Welcome to 2017 – USD!

BarroMetrics Views: Welcome to 2017 – USD!

Summary: I expect to see USD strength to continue to at least end February.

The question is what effect will Trump’s election have on the USD? Before his victory, we saw a strong USD.  The initial reaction to the Trump victory was as USD sell-off followed by, on the same day, a reversal of the USD weakness for the USD to end strongly. This strength was especially notable in the USDJPY.

The pre-Xmas and New Year showed profit taking as institutional traders squared positions to take their bonuses. But, even here, we saw USD strength displayed: a sideways correction rather than a deep retracement.

Then yesterday, in the US time zone, (Asia and UK closed for holidays), we saw a resumption of the USD uptrend. I expect to see USD strength in the UK zone followed by some squaring of positions in the US ahead of Friday’s Non-Farm payrolls. That number will have an impact, but my expectations for it will be the subject of a blog on Friday morning (AEST).

For me, the key chart is the Asset Monetary Base (Figure 1). We are seeing a breakdown suggesting that the funds presently deposited with the FED are making their way to Main Street. If I am correct, we should see inflationary pressures by end February 2017. An inflationary increase normally means that US rates will rise (USD up).

But, will that be true on this occasion?

At this time (Feb 2017), the question will be whether we’ll see:

  • the expected inflationary pressures due to Trump’s proposed infrastructure proposals, (USD strength) or
  • will Trump’s trade policies send the US economy into reverse? (USD weakness). If this scenario occurs, we may see the FED return to QE.

We’ll see

FIGURE 1 Asset Monetary Base

EU At Risk

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BarroMetrics Views: EU At Risk

The terrorist attack in Germany has increased the risk of the EU ending.

Merkel allowed a wave of refugees into Germany. She is now at risk. If Merkel exits, it increases an EU exit.

It’s important to recognize that in 2015 Merkel took an unpopular decision to allow 1M refugees into Germany. The reaction to the decision was immediate. Her approval rating dropped from 67% August 2015 to 49%

And, since then there have been a series of terrorist attacks weakening her further. (For a list of attacks see Terrorism in Germany).

A sign of the threats on the horizon is the call for an EU exit by far-right German parties e.g. AfD called for a referendum to exit EU once they were in 2017. (See Merkel’s Worst Nightmare).

Now here’s the interesting thing for traders. The most recent attack produced a ho-hum response in the EURUSD. Perhaps that’s because of Xmas hols or perhaps it’s because of the threat to Merkel is a Steidlmayer ‘unexpected event’.

An unexpected event is one which changes the underlying value that is not recognized by traders.

If my view is correct, any rally in the EURUSD is a shorting opportunity.

 

All Hands on Deck

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BarroMetrics Views: All Hands on Deck

In “New Era? 2“, I articulated my doubts on the resilience of the US Stock Market. But, given the directional move since Trump, I said I was unwilling to short this market.

A new clue has come in that deserves consideration: The St Louis Fed Reserve’s Asset Monetary Base.

Figure 1 shows the chart. You will notice we are seeing a possible break in the “topping pattern”. If the chart breaks down, it means that we’ll be seeing money flood into Main Street. In the past, within two to three months of surplus funds hitting the US economy, we have seen inflation rise (and thus interest rates) rise.

The problem for the FED is that, given the excesses of QE, it will find it hard to put a cap on inflation. At the moment it is looking for 2%; but if we see a surge above that number, the spectre of an unwanted inflation level will raise its head.

This is why it’s important to assess the stage of the business cycle the US: if it is at an early phase, interest rises will be a catalyst for further rises (on the basis, growth is back!); on the other hand, if in the latter stages, interest rate rises will awaken the bear (on the basis, OMG interest rising!). And, if we are seeing the latter case, it will be a case of “all hands on deck” to manage the bear.

The good thing is we have time. The sell signal is triggered on seeing two consecutive closes down to confirm the break. Then, there is usually a two to three month buffer from the break to a stock market reaction. So, there is no need urgency to act – we can assume the bull will continue unless the sell signal is triggered.

The next AMB is due Dec 30.

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FIGURE 1 AMB

A New Era 2?

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BarroMetrics Views: A New Era 2?

Xmas came early courtesy of the FED.

As expected, it raised rates 0.25 bp. What was unexpected was the comment that, in 2017, the FED would probably raise rates three times. Even more unexpected, the markets’ (USD and US stocks) was relatively muted until the news conference. At that point, the USD accelerated to the upside and stocks moved South.

The muted response gave a trader time to go long the USD against a host of currencies. For me, the EUR and JPY are especially vulnerable.

Given that response, I am unsure that we are on the cusp of a new era. For that to be, we should be seeing price action akin to the early bull stages for the US economy i.e.:

  • Interest rates up.
  • Stocks up and USD up.

The response we saw last night

  1. rates up,
  2. USD up, and
  3. stocks down

usually signifies the end of a bull market in stocks. But, that is not how I’d interpret the stock market’s price action since Trump’s election. In yesterday’s blog, I opted for the latter option because I had not seen enough bullish action in stocks to jump on the bull bandwagon. On the other hand, given the solid up move, I was not prepared to go short. Hence my comment in an earlier blog – “I’d be either long or out when trading US stocks”.

What then to do, given the dichotomy?

For the moment, I’ll focus on buying the USD and stand aside from stocks.

A New Era?

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BarroMetrics Views: A New Era?

Finally getting to my feet. The hip replacement has gone exceptionally well. The only issue now is to repair the mistake the HK specialist made when implementing the new lens in my left eye. That’s set down for Jan 5. I’m hoping all will go well.

Turning to the markets….

By far the most important event will be the FOMC decision at 14:00 EST today.

In my view, the FED will raise rates. The rate decision won’t be the only thing I’ll be focusing on. The others?

  1. Whether the FED is likely to raise rates more than twice in 2017? The post FOMC news conference will provide a guide.
  2. Trump’s tweet (if any) on the FED decision.

If the FED hints at no more than two rises, I’d see the stock market rallying and the USD not continuing its upmove (especially against the JPY and EUR) in the short term.

A suggestion of more than two rises will have the opposite effect: USD up and stock down.

Let’s see what happens.

Adjusted Monetary Base

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BarroMetrics Views: Adjusted Monetary Base

Figure 1 shows the most recent Adjusted Monetary Base. The flat movement after forming the low at 3,600B suggests that the FED is easing but not in any great way. So, it’s difficult to assess from the AMB the next direction the interest rates will take.

Probably the Non-Farm on Friday, Dec 2 will be a better guide. (See Interest Rate Rise Dec 2017?)

11-28-16-04-14-18-amb-slfrFIGURE 1 AMB

S&P – Up or Down?

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BarroMetrics Views: S&P – Up or Down?

A weekly bullish conviction close above the Maximum Extension (2186) will signal the start of new bull market. The problem is I am not seeing the range and volume I’d normally associate with the start of the a new bull.

Under the circumstances, I’ll resort to the 2007 view: ‘Long or out’. In other words, I am not prepared to short the indices until I see some sign that the sellers are back.

Interest Rate Rise Dec 2017?

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BarroMetrics Views: Interest Rate Rise Dec 2017?

I had rated a rate rise by the FOMC in December as close to a certainty as you can have in the uncertain game of trading. But the recent massive move up in interest rates  has changed my mind. (for an example of the move, click the link below to a chart for the 30-year US Bond cash rates).

The movement in the cash rates may have done the job for the FED. On the other hand, having signalled strongly for a Dec rise, if it doesn’t raise rates, its credibility will come into question.

So, what to do?

The answer is the Non-Farm Payrolls scheduled for release on Dec 2.

Normally, I guess at the figure by looking at what the FED may want the figure to be. This approach has served me to good stead. This time, I am reversing the approach:

  • If the number comes in near the bottom end (or worse) of the consensus range, I’ll take it that the FED won’t raise rates at the FOMC on Dec 14.
  • If the number comes in near the top end (or better) of the consensus range, I’ll take it that the FED will raise rates at its FOMC in Dec.

Why will a lower than expected jobs report provide the FED with wiggle room? Well, remember its ‘get out clause’: a rise is data dependent.   So, if the jobs data is poor, the FED need not raise rates.

If I can blog next week, I’ll post around Nov 30 on how I expect the markets to respond to the FED decision.

Note that I won’t be posting most of next week with a cataract op on Nov 28 and a hip replacement on Dec 2.

 

Markets, Non-Farm and US Elections

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BarroMetrics Views: Markets, Non-Farm and US Elections

USD and stock market weakness continued in November 3rd’s trading.

Today, 8:30 (EST) we have a possible driver of direction – Non-Farm Payrolls. The consensus range is 155,000  to 200,000 with consensus being around 175,000 to 178,000.

Regular readers know that I have been employing a theory which has served me to good stead: Non-Farm has been in recent times a tool to shape desired FED sentiment rather than a statistical model.

Today, the FED is clearly not keen on tanking the stock market. The problem is any number greatly above or below consensus leads to an unknown effect.

Until recently, we could count on a below consensus being as interpreted: “Poor number, bad for economy, no interest rate hike, good for stock market.

But, then we started to see the ‘normal’ response: “Poor number, bad for economy,  bad for stock market.

Given that a figure beyond consensus is an unknown quantity, I expect the number to come in at the 175k to 178k range +/- 2K. That should provide a stable stock market reaction until the election results.

What if I am wrong and the figure is outside consensus range? For the USD, a lower than expected number will be bearish and a larger than expected, bullish. For US stocks, we’ll need to watch the early (first 15-minutes) price action to make an assessment.

And this brings me to the US Elections. RealClearPolitics published a ‘swing state heat map’showing the States in balance. I’ll update the list around 19:00 (HK time) on Monday.

I wrote about the swing states impact yesterday and why I’d take a small bet on  Clinton winning – if the USD and US Stock Market continue to tumble into November 8. RealClearPolitics published a ‘swing state heat map’showing the States in balance. I’ll update the list around 19:00 (HK time) on Monday.

RealClearPolitics published a ‘swing state heat map’showing the States in the balance. I’ll update the list around 19:00 (HK time) on Monday.

http://www.realclearpolitics.com/epolls/2016/president/2016_elections_electoral_college_map.html

Let’s see what happens.

 

Trump and the Markets

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BarroMetrics Views: Trump and the Markets

The way some stock markets, and some USD crosses, are behaving, you’d think a Trump win is a near certainty – reminds me of the situation surrounding Brexit – where the markets were saying that ‘Britain Remaining In Europe’ was a foregone conclusion.

Let’s have a look at the facts:

  1. The hoopla surrounding the Clinton Foundation and her server has led to a Trump resurgence.
  2. Early voting shows that the Democrat black vote is down from Obama’s election. Unless the Latino and female votes recover the slack, she is in trouble.
  3. That said: Trump must win Florida, Ohio, Arizona, Texas and North Carolina,
  4. If he loses North Carolina (Clinton appears to be leading in the polls), he needs to win one of the swing or blue states. Nevada (swing) and Pennsylvania (blue).
  5. Pennsylvania seems out of reach, so he’ll need something like Colorado (swing), Nevada (swing), New Hampshire  (swing) and Minnesota (Blue).
  6. Failing to achieve the above means he won’t get the 270 electoral votes to win.

Trump definitely has more to do, while Clinton’s momentum is waning: that’s why I rate the contest too close to call.

However, the way the markets (especially the USDJPY, Clinton is “overs” i.e. she is good value. Think of it this way; my logic says her chances of winning are 50-50, but the USDJPY is rating her chance 30-70. So, my Clinton win bet has a 20% overlay.

If Clinton wins, we’ll see a strong stock and USD rally.

A bet anyone? Well, let’s see what the markets and odds look like on November 7 (EST). I may have a bet.

For those unfamiliar with the Electoral College see: “Electoral College

I have attached from the WSJ, ‘A Field Guide to Red and Bue America‘.

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