Market Talk – February 4th, 2016
Japan was again the talking point of the session with yet another down day. Initially, the index opened up 0.5% but it was just a matter of time until the sell orders hit the screens again and we were all looking for the bid. The stronger Yen was one reason being provided and we did see exporters (Toyota) lose another 2.2% in today trading. However, by the close of play the Nikkei was off a further 0.9% and has fallen an additional 1.3% in late US futures trading. China saw a slightly better tone for the Shanghai after the PBOC injected more liquidity into the system. There is a lot of talk in Asia of large Hedge Fund interest in the Yuan. Rumors that they anticipate a speedier currency weakness may come under increased scrutiny especially ahead of Chinese Luna New Year. Shanghai and Hang Seng both closed up just over 1%.
In Europe all core Indices had a mixed but volatile session. FTSE performed well (+1.1%) following mining stocks, with the strength spreading to IBEX to close +1.85% on the day. The CAC and DAX were not so fortunate closing unchanged to -0.5% lower. After yesterdays run the GBP drifted in aimless trading today. Main reason being the MPC voted 9-0 to keep rates unchanged and even took a dovish tone. Credit Suisse reported poor Q4 results which resulted in a loss for the year and even forecast unfriendly outlook (Shares took a 10.9% hit on the day).
In the US despite choppy, volatile conditions stocks closed positive for the day with dealers just happy the markets retained yesterday late sentiment. VIX remains low 20’s. Some weak economic data took the shine off the market and even Fed Dudley provided a warnings forecast but it really is tomorrow’s number that counts. The first Friday in the month and so it must be the unemployment release. The estimate is for a release around 190k (low I admit) so all eyes will be on the trading screens at 8:30AM (US) 13:30PM London for guidance for the rest of February.
Gold continued its march closing around the days high of $1155. Oil cam off its highs into the close which wobbled some of the less convincing players.
Given the weaker data seen today we saw support for the Bond Market. The curve 2/10’s flattened with 2’s down just 2bp (to close 0.70%), while 10’s lost 5bp (to close 1.84%) to close 2/10 at +114bp. German 10yr closed 0.30% (+3bp). Peripherals lost a little ground in all the uncertainty closing at the following levels: Italy 10yr 1.53% (+10bp); Greece 10yr 9.25% (+12bp); Turkey 10yr 10.35% (-6bp) and finally Gilt 10yr at 1.56% (+3bp).
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Gold & the Dow
QUESTION:
Dear Mr. Armstrong,
I have a question for your Blog . Do we need a falling dollar, like today, to see Gold rise?
Thank you
SH
Germany
Germany
ANSWER: No. When the majority begin to see that the government is really in trouble, gold will rise with stocks as they did going into 1980 as well as 1929 (in basket terms). The press is still touting that the world is fine with government in charge. The polls show that people are losing faith. This gradual process will snap in 2017.
The REAL function of gold is to act as a hedge against government — not inflation. We do not find any correlation that is consistent to imply that increasing the money supply will make gold rise. When you put the theory aside and just look at the data, you will see that gold rises when CONFIDENCE in government declines. When gold hit $875 in 1980, the national debt of the U.S. reached $1 trillion. We are now approaching $20 trillion. Obviously, all the sales jobs they use to sell gold are fictional.
Yearly: 1920 to 1950 in a Basket of Global Currencies
Here is what gold really did during the 1920 to 1950 period through the eyes of a basket of currencies, rather than just the gold standard fix of $20.67 and then $35. The dollar rose extremely high going into 1934, which is why Roosevelt devalued the dollar. Gold had actually fallen
Now look at gold in January 1970. It fell BELOW the Bretton Woods gold standard price of $35. I was a kid, and I was stunned at the time. I thought gold could never go under the “official” pegged price. I was clearly wrong. With time, I came to see that markets always made a FALSE MOVE in the opposite direction before a big move. You need this type of false flag move for it cleans out everyone.
This is what we are doing now. We just have to do this. We will get everyone offside and then slam them. The bearishness in the euro is too great so it must rally to clean out the shorts to make them think the euro has bottomed and QE is working at last. Then, when the majority flip positions — wham, it will unfold.
So beware of market false moves. This is just the pendulum swinging to both extremes. It must do so to create the energy for the opposite direction.
The Euro Bounce
QUESTION: Marty: I have been waiting to sell the Euro on that reaction rally you have been calling for since your post on January 9th. You stated there that a weekly closing above “11055 area and a small gap up to the 11365-11375 area.” Do you think this will reach your 116 target or stop at the 113 area?
KL
ANSWER: Naturally, the higher the rally, the better the fall thereafter. If we can close above 11055 on a weekly basis, then we should test the 113–114 zone. The main Weekly Bullish stands at 11450. That is the real beginning of resistance up to that 116 area. Getting through that will open the door to the 125 area, which is where the Monthly Bullish starts to come into play.
Keep in mind that the break to the downside against the dollar should be 2017–2020 and will end in monetary reform. With the Fed introducing negative rates into the stress test, capital will have no choice but to flee into equities. This whole thing is a real mess.
This is why we must follow the reversals. They will dictate the trend. We needed a weekly closing below 10675 to see the euro break to the downside, as it only reached 10711 intraday the first week of January. Since that did not materialize and we failed to elect the year-end sell signal at 10365, a bounce became inevitable. Curiously enough, we also did not elect the bearish reversal in gold at year-end. This has allowed the rally since we avoided all sell signals at year-end. What will not go down must bounce.
The Fed Being Brow-Beaten into Negative Rates?
The Federal Reserve is in a real crisis. Interest rates are falling negative around the world which by no means has succeeded in stimulating anything. Governments are dead broke and they keep raising taxes yet hope the central bank can compensate by lowering interest rates to negative. Between rising Taxes and declining interest rates, this toxic-mix is destroying pension funds and wiping out the elderly. There is nobody in government who has any common sense to see this is going to wipe out the economy – not stimulate anything.
The Federal Reserve has been talking to U.S. banks behind the curtain and asking them to consider that the Fed might have to do the same to stop the capital inflows. In its annual stress test, the Fed will assess the ability of big banks to survive a drop to negative rates on the three-month U.S. Treasury bill, which simply becomes prolonged.
The central bank announced the stress test for 2016 last week, commenting, “The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.”
The Fed pays 0.25% on excess reserves and that drives much of the capital inflow. Foreign banks have used their U.S. branches to get in on the game. They are shipping in cash from Europe and Asia, and they do not lend and park it at the Fed. Taking rates negative will only create a real financial crisis for as long as the Fed continues to pay 0.25% on excess reserves. A bank will be able to charge you to keep money there, so park it at the Fed and make a 100% riskless trade. This is the ultimate wet dream for Goldman Sachs especially.
Negative Interest Rates will flip investment and drive capital into the stock market just for yield. If pension funds do not dump government debt, they will go bankrupt. This is totally insane and even Social Security will collapse.
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