Theresa May has announced that she will be stepping down as British PM on June 7th 2019. Britain will have a new PM by the end of July, as the Tories will have a contest to select the new PM. Many have said they would enter, but Boris Johnson remains the favourite.
In an emotional speech, PM May said she tried her best to deliver a Brexit deal and it was a “deep regret” that she could not do so.
Readers of my blog know my opinions on Brexit. We have seen democratic votes ignored four times in Europe alone these past five years. Brexit can very well be the fifth, when a new referendum is announced. There is too much at stake. The city of London being a financial centre, and the fact that British EU Parliament members in Brussels will also lose their jobs. The Germans would like to see Britain remain, because if Europe requires some sort of bailout…the German taxpayer will not be able to do it alone…the British taxpayer would be welcomed to help out.
Finally, there is too much at stake for financial markets around the world. I believe these markets will be supported by central banks and politicians, and avoiding some sort of Brexit is what markets would like to hear.
On the US-China trade war front, the Chinese have told their people to prepare for a long trade war (and not buy or use American products). Meanwhile, President Trump keeps saying the trade war is going great, and will be easy to win. It seems that President Trump (or Donald Pump) tried to buoy the markets a bit on Friday with a tweet reassuring talks are going good…doesn’t seem like the market really cares anymore. This goes back to what I was writing a few months earlier. That sooner or later these tweets will not work anymore, traders and investors will want to see hand shaking/pen to paper type deals.
Here in Vancouver, I attended the Metals Investor Forum, and Eric Coffin from Hard Rock Advisors had this to say about this trade deal: China still has not slapped a tariff on Apple products. If Americans had to pay 25% more for Apple products, it would hurt Apple a lot, and the already hurting US Consumer. Essentially, China has not yet even begun using her financial weapons.
There was talk that China may cut off their rare earth metals to the US. This is big since the Chinese control about 70-80% of the rare earth metals supply which is used for technology and electronics. Although, investors (speculators) in the junior mining space would probably welcome this.
The FOMC Minutes on Wednesday said that the Fed will be ‘patient’ due to transitory inflation weakness. There will likely be no more rate hikes this year, and some are saying that the rate cut may happen later than many expect. The Bond market is showing that the market expects at least one rate cut this year. This is where many people cannot come to a consensus: if cuts will happen in September, December, or maybe sooner.
Again, this really depends on your belief on what the Fed Mandate is. Is it really about maximizing employment and handling inflation…or has it now morphed to keeping asset prices elevated. If you believe the latter, a rate cut may come sooner than expected if markets take a drastic fall.
Before we look at major economic events, just a reminder that US Markets will be closed on Monday for Memorial Day.
- Monday: US Memorial Day, Kuroda Speech.
- Tuesday: GBP Inflation Hearings.
- Wednesday: Kuroda Speech, Orr Speech, BoC CAD Interest Rate Decision.
- Thursday: Tokyo CPI ex Fresh Food (May).
- Friday: CAD GDP Q1 Annualized.
So the past week was a rough week. A lot of fake outs and just choppy action. We saw a lot of moves finally on Thursday and Friday. I just want to stress discipline and having a criteria and strategy for trading. Stick to this. It was a good lesson to take away from last week.
Equities maintain the same set up from last week:
The S&P and the Nasdaq have rejected the flip zone as discussed in last weeks post and video. I am watching the daily chart for sure. Look at the head and shoulders pattern. We need to see the break of the neckline to confirm the first lower high swings for these charts.
If you do a fibonacci on the weekly chart, you will see that the 38.2 fib level comes around the 2720 zone. Many will be targeting this zone for profits, and perhaps even a bounce from here. Watch to see what happens on the economic and geopolitical front when equities move lower.
Again, all eyes for me will be on the Fed, and if they actually decide to cut rates to buoy the markets…or if President Trump will be forced to make a US-China trade deal. We will definitely hear President Trump calling for more rate cuts as this continues, as it will be a way to prop markets higher instead of having to go to the trade table.
Remember, President Trump’s Achilles Heel is the US stock market. For his re-election, he will run with “Keeping America Great” so the stock market will need to be higher. He will win the next election barring some sort of economic issue, or lower stock markets. If the markets keep falling, President Trump will be forced to the table and the Chinese will be the one to dictate terms of the trade deal.
Remember, China does not have a democracy, nor elections. President Xi does not need to worry about re-election. Also, government is large there, and the state monitors everything. They can easily quash any sort of uprising if need be.
There are many other interesting equity charts. We are awaiting a confirmation of the lower high. Take a look:
Before we look at the plethora of set ups for this week, let’s discuss Gold.
A lot of people are looking at this Daily chart trendline. We managed to bounce above it on Thursday, but it is worrying because if we do get a daily close below this, then there is a chance Gold will fall lower…setting up a larger bounce later on perhaps once the Federal Reserve cuts interest rates.
Trendlines can be subjective. Some people connect the bodies, others connect the wicks. This is why I stick with market waves, looking for lower highs and lower lows. You can see that if we do break and close below 1270, that would be a strong sign that we are going lower.
A lot of discussion over Gold lately. I have given my opinions on who I really think are shorting Gold paper contracts, while buying physical.
Jim Rickards talks about the “Axis of Gold” (Russia, China, Iran, Turkey, India). Since none of these nations want to hold the Russian Ruble, Chinese Yuan, Turkish Lira, Iranian Rial, or Indian Rupee, they will use Gold to settle balance of payments. China opened their Shanghai Oil futures market last year, where China will buy oil for Yuan. Since most oil exporters do not really want to hold the Yuan, the Yuan is convertible to Gold. The nation can then take the Gold and convert it back to their currency if they want. Notice how the US Dollar is not used. This is how certain nations will push for de-dollarization, which will hit demand for the US Dollar. Oil exporters, like Saudi Arabia, may even want to drop the US Dollar because they do not want to lose their customers and market share to Iran…this is what the Iran tensions are all about. The Saudi’s have said to deal with this issue if you want us to continue to Petro Dollar system.
So when I see certain central banks stock pile Gold, it is for this reason in my opinion. A way to break from the US Dollar payment system.
Many look at Gold through the lens of an inflation hedge…meaning once the Fed cuts rates, real rates will be negative therefore Gold will go higher. So if we do see Gold break down from here and move towards the 1240 zone or lower, we would wait for the Fed to cut rates before moving higher.
I look at Gold more as a confidence hedge. Gold goes up when people are losing confidence in the government, central banks and money…these periods happen to coincide with large inflation in history.
Therefore, I can see a period where BOTH Gold and the US Dollar do move together.
So will Gold maintain this zone? Or have we just seen a bull trap?
I am looking at Gold on the 4 hour chart, and I expect one more wave higher. Quite the tease 4 hour close on Friday. We did not make a confirmed higher low, because price did not make a higher high, we closed just below the 1284 area. A tease. Again, if this fails, then we could be seeing a bull trap.
Also read these articles. I have spoken about Classical Economics vs Mercantile (today known as Keynesian) Economics. Throughout History, we do alternate in cycles. As empires and civilizations thrive, we generally follow classical economics. Then, a switch is made to mercantile for various reasons (government getting larger, decadence etc), and we see a downfall in these empires and civilizations. These cycles repeat themselves and I can see this occurring, as a new monetary system is required. Nations are preparing for this, so I think you should take note. It is also a way for de-dollarization, which has more geopolitical ramifications but it will affect you nonetheless.
The DXY is one many have their eyes on. A double top pattern with also a fake out wick candle. On the daily, as long as we hold 97.30, we are still in an uptrend. This means it is possible to have a move lower. I would be watching the aforementioned zone though.
USDCHF has confirmed a first lower high in this new trend. The Swiss Franc futures also looks good, as it is made a higher low. I would be looking to take profits at the 0.99 zone.
Finally have some interest on the Cable, GBPUSD. I like the head and shoulders pattern seen on the 2 hour chart. I have a line at 1.2750 because on the 4 hour chart, it is a zone of significance, could be the neckline for an inverse head and shoulders pattern on the 4 hour chart.
If you zoom out on EURGBP, you can see we are testing a resistance zone. I am awaiting some sort of topping pattern here before breaking below the swing at 0.8790-80. Looking good, as we had a fake out candle immediately followed by a red engulfing candle.
Not much has to be said about AUDUSD. Seems to be bottoming here with a triple bottom and also a confirmed higher low. I am waiting to see a close above 0.6940. Ideally, maybe see a pullback before breaking out, that way we sort of have an inverse head and shoulders pattern.
The Kiwi is what we want to see for AUDUSD. You can see a bit of a head and shoulders although not the cleanest. We also have a higher low swing, which closed above the previous lower high swing, indicating a reversal is likely in the cards.
I like the EURNZD here on the 2 hour chart. You can see that we have made our first lower high in a new trend. The close below the 1.7120 zone was important. So this would be mid trend play perhaps, but there is still plenty of room to the downside with a good risk reward ratio in my opinion.
I like GBPCAD here on the 4 hour chart. Not the best looking inverse head and shoulders pattern, but we can see a left shoulder and a right shoulder pattern occurring. Remember, this is really about seeing a transition from lower highs, to higher lows. We are at the cusp of that being confirmed.
Speaking about inverse head and shoulders…as well as Friday candle close teases, AUDCAD has a nice inverse head and shoulders with a Friday close above the neckline. Personally, it is not the strongest candle close, so I will await to see the next candle.