We near high yet again in US equity as Treasury yields have stalled near bottoms for the time being. The S&P 500 and other Us equity markets have crashed above the resistance of the range that had formed throughout August. Europe was in the news this week as Italy was looking to swear in a new government in the following week. UK MP’s look to have avoided a “no deal” Brexit in October thank to Boris Johnson. The trade talks look to continue this month as deputy-level meetings were confirmed from both China and the US in Washington which will lead to a gain on the trade deal and more meeting in October. This helped equities rally this past week a solid 2+ percentage points.

US economic data continued to soften this week as manufacturing data came out and ISM data flowed into contraction territory for the first time in three years as it flowed into overseas economies. The US employment number came out below expectations however markets did not react too poorly to it which could be due to the priced in rate cut this foreshadowed. This week recessionary fears slowed. Rates cuts are priced in for the month and the Fed took a step back in their rate cut aggression for the rest of the year which helped the Treasury yields move slightly higher. Fed Chair Powell spoke in Swizterland on Friday and he noted that the US is not expecting a recession and they are not insuring against it with the rate cuts to come.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks +2.41%
  • Technology +1.85%
  • Financials +1.65%
  • Retail +1.94%
  • Utilities +0.22%

Overview of key markets last week (bottom chart):

  • Crude oil +3.27%
  • S&P500 +2.10%
  • Silver was -1.57%
  • Gold -1.26%
  • US dollar -0.68%

Buying surges as Fed Doves come out

Fed rate cuts are on the horizon, they’re priced in for the next few months to wrap up the year and as the time approaches for the second of many this month, in September. The Fed voters, the doves came out with radically dovish statements. The main three Fed voters that sparked a dovish narrative were: Williams, Kaplan and Kashkari.
Williams said that he and the Fed are “ready to act as appropriate” and that the previous cut in July was a step in the right direction as the economic data was starting to slip, expressing that the low inflation was the leading factor to the decision. Williams was strong on the consumer front, saying that they are the driving force of the US economy.
Kaplan, another dove said that “monetary policy a potent force”, struggled to find the good in the yield curve inversion. This is a large factor of concern for the Fed voter. Weaker companies due to trade and again stressing the impact of consumers on the US economy, should the Fed wait for consumer data to weaken it will be too late.
Kashkari, was focused on the trade worries with China. Donald Trump mentioned that companies affected by trade wars are weak companies, while Kashkari said that the trade war and the tariffs are what’s rocking a lot of business in the US. The global growth weakness and the not as strong job market is a concern to the US and the Fed among the yield curve inversion. He looks for further cuts.
After these comments, the market went from to a 125 bps cut priced in by the end of 2020. Currently, the odds are high for at least a 75 bps cut by the end of the 2019 calendar year, which leaves us with four totals months to cut. So either there are 3 cuts in 4 months or a few double cuts. To add to this, NIRP is not out of the question as traders believe that is the direction the Fed is headed by 2021. At that point, global economic turmoil will be exposed. The cuts are insurance protection against a declining economy in the US, however, the rest of the world is already at mega low rates which can’t seem to get any lower. The Fed is getting more aggressive in their rate-cutting cycle to catch up with what seems to be the rest of the major economies. This leaves us with the question of where will the stimulus come from when there are no more rates to cut? Debt issuance?
Image result for federal reserve

From the Federal Reserve.Gov website

Gold and Silver, the assets of the year?

It’s no surprise that gold and silver have been on a surge over the past few months as risk-on assets have held their ground for the most part. What does the future hold for these commodities?
Well with the upcoming rate cuts, which are pretty much priced into the market and expected at this point, more upside for gold and silver is on its way! How high can they go? Gold could near the $2000 level and silver back to the $25 mark? Silver and gold aren’t the only commodities that made ground, other metals are on the rise as well. Where would money flow in during the recession worries and rate cut cycles? METALS.
Economic growth slowed down for the past quarter? No worries, gold has been on the rise during that whole period. Trade tensions build as there is almost no ground made on a deal between the US and China. The two countries are stubbornly going at each other with their own best interests in mind with little incentive to accommodate the other. So in comes the Federal Reserve to try and ease the effects of the trade war by the overly dovish bias and a continued rate cutting cycle. Trump has no problem with this, lower rates, means a lower dollar, means an upper hand in the trade war. Off this, we can see gold break into the $2000/oz area. We are so close to $1600/oz it doesn’t even seem crazy anymore. It was back when gold was at $1200/oz. The inversion of the yield curve has helped the flood of money into the metals market. The inversion of the 2/10-year yield curve is a recessionary indicator that surely never fails. This will prompt an expansionary monetary policy and strong metals.
Gold is up nearly 20% from the start of the year and silver up 27% over the year and 12% up just in August. Silver hasn’t seen a surge like this in 3 years. Why have both commodities shown aggressive signs of strength? Due to worsening trade tensions it seems, these are risk-off assets. Money flows into metals as safe havens when the global economic condition worsens. It’s not little retail investors buying gold and silver, its big money. Central banks are huge gold buyers for the past decade, margining up on their positions. The hints that neither China or the US is back down from their interests increases the demand for the metals. Global worries don’t end there. The faltering economic data out of Europe is prompting the ECB for more stimulus in September which will help metals move even higher.
What does gold look like on a technical front? Let’s look at a weekly and daily chart on gold.
The top chart represents gold on a weekly basis and the bottom is a daily candlestick chart. We used a longer time frame on the weekly to see an overall view of when gold was last in the $1900 area. This was in 2011 and 2012. There is no surprise that the most volume traded since 2008 to now is around the $1200-$1330 mark. That’s where price ranged for years it seems. Based on the recent volume over the past year, its drastically increased on the upside as we break through $1400. We have just come into resistance based on support from 2011/12. Based on a project, the next target is $1620.

Weekly Economic Calendar

A quiet week before the storm of the much-anticipated rate cut in economic news. The jobs numbers have been released and now we wait and see what their impact is on the future of the rate cut cycles.

Monday, GDP and Manufacturing production data out of the UK.

Tuesday, New Loans data from China begins.

Wednesday, Crude oil inventories from the US.

Thursday, Main refinancing rate, monetary policy statement and the ECB press conference all out of Europe. This has the potential to move all markets. CPI data out of the US, this will be an important report as inflation is a number one factor for the Fed’s rate cuts.

Friday, the week ends on retail sales data out of the US.

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