Trading Desk Notes - August 18Submitted by Polar Futures Group on August 17th, 2018
Emerging Markets, which have borrowed trillions of US Dollars, have been in the spotlight with some EM currencies down hard. For the past few months I have referred to the weakness in 2nd and 3rd tier currencies as the “stealth strength” of the US Dollar. I think we are at the point in the cycle where capital flows to America for safety and opportunity...lifting the USD and the American share market.
US Stock markets: Last week I noted that contagion risk from EM had inspired a sharp “risk off” move across markets. The DJIA fell over 700 points from last week’s highs to this Wednesday’s lows but sentiment reversed to “risk on” Wednesday and the DJIA recovered all of those losses by Friday’s close. The bounce back seemed to key off of initial reports (Wednesday and again Friday) that China and the US were beginning talks to resolve their tariff disputes.
Share buybacks have been a major bullish factor for the stock market with Goldman Sachs predicting buybacks will total a record $1 trillion this year which would mean over $4 trillion of buybacks since the GFC...a sum greater than the amount of stimulus provided by the Fed during that same period of time.
Currencies: American fiscal stimulus and monetary tightening have been bullish for the USD index the past few months, as have trade war fears, and it hit a 14 month high on Wednesday before backing off as market sentiment turned “risk on.” The Euro broke sharply last week and I think its rally off Wednesday’s lows is only a correction in a continuing downtrend...key an eye on Italy.
Gold fell more than $200 (15%) since the USD started to rally in April...closing lower 9 of the last 10 weeks. By this Friday’s close it had bounced ~$20 off its lows as the USD retreated from its 14 month highs. Sentiment is extremely negative with futures market net speculative positioning at 15 year lows. The decline in the gold price has been very much the mirror image of the USD rally but it is also at 2 ½ year lows Vs. the Euro. Since gold made its All Time high in September 2011 it fell ~38% against the USD. In that same time period it fell ~75% against the S+P 500 Index.
The Canadian Dollar has traded sideways against the USD between 75 and 77 cents the past 2 months but has rallied against nearly all other currencies during that same time period. This CAD strength has occurred despite weakness in the major commodity indices (CAD is usually correlated with the commodity indices.) It’s possible that CAD may be benefiting from a “spillover” effect of “capital flowing to America for safety and opportunity” and may also be benefiting from the billions of dollars flowing into the Canadian marijuana industry.
Leveraged risk is an agressive form of “Reaching for Yield” and it works wonderfully until it doesn’t. When money is freely available at low or negative rates it’s inevitable that some of it will be poorly invested...creating parabolic chart patterns that inevitably fall precipitously.