularly if protectionism rises. “I think you will see a much bigger focus on the question of who is owning US debt — are they an ally, or not?” predicts one former senior central banker. "
So, we do know how all this stuff is working - Fed buys out the major part of US debt and, using it as collateral, prints new money. Fed could turn to direct US yield curve control, to keep rates at necessary level. But, no other in the world will buy it. Would you invest in bonds with near zero interest rate and real credit risk of much greater than indicated AAA. I have real doubts about it. Now the worry on the real value of US debt is becoming real.
Another side of this story - Why we can’t “cancel” U.S. debt held by China — The Washington Post ran a story suggesting that President Donald Trump and some of his advisers want to retaliate against China over claims the Chinese withheld critical information about Covid-19. The story included this completely insane threat: “Some administration officials have also discussed having the United States cancel part of its debt obligations to China, two people with knowledge of internal conversations said.”
This is the factor, that, as we suggest should support gold price in long-term. It not necessary will lead to explosive growth, but it is definitely gold supportive moment.
In EU we have shyer scale of money printing, but still it is significant. Germany will have to work on another supplementary budget to help the state’s social security system cushion the effects of the coronavirus pandemic, Chancellor Angela Merkel’s chief budget lawmaker said on Saturday.
“If the five years to 2024 are summed up, there will probably be a minus in the middle three-digit billion euro range,” Rehberg said, adding that the federal government therefore had to work on another supplementary budget. Germany has already approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013. Europe’s biggest economy is braced for its deepest recession since World War Two due to the coronavirus lockdown.
"Gold in the short-term could struggle, but the macro driver continues to point to a rally to record high territory (in dollar terms) later this year," Edward Moya, a senior market analyst at broker OANDA, said in a note. Economic activity is expected to have a much slower rebound this quarter and that should continue to support expectations that global monetary and fiscal stimulus efforts will only intensify, Moya added.
"In the near-term gold may come in for some further pressure. But with interest rates so low, there is probably a limit to how far gold can fall, even in the case of an end to lockdowns," said Stephen Innes, chief market strategist at financial services firm AxiCorp.
However, "the primary drivers for strength in gold - interest rates at zero, massive spending and deep concerns about a second wave of infection - remain powerful so gold's prospects remain strong over the medium term," said Tai Wong, head of base and precious metals derivatives trading at BMO.
Second topic are developments surrounding U.S.-China trade as President Donald Trump's administration is weighing punitive actions against Beijing over its early handling of the outbreak. This story already gets continuation - Australia on Sunday raised concern that China is considering imposing hefty tariffs on imports of Australian barley, just as tensions rise between the world’s second-biggest economy and one of its biggest suppliers of farm products.
Australia is by far China’s top supplier of barley, exporting about A$1.5 billion to A$2 billion ($980 million to $1.3 billion) worth of the grain a year. China takes more than half of Australia’s barley exports.
China’s exports rebound has been quickly overshadowed by dire predictions of Trade War II between the world’s two biggest economies.
Markets are hoping Donald Trump’s threats to penalise China for COVID-19 are pandering to Americans’ fear of China during an election year. After all, neither side can afford to further knock business confidence at a time when the world faces the worst economic contraction on record.
In response to U.S. talk of slapping on more tarriffs, stopping U.S. pension money from investing in China and even stripping it of sovereign immunity, China has only offered verbal rejoinders so far. But could it decide to renege on its trade deal commitments to purchase U.S. agricultural products?
Beijing has been courting American companies such as Tesla and Starbucks, but it’s also looking more inwards for growth. While there were some signs the two countries’ trade negotiators were making progress, should Trump’s threats continue, trade war might take over from coronavirus as the main worry for markets.
COT Report
Recent CFTC data indeed shows some chilling to gold among investors as Open Interest has dropped due closing of long positions. This agrees with reasons that we've discussed last week and mentioned in the beginning of this report. Speculators have closed 10.2K longs, while hedgers closed shorts means rising of bearish expectations on gold in short-term a well. Still, reserves of SPDR fund has risen this week approx. for 15 tonnes - from 1067 to 1081.
As a bottom line we could say that it is very interesting time that we're living in. It is definitely seen the breakout between real economy sector, production, manufacturing and financial sector that is mostly driven by investors' desires and dreams. This divergence should stop some day, but back action, convergence will be very painful for financial markets as they stay off the reality. Here is the gold/copper chart that shows no bullish reaction on global supportive measures:
(FLI - is Fathom leading indicator, showing forecast of this chart)
While everybody knows on massive bounce of stock market, more than for 30%. This bounce stands only due liquidity injections. This is "easy money" action - all pumped liquidity is sent to stocks by transnational financial corporations, because it is much easier than put it into real economy sector via loans, direct credit or supportive programmes etc. Why? It is much simplier just buy stocks and do nothing. Stocks are growing because a lot of free money injection, but not because of improvement in companies' performance. This is inflation guys, hidden inflation.
As Fathom consulting said - "Overall, preliminary evidence would suggest that the sharp market rebound from the March lows has been driven primarily by central banks’ swift actions in averting a liquidity crunch. If true, there remains a question about whether central bank actions will be enough to completely discount an economic reality that is still at best uncertain, or whether economic fundamentals will eventually reassert themselves in equity markets. The jury is still very much out, but the pace and the overall shape of the recovery will be the key factors to watch. "
Our suggestion that big whales are drunk by huge liquidity that dropped on their heads that they put into stocks, force them to rise. Once they out of this "heat of greed passion", common sense should return and artificial balloon should blow to set correct balance of stock value and real economy conditions. Through all these coming turmoil gold, as usual, becomes a safe haven and demand should remain at good level.
Technicals
Monthly
Despite the real storm that stands in fundamental sphere, technical picture has not changed a lot. May range stands small by far.
Trend here stands bullish on monthly chart. Gold unfortunately was not able to show most optimistic performance and close above doji's top, showing pullback right in final days of the month. Still the was a technical reasons for that as well - strong weekly overbought condition. Despite that challenge was not successful by far, gold keeps turning near the top, that could be treated as bullish sign. It is not typical for fake upside breakout, when price usually turns down sharp.
Standing above YPR1 also tells that gold is not in retracement mode, but in longer-term trend continuation. Downside target mostly stands the same - YPS1 and major 5/8 Fib level around 1300 area. But now it is unclear what events should happen to make us consider this scenario.
Pay attention guys, that YPR1 level coincides with our major daily K-support area...
Weekly
Trend on weekly chart stands bullish as well. And recent performance gives us two important moments. First is, market shows upside action, ignoring weekly overbought level. This is definitely sign of strength and growing demand on gold. Currently OB level moves higher and price has the room to complete 1770 target.
We suggest that on weekly chart gold shows the sign of bullish sentiment, despite that we have clear bullish patterns. Although price hits OB level, no meaningful retracement has happened and price starts to form triangle consolidation right around the top. This is the sign of preparation to upside breakout. Multiple inside weeks tell the same:
Daily
Here, on daily chart we have minor changes. Almost everything we've discussed in updates through the week. The reaction that we've expected on Friday has happened, as market bounced up from support area. The bullish dynamic pressure still stands on the market. Next week we will keep an eye on two things - upward continuation and holding intraday support levels.
Intraday
First thing that we keep an eye on is support area of 1700 level. This level is vital for short-term bullish context as this is conjunction of important levels - daily triangle border, 4H upside channel and K-support. Market has to hold it to keep short-term bullish context.
Second thing, if market holds above the K-area, we keep an eye on reaching our targets, mostly 1770 level.