Macro Morning – Stocks surge, Aussie and gold fall

Fiscal cliff optimism was the key driver once again as there were more signs that the two sides of American politics are getting closer to a deal. This pushed stocks sharply higher and took the safe haven bid out of the US and, strangely, the Australian dollar. Gold also was hit hard and is very close to breaking a multi year trendline.

What seems to have buoyed markets is the movement by Barrack Obama from the $250,000 lower limit up to $400,000 for tax hikes. Equally however in a meeting with his fellow Republicans House Leader John Boehner has reasserted his authority to deal with the White House. Reuters reported,

Despite concerns of a revolt by Republicans in the House, Boehner emerged from a meeting with his members unscathed and pledged to press forward on negotiations with the White House. Boehner’s concession last week to consider higher tax rates on the wealthiest Americans – an idea long fought by his party – signaled that a deal was possible ahead of a year-end deadline.

Republican Representative Darrell Issa, a key committee chairman, said House Republicans “were supportive of the speaker. … I saw no one there get up and say, ‘I can’t support the speaker.'” Boehner is the top Republican in Congress.

For all the head winds faced by the US economy at the moment this is unequivocally good news as lawmakers march toward a deal and markets are reacting in a quite rational manner by rallying.  Given all the negativity that was available this year whether it was Greece, Spain, Italy or the cliff  itself, as the fog lifts toward thin year end trade there is every chance now that markets surge into the year end close.

s&p 500 index, spx index quote - (snc) spx, s&p 500 index index price

As you can see in the S&P 500 chart above the weekly technicals suggest that a move back to this year’s highs at 1480 is now possible. This is also possible given the recent stability of price as the S&P has been dancing on the spot for a long time now building momentum for a break – which appears to be higher.

There was no significant data released overnight except for UK inflation which was unchanged on the month from last month’s 0.6% rise. Year on year inflation rates sits at 3%.

At the close Europe was strong on the back of the US Fiscal lead with the FTSE up 0.4%, the DAX up 0.64% and the CAC rose 0.29%. Milanese stocks were up 0.94% while in Madrid they rose 1.60%. Worth noting is that Greece was upgraded from selective default by S&P overnight.

In the US with 23 minutes before the close the NASDAQ is leading the charge higher up 1.31%, the Dow is up 0.68% and the S&P 500 is up 0.88% to 1444.

The Australian dollar fell overnight even as the US dollar fell and risk markets rallied. This is very different to what you would usually expect to see from the Australian dollar which is rightly still viewed as a global risk proxy but it could be we are seeing a rotation in risk. By that I would highlight that last night gold tanked and copper was lower by 0.49%.

I have characterized the Aussie dollar as a safe harbour in a storm as opposed to a safe haven so although some might argue the AUD fall with the US dollar could suggest it really is now a safe haven equally it could simply be that my hypothesis that if the sun comes out money will flow out of Australia is equally true.

Also we know the market is very long the AUD, or at least the futures traders we use as proxies are with an all time high net long position, so that is also a big headwind.

Gold is the big mover last night down 1.55% to $1670 oz. It is now resting on very important long term trendline support. My personal and long term view is that I believe Gold is likely to tank in the next 6 months losing many hundreds of dollars an ounce but it has to break the trendline first.

Elsewhere Crude was up another 0.99% to $88.09 and headed toward $90 Bbl as we highlighted yesterday.

Lets have a look at some Meta 4 charts from my  AVATrade platform.

EUR/USD: The weekly chart below shows the scale of the potential rally. This set up is one of my favourites to trade and the target would be the 138.2% level which comes in at 1.3587 but with a stop at the 200 day moving average on the way – this level is 1.3518.

eur, eurusd, euro, euro (eur) price quote

AUD/USD:

The  Aussie is still in an overall uptrend from the 1.0150 low of a few months back but is stalling its momentum. Support is the old trendline that it broke up through at 1.0515:

aud, audusd, australian dollar, australian dollar price quote

Data

Westpac leading Index in Australia today and then Japanese trade data and coincident and leading indices. German IFO is the key in Europe tonight and then housing starts and building permits in the US.

Twitter: Greg McKenna

Here is how things [email protected] 7.44 this morning

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Comments

  1. Specifically why do you think this?

    “My personal and long term view is that I believe Gold is likely to tank in the next 6 months losing many hundreds of dollars an ounce but it has to break the trendline first.”

    • Deus Forex Machina

      Technical outlook over the very long term – the charts look to me to suggest a big move lower once the trendline breaks – but this pattern could take a while.

      Also I think that we are in a deflationary global environment and the relevance of the gold trade is reducing on this count and as the crisis in the EU recedes.

      Of course if the US dollar weakens then it might be hard for gold to fall materially which is why I am relying on a trend change and line break in the technicals as my signal to enter short.

      Cheers

      Greg

      • The crisis in the EU is receding – according to who ?

        Last time I looked their gooses were just as cooked as ever, nothing has changed for the better.

        Deflation – is that why they are printing like mad now in the US, UK, Europe, Japan etc, etc…..

        There is a global re-flation effort now being undertaken in an attempt to print our way out of the global slump. You have heard of the ongoing currency wars – yes, history tells us that it is stupidity and that it will eventually end in tears for most of us as currencies are debased.

        You know it is madness, you know that it cannot possibly work for the good of all and yet you are calling for gold and its relevance in the face of such interference to tank ?

        I will take your interpretation with a bucket of salt.

        • “There is a global re-flation effort now being undertaken in an attempt to print our way out of the global slump.”

          It’s been made pretty clear recently that they will reflate the system or destroy it trying. I wouldn’t trade against their efforts.

          If they fail (to reflate) then yes Gold could get hit hard (initially), but it would probably be the last asset/currency standing…

        • Deus Forex Machina

          Thanks for your valuable input Bob

          Have you noticed the reflation effort isn’t working – it is very hard to have upward price pressure when you lack aggregate demand to cause inflation which is where the world is.

          Equally the view is a trading view and I’ll get short when the signals, if the signals come. That is why I specifically noted it was a personal view because their is a difference between rhetoric and trading.

          As for the relevance of gold in the situation you talk about do me a favour – get an ounce of gold and go down to the shop and buy a litre of milk – then you see about relevance.

          The Apocalyptic version of events you are looking for suggests to me you be better to build a bunker, buy some bottled water and tins or baked beans and arm your self. Unnless you do then someone is just going to take your gold off you anyway.

          Cheers

          Greg

          • I can respect a chartist forming his view and taking his positions based on what the chart is doing, but the Gold bull market has been eating traders for breakfast. Fake outs are common, in fact we saw one last night as it tripped stops/opened shorts under $1670, dropped $10 and bounced back. Maybe the correction isn’t over yet, but we saw the same earlier this year with many traders saying the multi-year trend line was broken, the problem is each interprets the chart differently & when found wrong they just move the goal post (redraw the trend line).

            What price would Gold have to drop to before you open your short positions/consider the trend line broken?

            Re the rest of your post… I doubt we will see physical Gold return as a day to day currency in the physical sense given modern advances in technology, but that doesn’t mean it won’t play a role in a new monetary system.

            The boring rhetoric that those holding Gold are waiting for an apocalyptic world where civilisation breaks down gets tiring. There are greater minds than ours advocating or expecting a return to Gold playing a role in a new monetary system down the track:

            http://www.marketwatch.com/story/world-bank-chief-calls-for-new-gold-standard-2010-11-07

            http://www.forbes.com/sites/steveforbes/2012/09/05/gold-standard-is-coming/

          • Deus Forex Machina

            High BB

            I don’t think there is anything wrong with either buying or selling gold. And I strongly believe that is has a place in a well balanced asset portfolio but unless the entire financial system shrinks by many multiples then I can’t see how with this many people on the planet and this much nominal dollar value of assets and trade that gold can ever play a relevant role in the world again.

            Fiat money is all about confidence and it is always possible that the world loses confidence in the system but I dont think it’s going to be a gold dominated world although I will grant you that as a store of value under such a scenario.

            You are right about the rhetoric about the gold holder – I agree with you on that but I was referring not to the general but to the particular tone of the point I was answering. As long as you know why you hold gold, where you’d get out (if at all), where you’d get back in then happy days.

            In terms of the level – right here and now I would sell a break of 1635 which gives a little tolerance below my trendline. With regard to the head fake earlier this year that is how trend trading goes – interestingly though I’d argue that gold never got back above the trendline which I hadn’t noticed till just now – chart link below…so that kind of reinforces the strength of the down move if it occurs.

            http://globalfx.com.au/wp-content/uploads/2012/12/gold-gold-price-quote-lt.gif

            Cheers

            Greg

          • Hi DFM

            The reflation effort is only just really getting underway. As I pointed out central banks appear to be working in unison instead of isolation. Let’s give it a bit more time shall we before we attempt a call. We have a long way to go yet. We all know that in the end politicians and central bankers would prefer to inflate than die.

            There is absolutely nothing apocalyptic about the scenario now unfolding, life will still go on after all is said and done, we will be a tad smarter by then as we will have learnt some very valuable lessons. Your response re: bunkers and bottled water is completely over the top. They are not the version of events that I believe will unfold. What I do expect is that once the general populace wakes up to what is happening it will be too late to seek any refuge in alternate wealth preservation hedges.

            Dis-owning physical gold bullion in your possession now, when the future is so uncertain, is in my honest opinion not a smart move, it borders on plain dumb.

            And as Bullion Baron so rightly points out those calling for Gold’s demise have been humbled more than once in the last 10 years.

            Apocalypse – next you will be telling me that I can’t eat gold, you have already hinted that I won’t be able to drink it.

          • “but unless the entire financial system shrinks by many multiples then I can’t see how with this many people on the planet and this much nominal dollar value of assets and trade that gold can ever play a relevant role in the world again.”

            I agree in principal with this, although as opposed to the financial system shrinking we could see Gold increase multiple times higher to cater for the role.

          • Deus Forex Machina

            Hey Bob – sorry for being feisty earlier, wrong side of the bed

            You are right on the reflation effort they are getting serious – or at least more serious now…

            I reckon there is probably 7-8 crises of the sort that is the GFC since the first one in sienna in in the 13th century and what normally happens is that aggretate demand collapse and we get deflation and then sometime in the 5-25 year period then inflation comes back. But that was from super low inflation to low inflation.

            So I don’t discount the the end game as being inflation or that gold can go to $3000 possibly after it’s falls first or goes nowhere for a very long time.

            As for eating the yello stuff I would never tell you you cant do that – some poncy chef served it up on some chocolate once so I know you can 🙂

            Cheers

            Greg

          • DFM – Thanks for the replies.

            Interesting times ahead that cannot be ignored. One must be prepared.

            Cheers

          • You sure can drink it* but it may give you a headache afterwards…

            * – in very small amounts

            https://en.wikipedia.org/wiki/Goldschl%C3%A4ger

            Goldschläger is a Swiss cinnamon schnapps (43.5% alcohol by volume or 87 proof; originally it was 53.5% alcohol or 107 proof),[1] a liqueur with very thin, yet visible flakes of gold leaf floating in it. The actual amount of gold has been measured at approximately 13 mg in a 1 Litre bottle of Goldschläger.[2] As of November 2012 this amounts to €0.56 EUR or lower on the international gold market.[3]

        • What if Kyle Bass (recent video linked to) and Hugh Hendry (same – see The Economist interview on youtube) are right? And a sovereign debt restructuring (default) en mass is just around the corner (2 years) led by Japan, Peripheries, France and China and US (I said en mass).

          If the debt load is written down, what does this do for the correlation with gold?

          • I like those guys, can you send through the links for their talks?

            As to the debt restructure, if sovereign debt gets restructured, I assume either bondholders take a haircut (loss of confidence in sovereign debt) or govt borrows the money (from itself) to give to bondholders (loss of confidence in a currency). So a bondholder would either lose outright or all holders of a currency would lose by printing.

            That could be gold negative, in that no one would want to lend to govt, so interest rates would have to rise to attract people to lend. Problem is there is so much debt, that rising interest rates are not serviceable and risk of sovereign default arises, which then becomes gold positive.

  2. If the European crisis is over, you’d better tell the Spanish, French and Italians.

    When on hols I tend to spend a lot of time in bars 😉 after the sun goes down.

    I went to working class bars all the way up to bars attached to 5* hotels and resorts. The unanimous impression I got was this is the tip of the iceberg and its going to get ugly.

    Whats simmering below the surface is not pretty. Italy will be the canary in the coalmine and the outlook from professional types I shared the odd apertif with was gloomy.

    • Deus Forex Machina

      Yeah – I bet you do 🙂

      I should have mentioned this above – apologies to everyone who raised it but i forgot.

      The key is not that Europe is fixed it is that the market is moving on for the moment which sets the scene for a potential break down in gold. It’s similar to the call I made last january when I wrote that even though the economy was crap that stocks would be higher this year.

      Just a trade – economically Europe is screwed unfortunately and I marvel at how Spain and Greece function as a Society given youth unemployment but the market for whatever reason has European crisis fatigue and is moving on for the moment.

      Cheers V

      Greg

      • Spain and Greece function as a Society given youth unemployment. Its not functioning well at all.

        When I crossed into Spain I got my tyres punctured with a stilleto at a gas station. Mercs have run flats. 20k down the Autopista two flat tyres and some young men stop to ‘help’ me. On seeing my height and build holding a tyre lever, they scarper. Cops pull over and told me (laughing) its an industry and the technique is fine tuned.

        EVERYDAY I saw bag snatches, phone and tablet snatches (off cafe tables) and other thefts.

        EVERY wall (and I mean EVERY wall) is endless graffiti, it used to street art, now its just frustrated protest vandalism with less than 20% being art. Spain and Greece is surviving on fumes and memories.

        Because the jails are full and the govt no money, cops tell me theft under 300Euros is a misdemeanor.

        50% youth unemployment and little hope.

      • I forgot to add, the Spanish provincial highway type police are nice fellas. The widespread belief and acceptance is that city police are para-military and are there to keep the population controlled. They don’t wear ID and you can be arrested for photographing them. They won’t chase a thief but they’ll club the shit out of you for anything that resembles dissent against the status quo.
        http://www.thejournal.ie/video-spanish-police-brutality-austerity-strikes-676816-Nov2012/

        An Italian lawyer told me that many Athens police are switching allegiances to Golden Dawn (neo Nazi).
        http://www.guardian.co.uk/world/2012/oct/26/golden-dawn-infiltrated-greek-police-claims

  3. Hey DFM,

    Good can of worms opened here. Whatever your opinion of Martin Armstrong, I like his thesis on gold which can essentially be boiled down to : the driver of a higher gold price will be outflows from the sovereign bond markets.

    I think it’s important to remember that gold is a small market, we don’t need to have a techstockesque frenzy to drive price higher, only sensible allocations by more people and funds. IE 10-15%.

    If one where to say that the crisis is in the bond markets, then surely sooner or later we will start seeing money flowing out of the sector and portfolios being rebalanced. What asset would you pick to replace the bond portion of a portfolio? I wouldn’t bolster cash, because I’m not sure I like the banks that much.

    Bron Sucheki of the Perth mint did an interview recently that was interesting, he contends that larger institutional players are only just starting to enter the space.

    Regards,

  4. OK… After reading all of this I’m still going long and hard on gold. It’s a hedge against nearly all of my concerns.