From the Punter Trenches (7 February 2018)

 

IMG_5909

By Tanya Rawat

As expected after a strong move in Asian ETFs overnight as the US markets opened higher as expected, we saw Asian markets open in the green today though it pared some of its gains. Taking cue Europe opened higher as well. I maintain my Bullish call for Gold, and while we are seeing some Dollar strength, I see pullback to 86 handle before a more consistent Dollar strengthening in the latter part of the year. As a corollary, I see the weakness in Euro today as temporary and see upside till 1.28 handle till we see a reversal.

 

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

From the Punter Trenches (6 February 2018)

IMG_5863

By Tanya Rawat

What you see it what you get or so the old adage goes. It was indeed a case of self-fulfilling prophecy wherein what majority of the market participants were seeing in the markets or talking about came true.

However, it isn’t all gloom and doom. It was a necessary correction as the markets were steaming ahead while the economic condition didn’t support the extremity of the move.

Key Takeaways: Bullish Gold, Bearish Dollar, Bullish SPX, Bearish DAX

Bullish Gold, Bearish Dollar
I still remain Bullish Gold and see it after a pause (I mentioned last week that while I remain bullish Gold either as a haven asset now or inflation hedge in the future as the latter picks up steam in the US it could retrace to $1,300/oz or $1,293/oz levels) heading to $1,375/oz or higher. If the Yen is unable to breach 108 support (a key support level) vs the Dollar (DXY), I see no more room for its strength primarily given how strong the momentum in the Nikkei is.

Overall, I still remain bearish DXY and see another 2% down move in tandem with EURUSD 2% up move to 1.28 levels. Though we might see temporary strength in the DXY.
We must keep this in mind as, if the DXY does start to strengthen we will see momentary correction in Gold as mentioned above.

Bullish SPX
The top constituents of SPX are:
Infotech, Financials, HealthCare, Consumer Discretionary, Industrials and so on. Energy is a meagerly 6% of the index. (There seems to be slowdown in momentum in Energy names in Europe and US on a weekly basis).

IT companies have their own idiosyncratic factors hitting it. APPL because of X not being able to receive calls and a switch to Intel from Qualcomm going forward for chips etc, Google with its case with Uber etc. If you look at the largest component of  Infotech and SPX, it started stumbling mid-January way before the ‘correction’.

Additionally, Financials are probably being sold off as ETFs with the large cap names are being sold off. Historically when yields do well, so do Financials given their direct relationship. Also, the correction in Financials is because of the psychological resistance of 500 set prior to the ’07 crash. If it breaches that, it will set new highs, hence this correction is minor.

Bearish DAX
It has breached the 50 week Simple Moving average of 12,647 levels and looks headed to 12000 levels and probably 11604. This was on the back of it unable to breach the 13,400 resistance for a second time in a row (last attempted in November 2017). There remain downside risks to DAX given that I view the Euro weakness as only temporary till it retraces to 1.28 levels.

Stay Calm and Carry On.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

From the Punter Trenches (26 Jan 2018)

IMG_5477

By Tanya Rawat

World Economic Forum in Davos had an unexpected slate of volatility yesterday and as US Treasury Secretary Mnuchin supported the case for a weaker Dollar while European Central Bank (ECB) Governor Draghi sounded displeased with this blatant position by the US to jawbone the Dollar weaker. He maintained that the probability of rates hikes by ECB seem narrow while a stronger Euro is indeed concerning. Today US President Trump had an opposite rhetoric to that of Mnuchin and supported the case for a stronger dollar.

The Dollar see-sawed on these muddled signals coming from the US wherein it briefly touched lows of 88.7 handle while, as Euro touched 1.25 handle and JPY strengthened to 109.8 handle. Gold after touching resistance of $1365/oz is likely to see minor pullback before it continues its upward path. Good time to add on to existing positions or new ones.

All my calls apropos Dollar, Euro, Gold and Japanese came to pass this week or are coming. Key to watch will the US 10 Yr Tsy’s path from 2.65 levels. If it continues to hover around these levels and start consolidating upwards, we are likely to see stronger moves in other asset classes as I have been iterating. German 10 Yr Bunds also are very close to breaching a key monthly downward trend line viz. 0.65 levels.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

From the Punter Trenches (24 Jan 2018)

IMG_5331

By Tanya Rawat

As I stated start of the week, as expected Gold’s jumped a massive circa 1% to $1352/oz levels, while the Euro is markedly stronger as well at 1.2350 handle primarily due to US 10 Yr Tsy’s moving back up to 2.65 levels after taking a breather at 2.61 levels. FTSE continued to get smacked on a stronger pound, which is comfortably sitting above the 1.41 handle. On the back of a massive swing up on the Tsy yields, the Dollar weakened and seems headed to 88 as discussed in the last post and the Japanese Yen towards 108 handle. Watch the equity space take a cue from this.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

From the Punter Trenches (22 Jan 2018)

IMG_5312
By Tanya Rawat

Cryptocurrencies back to languishing levels. ETFs based on block chain technology viz. BLOK and BLCN respectively doing well since their debut.

Gold still hovering at $1330/oz levels, while the Euro is markedly stronger today at 1.2246 handle. FTSE continued to get smacked on a stronger pound, coming close to the psychological 1.40 handle. DAX continues to hover around 13500 for a while (resistance tested in 2017 as well) and SXXP has tested ~400 levels a few times already since 1998 and has been unable to breach it (key resistance level).  US 10Y Treasury yield breached key weekly and monthly resistance level of 2.65. Dollar continues to stutter around 90 handle while increasing the probability towards the 88 handle.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

From the Punter Trenches (18 Jan 2018)

me

By Tanya Rawat

Cryptocurrencies saw a swing back up after Bitcoin breached $10k levels. While Ripple, Bitcoin and Ethereum are up, ETNs based on the latter two have seen a massive move of 20% and above. Today, we will see the first two ETFs to start trading based on block chain technology named BLOK and BLCN respectively.

Gold still languishing at $1330/oz levels, while the Euro is markedly stronger today at 1.2246 handle as is Japanese Yen at 111 levels. Dollar still remains strong on the heels of strong Industrial Production numbers showing that hard data indicates that the economy is still purring on. FTSE continued to get smacked on a stronger pound, while an upswing in 10 yr UK Gilts saw homebuilders getting a hammering while Insurers continued their steady uptrend. DAX continued to hum ahead, shrugging off Euro strength with Autos still leading the charge. US 10Y Treasury yield breached 2.60 and here is testing a strong quarterly and monthly downtrend resistance level.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

From the Punter Trenches (17 Jan 2018)

Starting today, enjoy succinct daily financial market commentary via posts titled From the Punter Trenches.

IMG_5198

By Tanya Rawat

Taking cues from the US session yesterday, today Asian equities with the exception of Chinese and Indian names took a beating. Watch Gold which after a pull back, shows plenty of upside till we start testing 2014 levels, Dollar which I was bullish start of the week given it was testing strong support and resistance levels apropos the Japanese Yen and Euro respectively. I expect rotation into Value names after Momentum stocks in the US gained plenty traction start of the year. Europe with the exception of UK looks healthy equities wise. Expect more sizeable losses out of UK equities this week.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2018 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

 

Time to Stockpile Cash


By Tanya Rawat

While the Dubai and Saudi stock exchanges have been reaping gains from the rebounding oil prices, it’s time to start building up cash reserves into GCC portfolios.

There are three vital signs of imminent correction and why the timing is perfect for this approach. Since the start of the year both the DFM (the Dubai exchange) and Tadawul (the Saudi Index) have been stuck in a pretty tight price range (meaning that the markets have been moving sideways without meaningful direction) — the former at 3,380 wavering at +/-5.50% and the latter more tightly squeezed around the 7,000 level at around +/-3.50% on a weekly basis.

Secondly, the S&P 500, a leading US equity market index that dictates the direction of markets around the world, has been unable to sustain the rally after breaching the 2,400 price level since the start of the year and always falls back below that key level. As it nears this level again, it is unnerving as this time it’s laden with the fact that two of its largest constituents; infotech (tech firms like Apple and Google), and financials (banks like  Goldman Sachs, Wells Fargo and others) are poised to reach critical overbought levels. The infotech tech is shy off 3-4% off price the highs it saw in the year 2000 while financials have been trying to breach the 400 price level to sustain a stronger rally, however always fall below this level. Additionally, the weekly price data change shows sectoral rotation (change in portfolio allocation across sectors) in the S&P 500 into defensive names, such as consumer names, utilities and healthcare and out of cyclicals akin to infotech and financials.

Finally, for a month now, the benchmark US 10-year treasury yields appeared stuck below and around a pivot point of 2.30 yield level, which means declining consumer inflation expectations. Going forward, it is likely to decline further due to the falling yield spread between 10-year U.S. Treasuries and similar-maturity Treasury Inflation Protected Securities (TIPS), which measure investors’ expectations for average annual consumer-price gains over the next decade. They have also been retreating. Moreover, the Core PCE print, which is a key inflation measure employed by the Federal Reserve, has been coming in below the 2% print since February this year; a magic threshold set by the Central Banks around the world. This signals a strong case for keeping the rate hike on hold in June, which implies further headwinds for the GCC as it will likely stifle the rally in the US stock markets.

The fragility of the US financial markets are finally converging to what the economic data has been pointing to over the past two quarters of weak data like declining consumer spending and muted industrial production in the U.S. Durable goods orders which constitute 15% of the largest contributor to GDP (consumption) have also been painting a troubling picture with the recent rise in auto sector loan delinquencies across US.

So despite the positive beta rewards the GCC stock market has been reaping from oil price strength, there are still plenty of clouds to watch in the global financial space. CFTC (Commodity Futures Trading Commission) data shows robust ongoing consolidation move into haven assets like gold reflecting increasing risk-off sentiment or risk averseness. Time to deploy those cash reserves.

Questions? Comments? Contact me at Tanya@rawatspeaks.com.

Copyright © 2017 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

© https://app.hedgeye.com/insights/59481-cartoon-of-the-day-buried?type=cartoons

Ides of March

GRI2

Author: Tanya Rawat

On 15th March 2017, Janet Yellen, Federal Reserve (Fed) Chair, announced a quarter percent age rate hike in the Federal Funds rate (nominal rate); the third hike since 2008 financial crisis. While a widely-expected move (as shown by a near 98% probability indicated by the Federal Funds futures contracts traded on the Chicago Board of Trade), I reason it’s premature as inflation isn’t exactly as high nor is there sufficient strength in the labour markets as beckoned by the rate hike.

So what is a Federal Funds rate? And why is it so important? This is a short-term interest rate targeted by the Federal Reserve’s Federal Open Market Committee (FOMC) as part of its monetary policy i.e. to manage money supply in the economy. This rate is important as it forms the basis of the rate used by banks to lend reserve balances to other depository institutions overnight, on an uncollateralized basis. Raising the federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure and thus leaving the banks lesser amounts to extend to their customers. This reduces the money circulating in the economy, thus reducing inflation. Inflation is the rate at which the general level of prices for goods and services are rising. While inflation is a harbinger of an economy returning to normal levels of activity and is in fact a regulator along with deflation (fall in prices of goods and services), it carries negative connotations. This is primarily because it reduces the purchasing power of existing currency. For example, if $1 can buy who a chocolate bar, a rise in inflation would be mean the same bar probably costs $2 now. Thus, $1 can no longer buy you the chocolate bar, thereby reducing your purchasing power. In similar vein, if you are earning 2% (nominal interest rate) on your savings account or your equity portfolio, an increase in inflation to 3% would imply you will be earning -1% (real interest rate = nominal interest rate – expected inflation rate) or a negative yield, thus not earning anything ! This will force you to seek alternative sources of investment with a positive yield.

Rewinding the clock to the first rate hike in December 2015, the Fed announced the probability of four rate hikes in the following year 2016. On these rather bullish claims, the primary haven security viz. Gold first rallied up circa 30% before midway through 2016 it erased its gain by circa 17% (peak-to-trough). The rhetoric was carried forward to the December 2016 FOMC meeting when Janet Yellen, talked about three rate hikes to be expected in 2017. This I believed at that time was excessive optimism, given that, only 1 out of 4 rate hikes proposed in the December 2015 materialized in 2016 i.e. a 25% probability of a hike.

Armed with this data point, I inferred that the Fed was expecting high momentum in inflation in 2017 as well, akin to what they envisaged in the previous year i.e. negative real interest rates. This was an ideal scenario for haven securities such as Gold or US Treasuries as asset classes, since the Fed would only raise rates at such high regularity if the real rates turn negative i.e. making them more attractive as the classic inflation hedge along the way. It does the Fed no good to raise rates unless inflation is going up even faster or at least expected to.    The Fed’s measure of inflation isn’t the CPI number, but rather the PCE. (Foot Note 1) Take a glance at the recent PCE release which is indicative of rising inflation expectations, but these March numbers are from a survey for the month of February. Since then, crude oil prices have shaved off ~10%. This weakens any case of rising inflation as input costs will only fall in the coming months. Only in April will we see the markets ‘waking up’ to actual inflation, barring a scenario wherein crude oil goes back up to $55/barrel range. Furthermore, actual production numbers (capacity utilization and industrial production) and retail sales are moving sideways, implying sluggish manufacturing and consumer activity while there is unexplained ‘exuberance’ in sentiment indicators with non-manufacturing and manufacturing PMI and consumer sentiments gauges pointing North.

In the labour market, labour force participation rate is still below 2008 levels while the U-6 measure of unemployment rate (includes involuntarily unemployed and unable to secure jobs and those involuntarily stuck in par-time jobs but want full-time jobs) remains well above pre-2008 levels.

Capture                                                                                                                           (Source: Bloomberg)

This disconnect in actual numbers (fact) versus sentiment indicators (fiction) is unfortunately being overlooked due to the continued uptrend of the financial markets. Breaking down the S&P 500 Stock Index (SPX), we will look at how cyclical sectors are performing versus defensive names. Cyclical sectors as the name suggests do well when there are expectations are of an improving economic outlook and inversely for defensive sectors.

Here too, the sector indicators concur what the sentiment indicators (viz. PMI, Consumer Sentiment Surveys et cetera) are implying and that is the fact that cyclical sectors are gaining momentum while defensive ones are weakening; Information Technology (IT) outperforming the index, Consumer Discretionary has joined the momentum, while momentum in Utilities, HealthCare and Consumer Staples is plateauing. (4-week change in relative strength ratio momentum). Carrying the highest weight in the SPX (~21%), IT is most likely to extend the SPX to higher levels as a weakening Dollar is likely to benefit companies with majority of returns from outside the US Geography. 33% of SPX Index and NASDAQ Composite companies derive their profits from outside US markets with IT being the largest (Data Source: Bloomberg). Style indicators corroborate our findings that only Large Cap (LC) growth companies as improving tremendously whilst value companies are close to lagging the index.    In summary, financial markets merely reflect sentiment which is more times than less rather detached from reality and more so now. Latest economic data from February showed the gap between fact and fiction is widening; with Existing home sales falling showing home buyers are watchful of rising mortgage rates while Core Durable goods orders (goods that do not need to be purchased frequently because they are made to last for a long time viz. three years or more) and is a leading indicator for the health of the US economy, remained stagnant implying consumer sentiment in the medium term hasn’t improved. Because capital goods take longer on average to manufacture than cyclical goods, new orders are often used to gauge the likelihood of sales and earnings increases by the companies who make them.

Worryingly, only one member of the ten member FOMC dissented to a rate hike. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis raised the all-important question which hasn’t been remotely talked about in any of the FOMC meetings yet: When will the Fed start to reduce the size of its Balance Sheet which will be akin to a rate hike in its self. Maybe it’s time we start to take a look.

Footnote 1: The Consumer Price Index (CPI) is released by the Bureau of Labor Statistics and the Personal Consumption Expenditures price index (PCE) issued by the Bureau of Economic Analysis. The CPI and PCE have two measures: headline measure and a core measure, which removes the volatile food and energy components. Over the short term, the core measure is more likely to give an accurate reading of the inflation trajectory. While the CPI is based on a survey of what households are buying; the PCE is based on surveys of what businesses are selling. The CPI only covers out-of-pocket expenditures on goods and services purchased and excludes other expenditures that are not paid for directly; for example, employer-provided insurance which PCE accounts for.

Copyright © 2017 Tanya Rawat. All rights reserved. These materials are proprietary to Tanya Rawat and may not be reproduced, modified, transmitted, transferred or distributed in any form without the prior written consent of the author Tanya Rawat.

© https://twitter.com/hedgeye/status/655205796817555456

Back to Basics: To Gold or not to Gold?

Author: Tanya Rawat 

When the Federal Reserve announced the probability of 4 rate hikes in 2016 at the Dec 2015 FOMC meeting, Gold first rallied up circa 30%  before midway erasing its gain by ~17% (peak-to-trough).  The rhetoric I feel is similar this year.

There however is a bit of a disconnect in the markets. The possibility of 3 hikes happening in 2017 is a bit rich as it was in 2016 with only ¼ materializing i.e. a 25% probability of a hike. That just implies, the Fed is seeing high momentum in inflation as  they envisaged in Dec 2015 i.e. negative real rates (nominal rates less inflation).

That is perfect for Gold bugs as the Fed will only raise rates at such high frequency if the real rates  turn negative i.e. making Gold more attractive as the classic inflation hedge along the way.

It does the Fed no good to raise rates unless inflation is going up even faster.

Once Trump comes to power and clarifies his stance, Gold buys will look more attractive. Just my 2 gms worth of thoughts. P.S. Net speculative positioning in Gold is has reached oversold levels.

© 2012-2017 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© http://www.leadershipethicsonline.com/wp-content/uploads/2012/11/goldenrulecartoon.jpg

 

Powered by WordPress.com.