September 11 -17, 2022
FEAR NOT Brave Investors
Where have we been and where are we going? Join our weekly market thread on Traders Community…
The Week That Was – What Lies Ahead?
Click on the links below to navigate to the relevant section.
- Part A: Stock markets
- Part B: Bonds
- Fed and Banks
- Part C: Commodities
- Energy – Oil and Gas
- Gold and Silver
- Part D: Foreign Exchange
- Geopolitics and Economics
- Economy Week ahead
Geopolitically it has been a big week with a number of Central Banks raising rates, The RBA, BOC, ECB and Poland all raised. We also got hawkish comments from the Fed’s Powell and Brainard. De-risking continued after Fed Chair Powell’s policy speech with uncompromising inflation resolve at the Jackson Hole Economic Policy continued this week but reversed Thursday. On Friday Fed speakers pushed the narrative with Fed Governor Waller (FOMC voter) saying, “I support another significant increase in the policy rate. and “Rough estimate Is that $1 Trillion of runoff is about 25Bps worth of rate hikes.” Kansas City Fed President George (FOMC voter) said that the case for continuing to remove policy accommodation remains “clear-cut.”
Central Banks Continued to Tighten
- Fed’s Powell Reiterated his Commitment to Inflation at Jackson Hole in Cato Speech. The chairman sent stock futures lower initially when he reminded his to intention “to keep going until we get the job done on inflation”
- ECB raised key rates by 75 bps in its July monetary policy decision following a 50bps rate hike in July, and matching expectations from most analysts.
- Federal Reserve Beige Book Highlights Softening Demand as Wages Growing but at Slower Pace.
- Fed Vice Chair Brainard Talks on Bringing Inflation Down
- Bank of Canada Raises Rates 75 Basis Point to Highest Level Since 2008 Bank of Canada raised the target for its overnight rate by 75bps to 3.25% in September 2022, in line with market forecasts.
- Reserve Bank of Australia raised interest rates for the fifth consecutive time on Tuesday to 2.35%. The move was as expected by the RBA board.
The UK had a tumultuous week with new British Prime Minister Truss sworn in and the day later the universally beloved British Queen Elizabeth II died at the age of 96. Many British events have been pushed back including the next BoE meeting with the formal mourning period for the Queen.
PM Truss wasted no time in addressing the energy crisis, she announced that a fracking ban will be lifted and that household energy bills will be limited to GBP2,500 per annum for the next two years. Germany is also expected to announce energy subsidies for households and businesses, though Germany’s economy minister said that subsidies can’t continue forever.
US stock markets climbed a wall of worry Thursday through Friday despite all the negative inflation, war and Central Bank news. The move was fueled by a market positioned short, or at least not long at significant levels. The US S&P 500 has the highest put hedging in recorded recent history (20 years+), a -$13billion outflow from equity Mutual Funda + ETFs -$55b outflow since the $SPY low 3 months ago. The 3900 line has a massive open interest at 3900 SPX and the $SPY equivalent hence the support there. The major indices finished near their best levels of the day on relatively light volume; with the S&P 500 and Nasdaq Composite back above their 50-day moving averages. The move was being pumped as a result of tech earnings from $ZS and $DOCU however it seems clear to be covering the wall of worry. The CBOE Volatility Index was down 3.2% to 22.85.
In Foreign exchange it has been about the soaring US dollar. The USDJPY soaring over 143 prompting Japan’s deputy chief cabinet secretary saying the yen’s movement is being watched with a strong sense of urgency. Through the week we saw historic moves in the Yuan and Pound.
Historic Week in Forex
- The British pound hit its lowest level against the U.S. dollar since 1985 as the U.K.’s dismal economic situation spirals out of control
- The PBoC on Monday moved to support the Chinese Yuan, or Renminbi as it also known as it continues to crumble.
- The yen on track for its worst year on record falling to 144.99 per dollar, a 24 year low, fueled by the selloff in Treasuries widening the yield gap between the US and Japan.
Positive News on Food Inflation and the Supply Chain
The New York Federal Reserve surmised global supply chain pressures decreased in August, continuing the easing observed over the past three months in the Global Supply Chain Pressure Index (GSCPI). We also get some respite last week with the FAO Food Price Index falling for the fifth consecutive month in August.
Another big week for inflation.
The main focus over the coming week will focus upon US and UK inflation readings that could inform the Federal Reserve’s and Bank of England’s next policy steps. Policy decisions by the People’s Bank of China and Russia’s central bank will combine with several significant global macro releases. Australia updates jobs for August on Wednesday. Eurozone releases will include updates of the ZEW investor sentiment gauge for September (Tuesday) and July readings for industrial output and trade.
Tuesday’s August CPI figures for August, Thursday’s retail sales and Friday’s UofM inflation expectations hint whether FOMC hikes by 75bps or 50bps on September 21st. Lower gasoline prices that should shave about 0.6% m/m SA off of headline CPI with only a small offset from higher natural gas prices through the piped utility component. They will be the last pieces of material new information following another firm US jobs report.
UK August CPI gets updated on Wednesday. A strong expected month-over-month gain is expected to offset year-ago base effects to keep the year-over-year inflation rate over 10% y/y. Core inflation is expected to tick a little higher from the prior 6.2% y/y.
The bigger question going forward is whether this is a peak in inflation. UK Government economists incorporated the effects of the new Truss administration’s energy plan and have estimated that it would set a nearer term peak of 10% inflation through winter compared to a baseline forecast that preceded the plan. That rests upon the assumed 4–5 percentage point reduction and a lower base case outlook than other forecasters anticipate.
The Peak Inflation Narrative Feeding the Machines…
The markets got all fired up because it saw signs of disinflation in the Consumer Price Index (CPI), Producer Price Index (PPI), and Import-Export Price Index reports for July. These supported the peak inflation narrative and as oil prices showed this was inevitable. Again, and we repeat ad nauseum, it was the market as a whole reacts not an ego verifying view thinks.
Caution is warranted on the peak inflation narrative.
Independence – Never Take It for Granted Traders
“In aggregate, the market goes from order to disorder, and on that journey little pockets of order can form, including in commodities, bonds, stocks, currencies that circle back and reorder disorder. Then there is us the market player that reflects through order and disorder in an ever-evolving loop towards independence. It all starts with gravity and ends with equilibrium and back we go.” KnovaWave “The rules of market flux”
The Fed has kicked off its first real tightening campaign since 1994, with securities markets already at the brink of illiquidity and dislocation. Markets could soon be screaming for assurances of the Fed’s “buyer of last resort” liquidity backstop, while the Fed is prepared to begin withdrawing liquidity by selling Treasuries and MBS.
Another important aspect is the Fed doesn’t Control corporate pricing or wage decisions. Let us be clear geopolitical, climate change developments and what an out of depth, politically motivated administration are outside the Fed’s sphere of influence. There has been over $5.1 Trillion new “money” in 126 weeks, it’s a reasonable conclusion the Fed has lost control of Inflation.
The VOLX`s underlying instrument is the Mini VIX™ Future. The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility. The VIX is calculated using a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls (options) on the S&P 500.
When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.
Monetary inflation is running wild. In 2021 Federal Reserve Credit expanded $1.391 TN or 19% to a record $8.742 TN. The Fed’s balance sheet inflated a mindboggling $5.015 TN, or 135%, in the 120 weeks since QE was restarted in September 2019. Federal Reserve Assets have now inflated 10 times since the mortgage finance Bubble collapse.
We need to grasp all the risks to be wary off and received plenty of flak from it. We always talk here about expect the unexpected and now that is front and center, gage the market’s reaction, the market is always right and that’s why we focused on the crowd psychology aspect over the past few weeks.
“We have a market trying to interpret the Fed who is trying to find out how they can interpret their long-only portfolio at a risk parity where rates cannot rise.”– MoneyNeverSleeps
Our weekly reminder for risk. The downside is clear with the absence of moral hazard from repeated Federal Reserve market bailouts in an environment of some would say obscene liquidity pumps. Pure greed is the other part, not wanting to miss out on fees. The obvious question is, how deeply ingrained is this attitude through the markets? How do we ween the markets off this continuous dip feed? At this point the Central Banks have kicked that answer down the road.
PART A – Stock Markets
Weekly Highlights – USA
- S&P500 rallied 3.6% (down 14.7% y-t-d),
- Dow recovered 2.7% (down 11.5%).
- S&P 400 Midcaps rallied 4.4% (down 12.1%)
- Small cap Russell 2000 recovered 4.0% (down 16.1%).
- Nasdaq100 advanced 4.0% (down 22.9%).
- Utilities surged 3.7% (up 6.7%).
- Banks rallied 5.0% (down 16.6%)
- Broker/Dealers jumped 4.4% (down 6.6%).
- Transports gained 2.4% (down 14.7%).
- Semiconductors jumped 4.7% (down 31.0%).
- Biotechs surged 5.7% (down 10.0%).
- With bullion gaining $5, the HUI gold equities index rallied 6.2% (down 23.2%).
Biggest SPX Stock Winners and Losers Last Week
Cboe Daily Market Statistics
US Markets YTD
- Dow Jones Industrial Average: -11.4% YTD
- S&P 400: -12.1% YTD
- S&P 500: -14.7% YTD
- Russell 2000: -16.1% YTD
- Nasdaq Composite: -22.6% YTD
Global Stock Market Highlights
Highlights – Europe Stocks
- STOXX Europe 600: +1.62% Friday (+0.94% for the week)
- Germany’s DAX: +1.43% (+0.29% for the week)
- U.K.’s FTSE 100: +1.23% (+0.96% for the week)
- France’s CAC 40: +1.41% (+0.73% for the week)
- Italy’s FTSE MIB: +1.9% (+0.7% for the week)
- Spain’s IBEX 35: +1.47% (+1.27% for the week)
Germany’s benchmark Blue Chip DAX 30 index (Deutscher Aktienindex) expanded to 40 companies on 20 September adding 10 new members to the German stock index from the MDAX which will be reduced from 60 to 50 members.
Highlights – Asia Stocks
- Japan’s Nikkei: +0.5% Friday (+2.0% for the week)
- Hong Kong’s Hang Seng: +2.7% (-0.5% for the week)
- China’s Shanghai Composite: +0.8% (+2.4% for the week)
- India’s Sensex: +0.2% (+1.7% for the week)
- South Korea’s Kospi: CLOSED (-1.0% for the week)
Highlights – Australian Stocks
- Australia’s ASX All Ordinaries: +0.8% Friday (+1.2% for the week) bounced back from the worst week since mid-June with last week’s 3.9% decline.
- 1.8 per cent gain on Thursday after RBA governor Philip Lowe hinted the bank might reduce the pace of interest rate rises.
- Miners jumped Friday BHP +3.1%, Fortescue Metals +6.1% to $17.8. Rio Tinto, South32 & Newcrest +2.7% to +3.8%, De Gray mining +11.9% and Sandfire Resources+8%
- Australian ASX 200 Snaps Three Month Losing Streak in July with Aussie at Six Week High
Highlights – Emerging Markets Stocks
EM equities reacted to currency valuation
- Brazil’s Bovespa index gained 1.3% (up 7.1%)
- Mexico’s Bolsa index jumped 2.5% (down 11.7%).
- Turkey’s Borsa Istanbul National 100 index surged 9.3% (up 89.6%).
- Russia’s MICEX equities index dropped 1.8% (down 35.9%).
Daily: SPX500 performed a perfect competitive wave last week at extreme fear and bear. From there we rallied through the daily Tenkan to close at 5/8 and last week’s break. The Kijun by week’s end had flattened above in a perfect measured 3 wave move on the 240 Murrey Math highlighted in the podcast. We also see this hit confluence of the 50dma which is pulling the prices higher to solid resistance between 4110 and 4120 (yellow line). The prices pulled through the downward cloud pulled by the twist ‘helium contusion’ on the completive.
Recall the fuel from the top of the channel after completing 3 waves off ATH, accelerated after broke the Tenkan through to the 4600 OI where it reversed with impulse back to Tenkan Bulls this a (ii) of a 5. Bears this is 1-2 of (i) completive V of degree. We watch if this low was a (iii), (a) or C. We have to respect the number of alternatives of degree of 5. With such trends keep it simple support is Tenkan and Kijun and watch for ABC. From no fear to panic is the driving element. For fractal purposes, SPX completed 5 waves up where it reversed with impulse with energy fueled from the power impulse down from +1/8 ATH spit of a spit fail. On the way down (just like up) it accelerated after it broke the Tenkan through the rejected Kijun and then through the median after tapping 8/8.
The break up was from above the 200dma. The balance from sharp reversal after the initial 3 wave down from the SPX wave 5 extension as Covid19 fed impulse accelerated under the Tenkan. From there we had seen the ABC or 1-2-3 spinning around the 61.8% of the move. Support began at the October 2019 lows. A manic wave 5 or 3 of some degree was a resolution for the ages. Note the 100% extension from the emotive element and MM levels when the spit kicks in. A manic wave 5 or 3 of some degree was a resolution for the ages. Note the 100% extension from the emotive element and MM levels when the spit kicks in
The S&P 500 reversed higher after three straight weekly falls. For major cycles we watch the S&P 500 over 4,231, the 50% retracement of losses from the Jan. 3 & June 16 close. Since 1950 there has never been a bear market rally that exceeded the 50% retracement & then gone on to make new cycle lows. We have accelerated up since holding the 38% correction and spitting the previous low. Power came from holding support and spitting recent lows. From there back over the Tenkan, as one would expect in a 3 or C, i.e impulse right to the weekly cloud is needed for cycle switching. For that you would have to break the Kijun and 50wma.
The flat weekly Kijun acted as a magnet as the Spoos blasted back up through the wave iii or C lows. Each new high evolved after testing Tenkan key support on the way and we are now getting a retest as resistance. We reiterate this needs to be recovered for a resumption of the uptrend meanwhile the bear market plays out. Watch Tenkan this week and watch for Kijun reaction. Extensions are difficult to time, keep it simple.
THE KEY: Key for the impulse higher was the spit or retest of MM 8/8 and Tenkan San, which held with the previous highs and Tenkan. To repeat “We look for 3 waves down and reactions to keep it simple with the alternatives in the daily.” Keep an eye on the put/call ratio with recognition to the sheer size of contracts AND keep in mind the stimulus distortion. The spit per channel fractal and Adams rule launched back over the cloud where we were encased AND we are back testing it. Watch if a spit or clear break support as Chikou rebalances
A reminder that Apple Inc $AAPL, Microsoft Corp $MSFT, Amazon.com Inc $AMZN, Facebook Inc $FB, and Google-parent Alphabet Inc $GOOGL make up approximately 23% of the total weight of the S&P 500. With that comes gyrations that are an outsized impact on broader markets
Since the Nasdaq spat the weekly MM 5/8 and retested it, we have seen impulse from the median, Tenkan confluence spit to close at recent highs at the Tenkan retesting after it broke the Kijun last month and downward channel resistance. The Nasdaq is well behind the S&P pace with the weekly cloud and 50wma well above. Support the break up level and between the 38/50 Fibs.
Recall ATH was after it broke and held the weekly Tenkan to see a spit of a spit fail which is completive of 5 of some degree with Chikou rebalancing. Watch Chikou for divergence for continuation or failure. Divergence with Russell also a clue.
The Dow like the Nasdaq closed at the weekly Tenkan after bouncing back to test that Tenkan and Kijun after the reaction here off the weekly cloud. Support is the channel and previous breakups.
The small cap Russell RUT had been developing a large flag which it did a false break to fuel the selling from there we replicated to the down (Adam’s theory). Russell 2000 low-price tested the 38.2% retracement of the move up from the March 2020 low before bouncing higher.
After some delay we broke through Tenkan and Kijun which had rejected the bounce highlighting its weakness. This is the index showing more of the fast money crowd and is trading like it. Closed right in the middle of the cloud. Needs to get traction in here for bulls. 8/8 support collapsed on the way down and is now major resistance.
Semiconductors SMH clean with reaction from above reverted with the retest & break of the triple top patterning in a pennant. Pull from Chip Shortage players $ON $TSM $NVDA $ASML $AMD $QCOM $AVGO $TXN $INTC $AMAT $LRCX $XLNX
NVidia heads into another earnings week, last quarter signaled the low at 5/8 and the breakup retest from May 2021. NVidia is a clear leader of #SOX #SMH look for cues there and ABC failures for changes. Above is the Key Break (mauve) and Tenkan to a flat cloud. Support the recent low.
On the way up Apple gently motored up to new ATH over the massive $160 then $170 thru to $180 gamma level on the way down these levels became key energy levels all the way to $132. Support held at the May break (just like NVDA) where from there it spat the cloud pulled by a flat Tenkan and Kijun as it rebalanced Chikou. It closed right at the old channel break and MM 8/8 which is now key. Remember the impact $AAPL has, at least short term on all the major indices.
The ARK Innovation ETF (ARKK) finally found some support at -1/8 and the 423.6% extension! The fund is filled with growth stocks and was the top-performing U.S. equity fund tracked by Morningstar in 2020, it has not been a pretty slide.
The ARKK ETF trading clinically, tested triangle breakdown and failed off 50 WMA. Some work at support at 61.8% of whole move and then wrecked again. Clear crowd behavior, we saw ATH in NASDAQ & SPX, yet this couldn’t raise a bid – very telling negative divergence. $ARKK rebalanced Chikou at week’s end
US Stocks Watch
Investors (and algos) will focus on the conference calls and outlooks. Last quarter everyone expected the worse, we saw critical updates on production in coronavirus impacted regions and if there is extended halting of operations weighing on multi-nationals.
Earnings Highlights This Week:
- Oracle (ORCL), Rent the Runway (RENT), Braze (BRZE) and Planet Labs PBC (PL)
- Cenntro Electric Group (CENN), PharmaCyte Biotech (PMCB), Evolution Petroleum (EPM), 17 Education & Technology Group (YQ), and Aspen Group (ASPU)
- Li-Cycle Holdings (LICY), BRP Inc. (DOOO) and LightPath Technologies (LPTH)
- Adobe Inc. (ADBE), MYT Netherlands Parent (MYTE)
- S&W Seed (SANW), Apogee Enterprises (APOG), and Paramount Gold Nevada (PZG)
US IPO Week Ahead:
Part B: Bond Markets
Inflation with Henry Kaufman
Kaufman is the legendary chief economist and head of bond market research at Salomon Brothers is someone who knows Inflation. Henry Kaufman in an interview with Bloomberg’s Erik Schatzker Jan 14, 2022:
“I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”
“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector — and the more it will have to shock the system.”
“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”
The rubber is meeting the road as the trifecta of rising interest rates, the Russian invasion of Ukraine and surging costs continues to weigh, this has been no surprise to us here and shouldn’t have been to the market and PTB. You can only play with fire for so long before you get scorched!
Food prices have reversed sharply after being almost vertical for the past year, world food prices as measured by the FAO Food Price Index fell for the fifth consecutive month in August. The index was down 2.7 points (1.9%) from July, however remained 10.1 points (7.9%) above its value a year ago. At 138.0 the index is well under the record high 159.7 from March. Price falls were seen in all the five sub-indices of the FFPI in August, with monthly percentage declines ranging from 1.4 percent for cereals to 3.3 percent for vegetable oils.
With all the redirection of blame at the Fed about inflation one has to understand it is a global phenomenon outside the Fed’s Control. With the war drums louder than ever the supply chain issues are out of control. The Federal Reserve is not in control of global energy and commodities prices.
Everything points to powerful inflationary dynamics and a Federal Reserve so far “behind the curve.”
Highlights – Treasuries
“This is shaping up to be the most volatile year for Treasuries in over a decade, as uncertainty about the impact of aggressive Federal Reserve tightening whipsaws yields. The yield on 10-year US notes has traded in a range of at least 10 bps in 50 of 95 trading days so far in 2022. That puts it on track for an annual rate of more than 130 episodes, which would be the highest since 2009.”May 18 – Bloomberg (Garfield Reynolds)
Investment-grade bond funds posted outflows of $4.641 billion, and junk bond funds reported negative flows of $5.043 billion (from Lipper).
U.S. Treasuries ended the week with losses across the curve after a quiet start gave way to a retreat that was paced by shorter tenors. Treasury note yields settled noticeably higher Friday with the 2-yr note yield up eight basis points to 3.57%. The 10-yr note yield rose three basis points to 3.32%. Friday’s retreat briefly saw the 30-yr yield to a fresh high for the year while the 2-yr yield settled on at a fresh high. This week’s action deepened the inversion of the 2s10s spread by four basis points to -25 bps.
- 2-yr: +8 bps to 3.57% (+17 bps for the week)
- 3-yr: +8 bps to 3.62% (+18 bps for the week)
- 5-yr: +5 bps to 3.45% (+15 bp for the week)
- 10-yr: +3 bps to 3.32% (+12 bps for the week)
- 30-yr: +1 bp to 3.46% (+12 bps for the week)
All good until markets hold up but take note that the loosest financial conditions in history have supported record corporate debt issuance. While easy credit availability has supported economic activity, funding new investment whilst keeping vulnerable companies afloat. The combination of urban shifts through virus and riots fears fueled a booming MBS market and record low mortgage rates pushed strong housing markets into Bubble risk territory.
Key Rates and Spreads
- 10-year Treasury bonds 3.32%, up +0.12 w/w (1-yr range: 1.08-3.48)
- Credit spread 2.22%, down -0.06 w/w (1-yr range: 1.65-4.31)
- BAA corporate bond index 5.54%, up +0.06 w/w (1-yr range: 3.13-5.54) (new 6 year high)
- 30-Year conventional mortgage rate 5.97%, down -0.05% w/w (1-yr range 2.75-6.28)
- 10-year minus 2-year: -0.24%, down -0.04 w/w (1-yr range -0.48 – 1.59)
- 10-year minus 3-month: 0.28%, down -0.01% w/w (1-yr range 0.04 – 2.04)
- 2-year minus Fed funds: +1.23%, up +0.16% w/w
Instability is pronounced, credit defaults are on track to rise in North America, Europe, Asia, and Australia, according to a survey by the International Association of Credit Portfolio Managers. The economic slump is likely to occur later this year or in 2023, according to the survey.
Highlights – Mortgage Market
- Freddie Mac 30-year fixed mortgage rates surged 23 bps to 5.89% (up 301bps y-o-y) – the high since November 2008.
- Fifteen-year rates jumped 18 bps to a 13-year high 5.16% (up 297bps).
- Five-year hybrid ARM rates rose 13 bps to 4.64% (up 222bps).
- Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 6.10% (up 305bps).
Highlights – Federal Reserve
- Federal Reserve Credit last week declined $8.7bn to $8.788 TN.
- Fed Credit is down $101bn from the June 22nd peak. Over the past 156 weeks, Fed Credit expanded $5.062 TN, or 136%.
- Fed Credit inflated $5.977 Trillion, or 213%, over the past 513 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.1bn to $3.388 TN.
- “Custody holdings” were down $83.2bn, or 2.4%, y-o-y.
- Total money market fund assets slipped $3.3bn to $4.564 TN. Total money funds were up $60bn, or 1.3%, y-o-y.
- Total Commercial Paper was little changed at $1.198 TN. CP was up $35bn, or 3.0%, over the past year.
Highlights – European Bonds
- Greek 10-year yields gained eight bps to 4.26% (up 295bps).
- Spain’s 10-year yields jumped 14 bps to 2.86% (up 229bps).
- German bund yields rose 17 bps to 1.70% (up 188bps).
- French yields gained 12 bps to 2.27% (up 207bps).
- The French to German 10-year bond spread narrowed five to 57 bps.
- U.K. 10-year gilt yields jumped 14 bps to 3.10% (up 212bps).
Highlights – Asian Bonds
- Japanese 10-year “JGB” yields added a basis point to 0.25% (up 18bps y-t-d).
Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test
The Federal Reserve released its annual bank stress test after the market close Thursday. All 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks. With the dismal state of the economy through soaring inflation and record low consumer sentiment these tests were keenly watched. Banks suffered slightly more hypothetical losses in the 2022 severe test than last year, posting $612 billion in projected losses as capital ratios fell to 9.7%. Read More Here.
Part C: Commodities
- The Bloomberg Commodities Index slipped 0.5% (up 19.5% y-t-d).
- Spot Gold increased 0.3% to $1,717 (down 6.1%).
- Silver rallied 4.5% to $18.86 (down 19.1%).
- WTI crude was little changed at $86.79 (up 15%).
- Gasoline fell 1.2% (up 9%),
- Natural Gas dropped 9.0% to $8.00 (up 114%).
- Copper recovered 4.5% (down 20%).
- Wheat surged 7.2% (up 13%),
- Corn rose 2.9% (up 16%).
- Bitcoin jumped $1,348, or 6.8%, this week to $21,308 (down 54%).
Risk markets continue to respond to the war in Ukraine and the supply crisis from the Coronavirus outbreak and lockdowns.
BDI Freight Index
- The Baltic Exchange’s dry bulk sea freight index on Friday was up 35 points, or about 3%, at 1,213 points bouncing off an over two-year low.
- The overall index, which factors in rates for capesize, panamax and supramax vessels gained 11.7%, its highest since mid-May.
- The capesize index snapped its three-day down streak Friday, gaining 20 points, or about 3%, to 672. It posted a weekly loss of 8.3% and has fallen for seven out of the last eight weeks.
- Average daily earnings for capesizes, which typically transport 150,000-tonne cargoes such as coal and steel-making ingredient iron-ore used in construction, rose $167 to $5,574.
- The panamax index, which had not seen a single day of gains since over a month, was up for the seventh consecutive session, gaining 108 points, or about 6.2%, to 1,865, an over three-week high. It posted a 46.7% weekly gain, its best since early July, 2014.
- Average daily earnings for panamaxes, which usually carry coal or grain cargoes of about 60,000 to 70,000 tonnes, were up $971 at $16,786.
- The supramax index which has not seen a single session of gains in over two weeks, lost 2 points to 1,475.
We analyze Alcoa as a surrogate to Aluminum given its high beta relationship and more liquid aspect as an investment vehicle.
We have seen $AA retest the previous high after the +3 Spit as the Chikou rebalanced. We have the Gap below at +1/8 confluence. We move to 240 for this pennant resolution.
Copper rebounded sharply off the 50wma but again has failed on the cloud spit and channel break. The flattening Weekly Tenkan and Kijun acted as a magnet to close right there. #HG power spits have quickly rebalanced back into the wide channel. Copper had been a leader in the risk on movement for commodities.
Lumber prices were a leading indicator of the supply-chain problems and inflation that followed pandemic lockdowns.
Lumber futures for July delivery ended Friday at $695.10 per thousand board feet, down 52% from a high in early March. On-the-spot wood prices have plunged, too. Pricing service Random Lengths said Friday that its framing composite index, which tracks cash sales, fell about 12% last week to end at $794. That is down from $1,334 in March, just before the Federal Reserve raised interest rates for the first time since 2018.
USDA June 30 Acreage Report
USDA influential report for commodities, the June 30 Acreage report. The most significant point was corn again the largest crop produced in America in 2022. USDA raised 2022 acreage expectations for corn by 431,000 acres from the March 31. Markets pared some of their earlier morning’s losses on the news. The announcement reversed USDA’s March 31 Prospective Plantings report which had projected higher soybean acreage relative to corn for only the third time in U.S. history.
KnovaWave analyze US Wheat futures given its high beta relationship and more liquid aspect as an investment vehicle.
Wheat held after it threatened its weekly cloud and 0/8 which held. In a chopper week it closed at the 61.8%. The contract stabilized after it continued its sharp impulsive collapse fueled from when it retested and broke the Tenkan (orange). This came about after a failure at retesting the 8/8 move and high after it spat 8/8, and the minimum target. It had completed a measured 4/8 correction off highs then broke key support at 38% then 50% and 50wma confluence in the freefall. From here Wheat support at that $700 cloud confluence with the breakup level at 61.8% resistance, then Kijun and Tenkan.
Corn recovered from its freefall rejected at the 4/8 and bottom of the weekly cloud. The Corn rally had topped out at the highest since 2012 in Chicago at +1/8 and corrected with impulse back to break the Tenkan which it swiftly did a spit of a spit after bouncing off 720, which also the price successfully retested the high from April 2021. From here we saw Tenkan fail again, and empowered selling smashed through previous high, Kijun and 7/8 confluence. The 50wma gave no support with the cloud and 6/8 slowing the selling down. All these levels are now resistance.
Soybeans broke the triple bottom and the cloud twist after prices were rejected harshly at the tenkan, off the Kijun and under the 50 wma. Support at the Cloud gave way, and we sit near the January breakup. On the way down soybeans rejected the Kijun and channel retest to spit back the 50wma. The weekly cloud and Murray mingle around the $14.6/bushel benchmark are massive.
Recall beans broke down from the bull pennant framed by +4/8 and +1/8 with the Kijun unable to sustain support right at the breakout. Support at the 50wma gave way to under the futures pivot at $15/bushel benchmarks and at the close of the week was a magnet to the recovery bounce. Pressure came from futures spitting the Weekly +4/8 over $17.50/bushel three times. The market needs to rebalance that energy.
US Crude Oil (WTI)
Measuring oil MM recalculation higher to almost +2/8 and 161.8% Fib retest. We are in a completive mode with this impulse, it’s a question of degree on the topside, use the Murrey math 240/60 grid. From there down in 3 waves, completing a C or IV? Support wasn’t found until 0-8. Support is previous lows and Tenkan. Resistance Kijun and 50dma which it needs close above for a rally to get legs.
Weekly: WTI crude Oil futures traded over $94bbl after reversing off last Tuesdays $86.53Bbl, the lowest settle since January 25, it closed the week above the 50wma. That was after it’s measured move reversed from 7-year highs and regained them right to the top of the weekly channel with the downside open. Risk support is the grid. Long term 61.8% target fueled the spit of a spit by ABC bull flag after rebalanced Chikou sated the 5 waves. Resistance Weekly Tenkan & Kijun and Murrey Math levels and previous breaks (off monthly)
The key is crowd behavior to help tell the story which in energy is often around geopolitics. A great example of why we watch ABC corrections and from here we get the energy from the break being balanced. This move that was powered by 50 dma Tenkan spit of a spit – hence the fractal energies reverberations.
These are special times, recall “After we regained the pattern 261.8% from the extreme (-$40) move. The climax of the larger acceleration lower after broke the weekly uptrend, a fractal of the sharp and all the way to all time lows to negative pricing we have seen mirror replications.” Support is previous channels, tenkan and Kijun. Above we have Murrey Math time and price
US Natural Gas (Henry Hub)
US Natural Gas has continued higher after it completed 3 waves correcting the daily 8/8 spit correction to -2/8. Two clear alternatives, we are correcting the highs 5 or that was a 3 and we go higher. We closed over the 2 most recent highs and +1/8 right. Support is Tenkan, Kijun below.
The Cloud top broke Kijun and Tenkan with a kiss of life. Meaning that 3 was either an a i or iv– impulse in a nutshell. Prior to this move the adjunct failure of the 50dma and Tenkan opened up the retest of 3.80-3.60 last time which fueled this week’s move higher. From there we fell sharply to the Kijun, A completion of 4 (bear) or (i) of 5 (bull) which gave this move sustenance
Notice the fractals of the move after completing the C of 4 bullish scenario played out the consolidation phase since it completed its IV (Bull Case) last year since then a series of 3 waves. For the bulls all this needs to hold for the highs to be a (iii) looking at possibilities we have the 161.8% at 7.026 if we get ‘silly’ 50dma support.
Like the larger wave on the way up it accelerated through previous highs (flat topped triangle energy) and over the resistance at 8/8 and new highs. We successfully tested that break in a pennant ABC. Previous highs (flat topped triangle energy) and 8/8 and new highs underscore the structure that fed the move and is key longer term.
Notably no sharp reversal, like the previous impulsive spikes. We saw a clean break of the Kijun to close back over near highs. This move was fueled by a fractal of the classic double top playing out after a spit of the weekly Kijun was sent back off Tenkan only to reverse all the way to spit the 50wma for the energy needed. Resistance is Previous highs and Murrey Grid.
The Natural gas rebalanced after continued to fail and retrace with impulse after reaching its major target, the double top potential from 2014 which equated nicely to over 8/8 Weekly and showed true impulse off that to rebalance Chikou. It’s now a question of degree, 3 or 5? Impulse just shy of the 8/8 and Tenkan confluence. A question of continuation with the 50wma as resistance and cloud as support.
Key Energy Reports
- Into The Vortex – Natural Gas Outlook with European Supply Tightness & Scorching Summer
- Around The Barrel – Crude Oil, Gasoline and Distillate Outlook
- OPEC Monthly Oil Market Report July 2022
- World Natural Gas Production and Delivery the Modern Geopolitical Weapon
- Renewables Sources Make Up 13% of Global Power Generation in 2021
- Wind and Solar Generate More Energy Than Nuclear Power
- China Overtakes Europe as World’s Biggest Renewable Electricity Generator
- Coal Consumption Rebounded to Near Record Highs as Primary Energy Consumption Soared in 2021
- Energy Crisis Pushes German Gas Giant Uniper SE To Seek 9 Billion Euro Bailout
- American Gasoline Prices Hit Record High $5 per gallon
Gold futures back testing the median after another rejection at the Tenkan (orange). Needs gets impulse off this ABC off this cloud or double top gains more weight and it follows silver weakness The yellow metal is consolidating after it accelerated after breaking the weekly triangle higher. Gold has bounced after support at it’s uptrend line since the August 2021 bottom and Kijun. It garnered strength after rebalancing after manic rise to +5/8 weekly rebalance of Chikou in 5 waves. To be bullish we need to stay above the triangle. Murrey Math resistance, watch Fibs & Chikou.
Silver, like Gold bounced under the cloud base. Back underr 50wma after spitting Tenkan providing support after reversed. Closing under weekly Kijun which is now resistance. Major support is previous lows
Part D: Forex Markets
John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”
- For the week, the U.S. Dollar Index declined 0.5% to 109.00 (up 13.9% y-t-d)
- For the week on the upside, the Swiss franc increased 2.1%, the Swedish krona 1.4%, the Norwegian krone 0.9%, the euro 0.9%, the Canadian dollar 0.8%, the British pound 0.7%, the Brazilian real 0.4%, the Australian dollar 0.4%, the Mexican peso 0.2%, the Singapore dollar 0.2% and the New Zealand dollar 0.1%.
- On the downside, the Japanese yen declined 1.6%, and the South Korean won fell 1.3%. The Chinese (onshore) renminbi declined 0.38% versus the dollar (down 8.24% y-t-d).
Australian Dollar – AUDUSD
For the week AUDUSD closed down 0.22%
The Aussie dollar has reversed off an eight-week high, trading over US71¢ with the revitalized hawkish Fed. The Reserve Bank of Australia has hammered on stagnant wage growth as a problem within the Australian economy. In June, the government raised the minimum wage by 5.2%. This week, the Federal government will host a jobs summit and a number of parties have already started media campaigns to push the case for further significant wage increases. Keep an eye on the effect on bonds and the dollar here.
To reflect potential upside, we look at the way down AUDUSD with cloud, Kijun and channel confluence over $0.7250 it reversed lower to 4/8 just over .66. This week we closed under the Tenkan around the channel midpoint. Since completing a 5 at the psychological 80 level it had fallen & corrected under the weekly cloud in emotive fashion
China lockdown fears overhang and AUDUSD forwards support with bonds and RBA raising. Support is the Murrey Math Levels. Resistance the Cloud and Kijun like many commodities. It was the strongest major currency against the USD in July after the Yen correction and has continued in that fashion.
New Zealand Dollar – NZDUSD
For the week NZDUSD closed down 0.6%
The Kiwi outran the Aussie lower this week after it mirrored the AUD spitting the lower channel wing to recover through Tenkan after momentum failed and reversed from there. Kijun resistance, which is pivotal is a long way off. We closed back over the old 61.8% break. The RBNZ Policy Announcement has had 7 consecutive rate hikes which has been supporting the forwards..
Canadian Dollar – USDCAD
For the week USDCAD closed up 0.3%
The USDCAD popped through 1.3000 on the hawkish Powell comments, while the liquidity zone below 1.3100 could limit upside price action. The high of 1.3223 on July 15 is back in focus. That was the highest level since November 2020. It has recaptured the Tenkan led by the AUD and NZD as it spat the weekly flat-topped triangle. Watch flat Kijun and Tenkan.
Use Fibs for support and resistance. Eyes are on Canadian CPI, the recent decline in energy prices should help alleviate some of the broader pricing pressures. The BoC have been quiet since their 100bp hike in July after it was accompanied with the removal of language about acting in a “forceful” manner, but it did signal rate hikes are to continue with the path being decided by its ongoing assessment of the economy and inflation
Euro – EURUSD
For the week EURUSD closed down 0.75%
The Euro back tested the 1/8 after its first sweep of parity with the sharp selloff fueled reversal off last month’s correction off the Tenkan which was fast and furious to the lowest closing rate since 2017 spitting the outer channel. Euro continues to cascade in what seems like eternal flags in the channel as it spits the Tenkan. We watch if Kijun (pink) reflecting Tenkan (orange) creates any impulse as EURUSD develops in the channel. Watch 3 waves to see development for continuation. Again, governed by EURGBP and Bund volatility
British Pound – GBPUSD
For the week GBPUSD closed up 0.5%
For the week GBPUSD closed down 0.77%
It is still hectic for Sterling; it is down to a new leader between Rishi Sukan and Liz Truss with Truss the favorite. GBPUSD structure leaves the recent 1.1718 low vulnerable. British pound continues to have difficulty since it’s vicious move down in July that reversed to unchanged by the end of the month.
Cable lost all of the steam from its biggest weekly gain since December 2020 against the dollar to above $1.26 to be smashed to the bottom channel under 1/8 and 1.1800 after retesting the channel and Tenkan. It is still undermined by political risk and recession fears. Above we have channel and Tenkan confluence and flattening Kijun. The upcoming week will be heavy on UK data, which could mean an eventful week for the British pound.
Euro Pound – EURGBP
For the week EURGBP closed down 0.27%
EURGBP has been in the doldrums since it back tested 50wma after breaking it early. 50wma and cloud proved too much and EURGBP failed under Kijun support with Tenkan resistance. The EUR/GBP gave up control.
Japanese Yen – USDJPY
For the week USDJPY closed up 0.53%
Last month USDJPY corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. Dollar yen accelerated higher moving above the May high of 131.342 which was 20-year highs for the USDJPY. It didn’t let up with Murray Math Weekly levels recalculating higher. USDJPY closed at 135.75 last month, traded to almost 140 where it spat 8/8 and reversed lower, it is trading at 133.32 today. The last two trading days of the month saw the reversal from positive to negative and traded at the low for the month on the last day of the month to close at the weekly Tenkan.
On the way up the price accelerated after the close above the Tenkan over 114 hence the pull for it to correct to the Tenkan which it did to ignite this rally a month ago. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel.
Use your USDJPY Murrey grid for now. EURJPY AUDJPY will determine risk on/off. The Tenkan is the natural balance of support ahead.
Emerging Market Currencies
For the week USDMXN closed down 0.67%
The Mexican Peso held its triple bottom to rally back to the Tenkan as rates rose in the US. It continues in the long sideways pattern and consolidates despite outside uncertainty from oil and high rates. The recent high near 19.5 per USD was the highest level since March of 2020 and tracked general strength in Latin American currencies which has since reversed. Use the Gann octave and the extension fibs to help measure the noise.
Turkish Lire USDTRY
For the week USDTRY closed up 0.52%
The Turkish Lira slow decline continues as it rides the median in the corrective channel tier spitting 17 against the dollar. We are still in spitting distance of that all-time low of 18.4 hit in December. The Turkish Central Bank is expected to maintain its Weekly Repo Rate at 14.00% at its upcoming meeting. Turkey’s recent monetary policy decisions have not been based on economic fundamentals, with late 2021 seeing a cumulative 500bps cut in rates in a matter of months to current levels.
The background is the same with President Recep Tayyip Erdoğan vowing to cut interest rates despite spiraling inflation. In December last year, the Turkish Central Bank introduced a “Lira deposit scheme” to stem the decline in the currency. The Turkish president said that the country had ‘wasted years’ with the misguided view that prices should be controlled by using higher borrowing costs to suppress consumption. Such policies, he said, benefited only ‘those living a charmed existence and filling their pockets with [the proceeds of] high interest’, including foreign investors.”
To recap the wild 18-10 USDTRY swing last year reversed after falling in 3 waves to explode over the Tenkan, weekly cloud Kijun and 50wma below. The Murrey Math and Fib targets with last year’s Lire all-time lows in a hyper inflating collapse. So far this year the lira is the worst performer in emerging markets, raising concerns that the country could be heading for a repeat of the FX crisis seen at the end of last year.
Bitcoin continues to perform technically to perfection. Impulse begets impulse. To understand panic, understand greed. $BTC tested the top of a rising channel after the preceding sharp downturn which was the downside breakout of an earlier bearish flag, after breaking downside a H&S top and then down it went….
Recall Bitcoin exploded higher following it’s correction impulsively upon completing 5 waves up at +2/8. Each Tenkan and Kijun tap saw an explosive kiss of death until we completed 3 waves to around 28,000. From there we have seen extreme volatility.
Looking back Bitcoin put in a high of $63,000 around Coinbase, the largest US crypto exchange successfully went public which signaled profit-taking. The recent high over $68,000 came after the launch over the Bitcoin ETF, Bitcon. From that high we have 2 main alternatives a V of a 1 of a V. For bears it a completive five with impulse right to the 50wma – an incredible 26% fall in a Friday night session. That’s impulse! We watch for an ABC to develop here support is the 50wma and bottom of the weekend cloud.
The Fail of TerraUSD
May 12 – Wall Street Journal (Alexander Osipovich and Caitlin Ostroff): “The cryptocurrency TerraUSD had one job: Maintain its value at $1 per coin. Since it launched in 2020, it had mostly done that, rarely straying more than a fraction of a penny from its intended price. That made it an island of stability, a place where traders and investors could stash their funds in between forays into the otherwise frenzied crypto market. This week TerraUSD became part of the frenzy too, slumping by more than a third on Monday and then tumbling as low as 23 cents on Wednesday. The collapse saddled investors with billions of dollars in losses. It ricocheted back into other cryptocurrencies…”
May 16 – Financial Times (Scott Chipolina): “Traders have yanked $7bn from Tether since the world’s biggest stablecoin last week briefly lost its peg against the US dollar, intensifying concerns about the assets that underpin the global cryptocurrency market. Tether’s market value has fallen by 9% since May 12 to $76bn as tokens have been removed from circulation to meet redemption requests, CryptoCompare data show. The decline came after Tether last Thursday traded at about 95 cents, well below the $1 level it seeks to maintain following the failure of a smaller rival. Observers inside and outside the crypto market have warned that deeper or more lasting volatility in stablecoins, which are designed to maintain a one-to-one peg with the dollar, could drag down the value of thousands of speculative crypto assets that have drawn buyers around the world.”
We have seen what you would expect from a 5 wave impulse peak and ABC correction, a violent correction and completion. Use Murrey Math levels for corrections and targets as algorithms control the herd here, support is the cloud and sharp ABC, 1-2 moves. From there prices agitated towards those ATHs as news of a Bitcoin ETF fueled the rally, sound familiar? But this time it wasn’t signaling we are in a 3 high probability but a 5.
On the Risk Radar
Geopolitical Tinderbox Radar
Economic and Geopolitical Watch
Major banks kicking off earnings this quarter, including BlackRock (BLK), Citigroup (C), First Republic Bank (FRC), JPMorgan Chase (JPM) and Wells Fargo (WFC).
Major US Banks Deliver Mixed Results in Q2, 2022
The major money cents banks released earnings with many strong results for Q3. Mainly from trading on the positive side. We see a reversal of loss reserve releases from the pandemic kitty. Rising interest rates also help the bottom line.
- Citigroup Earnings Beat Expectations with Strong Trading in Fixed Income and Net Interest Margin
- BlackRock Profits Fall as Assets Under Management Decrease $1.1 trillion With Lower Investor Confidence in Markets
- PNC Bank Revenue Grew 10% on Strong Loan Growth
- Wells Fargo Earnings Disappoint as Revenue Falls from Slow Down in Mortgage Banking
- Morgan Stanley Investment Banking Hit by Capital Markets Seizing Up
- JPMorgan Sets Aside More for Bad Loans and Suspends Buybacks after Earnings Miss
Banks stocks have benefited from the Federal Reserve partially lifting its hold on share buybacks, saying that banks can resume repurchases in the first quarter of 2021 as long they don’t exceed the average quarterly profits from their past four quarters. The change came after the Fed found that all major banks passed a second round of stress tests, indicating the firms can continue lending to businesses and households even if the economy dipped into a new recession.
Banks are also benefiting from the Federal Deposit Insurance Commission intending to ease the Volcker Rule, which restricts banks from making large investments into venture capital. The Volcker Rule was enacted in the wake of the 2008 financial crisis, and the new changes could potentially free up billions in bank capital. Bank stocks rose.
Through the first three quarters of 2020, NFD surged an unprecedented $5.740 trillion, or 14.1% annualized. NFD was up $6.181 trillion over the past year (11.5%) and $8.817 trillion (16.7%) over two years. For perspective, NFD expanded on average $1.830 trillion annually over the past decade. NFD has ballooned 71% since the end of 2008.
“Negative yields on long-dated government securities are more reflective of distorted market conditions than of stronger sovereign credit profiles, Fitch Ratings says. Lower interest service costs support sovereign creditworthiness, but this must be weighed against the impact of the economic conditions leading to lower yields and historically high government debt levels in a number of countries.- Fitch”
The Week Ahead – Have a Trading Plan
Watch Central Banker and Geopolitics speeches, reports and rate moves.
- Next Week’s Risk Dashboard via Scotiabank
- UK, Canadian fiscal policy versus monetary policy
- Another hot US core inflation print?
- Powell & Co may have already made their September decision
- UK core CPI expected to rise sharply
- Bank of England postponed
- PBoC unlikely to cut
- Are UK jobs still recovering?
- Another dip in Aussie jobs would follow Canada
- Russian central bank expected to cut again
- Other macro
US Events Focus
- Monday: $41 bln 3-yr Treasury note auction results at 11:30 ET and $32 bln 10-yr Treasury note reopening results at 13:00 ET
- Tuesday: August NFIB Small Business Optimism (prior 89.9) at 6:00 ET; August CPI (prior 0.0%) and Core CPI (prior 0.3%) at 8:30 ET; $18 bln 30-yr Treasury bond auction reopening results at 13:00 ET; and August Treasury Budget (prior -$211.10 bln) at 14:00 ET
- Wednesday: Weekly MBA Mortgage Index (prior -0.8%) at 7:00 ET; August PPI (prior -0.5%) and Core PPI (prior 0.2%) at 8:30 ET; and weekly crude oil inventories (prior +8.84 mln) at 10:30 ET
- Thursday: August Retail Sales (prior 0.0%), Retail Sales ex-auto (prior 0.4%), weekly Initial Claims (prior 222,000), Continuing Claims (prior 1.473 mln), August Import/Export Prices, September Empire State Manufacturing (prior -31.3), and September Philadelphia Fed Survey (prior 6.2) at 8:30 ET; August Industrial Production (prior 0.6%) and Capacity Utilization (prior 80.3%) at 9:15 ET; July Business Inventories (prior 1.4%) at 10:00 ET; and weekly natural gas inventories (prior +54 bcf) at 10:30 ET
- Friday: Preliminary September University of Michigan Consumer Sentiment survey (prior 58.2) at 10:00 ET and July Net Long-Term TIC Flows (prior $121.80 bln) at 16:00 ET
Global Central Bank Events
Focus on yourself and what YOU CAN INFLUENCE, set your trading plan and goals in be set for 2022.
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