Weather-induced Inflation?

Dear readers,

I visited a vineyard of a local monastery this week and noticed the grapes are still green due to a cold, late spring.  They should be ripening by Labor Day.   No so in Burgundy.

ZeroHedge reports, “Vintners in France haven’t seen such a succession of hot weather and dry harvest since the 14th century, during a time called “the Black Death”, according to Bloomberg. Has a nice ring to it, doesn’t it?

Though these weather extremes may seem normal to those under the age of 30, they are unprecedented by historical standards, going all the way back to when Europe was recovering from the pandemic that trounced its population. This is the conclusion of researchers who examined temperature, grape harvest and wage data dating back to 1354.”

So it’s not just the corn and soybean crops in the U.S. that are being affected by the weather, it appears to be a global problem from drought in South America to heat in Europe and cold, wet weather in the United States and Canada.  This may introduce a type of inflation (cost-push) that the Fed may have no control over.

Is it time to stock up the larder?

VIX tested Long-term support at 16.80, closing above it. This has provided a confirmed buy signal.

(Barrons) All hail VIX $20 calls.

With the near-term outlook for the S&P 500 index clouded by the risk of presidential tweets, potential interest-rate cuts, and other factors that could whipsaw equity prices, it’s no wonder this call option has become increasingly popular with investors.

SPX rally stopped at Sort-term resistance.

SPX rallied to Short-term resistance at 2946.62, but could not surpass it.  SPX remains on a provisional sell signal, awaiting a close beneath Intermediate-term support at 2911.25 for confirmation.  “Point 6” remains beneath the December 26 low.

(CNBC)  Stocks could be in for a rough second half.

While the major averages are stuck in consolidation mode, spending much of August swinging back and forth on trade and Federal Reservedevelopments, the sideways action is likely to end soon, says widely followed Wall Street strategist Sven Henrich.

Anything can change at any moment,” Henrich, founder and lead market strategist of NorthmanTrader, told CNBC’s “Trading Nation” on Tuesday.

NDX rally also rejected at Short-term resistance.

 

NDX rallied this week, but was rejected at Short-term resistance at 7740.66.  From the July 26 peak, there were 6 days of decline followed by 18 days of retracement.  NDX was stopped very near the 61.8% Fibonacci retracement level.

(Bloomberg)  Wall Street was a very conservative place politically when I started working in the capital markets in 1999, but it seems to have lurched to the left lately. It’s not only that many of the people who work there have become more liberal, but more importantly, left-leaning behavior by publicly traded companies is being rewarded by the stock market.

The decision by the Business Roundtable, which is an organization led by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, to explicitly state that the purpose of a publicly traded company is social responsibility and not creating value for shareholders is just the latest example of this lurch to the left.

High Yield Bond Index bounces off mid-Cycle support.

The High Yield Bond Index bounced off mid-Cycle support at 198.31, but stopped short of its Long-term resistance at 204.77. It remains on a sell signal. The Cycles Model warns the next step down may be a large one.

(Bloomberg) Junk-bond investors are pilling onto the safest rung of the U.S. corporate high-yield market, pushing yields to their lowest level in almost two years.

The average yield on BB rated notes fell to 4.05% Monday, the lowest since October 2017. Growing concerns about a shift in the credit cycle are driving traders toward lower-risk securities, according to Lale Topcuoglu, senior fund manager and head of credit at J O Hambro Capital Management.

“Investors are sort of hiding out in these BBs,” Topcuoglu said. “They’re still earning something, but not necessarily taking the biggest credit risk by being in the CCCs.”

Treasuries consolidate.

The 10-year Treasury Note Index rallied to a high (131.83) not seen since September 2016, where it consolidated. The Cycles Model suggests the rally may continue through options week. It appears that the bullish impulse is so strong that investors are buying call options to boost returns.

(Bloomberg) It’s a subject that just won’t go away: Should the U.S. Treasury issue 100-year bonds?

With yields on 30-year U.S. bonds below 2% and much of the yield curve inverted, the conditions for issuing such debt couldn’t be more favorable. So it’s no surprise that Treasury Secretary Steven Mnuchin is once again talking up the possibility. In an interview Wednesday, he said issuing ultra-long U.S. bonds is “under very serious consideration.”

But what about the buyers?

The Euro tests the Neckline.

The Euro declined to test the Head & Shoulders neckline at 109.60 on Friday.  It remains on a sell signal that may get further confirmation as it crosses beneath the neckline.  The Cycles Model suggests a period of weakness stretching through the end of October.

(Reuters) – The euro fell below $1.10 on Friday to its weakest since May 2017 as a multi-day downward shift in the single currency intensified in afternoon trade.

Traders had varied explanations for the drop, including that month-end rebalancing of portfolios heightened an existing bias. The longer-term trend, which has seen the euro fall 0.90% in August, has been driven by an economic slowdown in Europe among other factors.

“We had a quick 50-odd point drop, which seems to be month-end related. Clearly the euro has been quite soft for some time. We touched below $1.10 earlier in August and we’ve struggled really to rebound from that point. The underlying softness that we’ve seen persist in the past month seems very much intact,” said Shaun Osborne, chief foreign exchange strategist at Scotia Capital.

EuroStoxx rally hits Intermediate-term resistance.

Note:  StockCharts.com is not displaying the Euro Stoxx 50 Index at this time.

The EuroStoxx 50 SPDR rallied from Long-term support at 35.69 only to be stopped by Intermediate-term resistance at 37.06.  It remains on a sell signal.  The Cycles Model suggests a probable 2-3 week decline may lie ahead.

(CNBC) European stocks closed higher on Friday after China struck an accommodating tone over its trade war with the U.S., while British opposition lawmakers plan to trigger an emergency debate to prevent a no-deal Brexit.

The pan-European Stoxx 600 ended the session 0.6% higher, with almost every sector in positive territory and China-exposed basic resources stocks jumping 2.5%.

However, Friday’s rally marked the end of a volatile month for European stocks. Britain’s FTSE 100 index, which was up 0.3% at the closing bell, was down 5.3% in August in its worst monthly fall since August 2015.

The Yen consolidates under Cycle Top resistance.

The Yen declined to test Short-term support at 93.49 on Thursday before consolidating beneath the Cycle Top at 94.15.  A breakout appears to be due that may propel the Yen to the upper Broadening trendline.

(JapanToday)  Japanese Finance Minister Taro Aso said on Tuesday he was monitoring currency moves “with a sense of urgency” after a recent spike in the yen, using a phrase suggesting policymakers’ concern about excessive volatility.

While declining to comment on specific foreign exchange levels, Aso underscored the importance of stability in the Japanese currency, which tends to be perceived as a safe-haven asset attracting demand when global markets are volatile.

Japanese policymakers tend to try to talk down the yen to prevent it from strengthening, which can undermine export competitiveness and hurt Japan’s export-reliant economy.

“Currency stability is important. We must closely watch the currency market moves with a sense of urgency,” Aso said.

Nikkei bounces off the “Lip”.

The Nikkei Index bounced a second time off the Lip of the Cup with Handle formation at 20150.00.  It appears due for a reversal that may take it well beneath that formation in the next few weeks.

(Investing.com) – Japan stocks were higher after the close on Friday, as gains in the Paper & PulpRailway & Bus and Real Estate sectors led shares higher.

At the close in Tokyo, the Nikkei 225 added 1.19%.

The best performers of the session on the Nikkei 225 were DIC Corp (T:4631), which rose 7.59% or 198.0 points to trade at 2808.0 at the close. Meanwhile, Olympus Corp.(T:7733) added 6.78% or 79.0 points to end at 1244.0 and The Japan Steel Works, Ltd. (T:5631) was up 5.99% or 107.0 points to 1893.0 in late trade.

The worst performers of the session were Tokyo Dome Corp. (T:9681), which fell 2.18% or 23.0 points to trade at 1033.0 at the close. Familymart Ltd (T:8028) declined 1.33% or 33.0 points to end at 2450.0 and Suzuki Motor Corp. (T:7269) was down 1.21% or 50.0 points to 4098.0.

U.S. Dollar extends its rally.

USD may be rising for a retest of Cycle Top resistance at 99.41 and trendline near 100.00.  It appears to have 3-4 weeks to achieve its objective.  Round number resistance appears to be attractive to the USD.

(Reuters) – The strength of the U.S. dollar has long been a thorn in President Donald Trump’s side. That has put the almost unthinkable scenario of currency intervention up for debate in global foreign exchange circles.

Forcibly halting the U.S. dollar’s strength would be a drastic step, not deployed in more than three decades.

The last big concerted effort to weaken the dollar was after the Plaza Accord in 1985 when five of the largest industrialized countries agreed to act to bring down the value of the dollar.

Most recent FX interventions by policymakers in developed economies have been to address currencies getting out of whack from historical exchange rates or to counter disorderly markets.

Gold is rejected at the trendline.

Gold probed to a new high at 1565.00 on Monday, then eased back from the upper trendline of the Broadening Wedge.  This is a very extended high (both time and price) and is due for a correction.  A breakdown beneath Short-term support at 14628.32 may offer a sell signal.

(Kitco News) – Precious metal investors are turning their attention to the U.S. economic outlook next week as Federal Reserve Chair Jerome Powell is likely to give his final clue before the central bank’s September monetary policy meeting.

Gold prices have lost all their weekly gains after hitting fresh 6.5-year highs on Tuesday as risk-on sentiment climbed on signs that the U.S.-China trade tensions were calming down in the near term. December Comex gold futures were down 0.3% on a weekly basis, last trading at $1,532.60.

Crude consolidates beneath resistance.

Crude made a wide-ranging consolidation this week, but closed beneath Long-term resistance at 56.05.  The Cycles Model suggests the Broadening Wedge formation may be triggered in the next week.  It remains on a confirmed sell signal.

(OilPrice) Oil futures settled sharply lower Friday, contributing to a loss for the month, after reports emerged that Russian Energy Minister Alexander Novak said Russia’s oil output cuts in August will be slightly smaller those agreed to under the deal between OPEC and non-OPEC producers.

Novak said the countries under the deal will discuss the agreement and the market situation at the Monitoring Committee meeting on Sept. 12, Reuters reported, citing RIA and Interfax news agencies. The reports quoted Novak as saying Moscow still aims to fully comply with the deal.

But the report shook confidence. Now with Russia “faltering,” it’s possible the output-cut deal between the Organization of the Petroleum Exporting Countries and non-OPEC member Russia “may not be taken for granted,” said Phil Flynn, senior market analyst at Price Futures Group. “Still, Russia has over-complied last month.”

Agriculture Prices reach the weekly Cycle Bottom.

The Bloomberg Agricultural Subindex may have hit its Master Cycle low at 37.02 on Wednesday at the Cycle Bottom support.  A reversal here may signal a change in trend.  A rally above Intermediate-term resistance at 39.47 offers a potential buy signal.

(Bloomberg)  Crazy weather that disrupted U.S. Midwest plantings is adding to farmer stress, with growers ranking 2019 as their hardest year ever.

A survey conducted by Farm Futures showed that 53% of respondents said 2019 is the most difficult year they’ve faced as farmers — that includes 49% of baby boomers and mature growers, who lived through the 1980s farm crisis, according to the poll of 711 growers carried out from July 21 to Aug. 3. Results of the survey are being released at the Farm Progress Show in Decatur, Illinois, Wednesday.

Shanghai Index bounces off Long-term support.

The Shanghai Index gained traction off Long-term Support at 2839.04 only to be stymied at Intermediate-term resistance at 2901.43.  The Cycles Model suggests three weeks of decline to the next major pivot point, which may be near the Cycle Bottom support at 2464.08.

(ZeroHedge) One could see it coming from a mile away, but still the breakout in Chinese pork prices as a result of the country’s “pig ebola” outbreak and the ongoing trade war with the US, is a sight to behold.

As the chart below shows, pork prices in China have soared to record highs in the past two weeks, adding pressure on a government trying to contain food-price inflation during the trade war with the U.S., even as the country’s Producer Price index posted its first negative print in 3 years, putting China in a bind: contain soaring food inflation, or stimulate the economy and risk an angry public backlash (something we discussed extensively two weeks ago).

Prices of China’s favorite protein – used in dishes such as lunchtime dumplings and spicy mapo tofu — have surged 18% in China in just two weeks, since the week ended Aug. 9 and are up more than 50% in the past year. The average price of pork, excluding offal, in the week ended Aug. 23 was 31.77 yuan a kilogram ($2.02 a pound), according to data from China’s Ministry of Commerce.

The Banking Index bounces at Cycle Bottom support.

— BKX bounced at the Cycle Bottom support, but only made a weak 34% retracement.  It appears to be due for a resumption of the decline that may take it beneath the 8.3-year trendline.  The Cycles Model suggests a loss of liquidity over the next 2-3 weeks that may surprise investors.

(CNBC) Stock pickers are heavily invested in bank stocks, and it hasn’t been working out well for them.

Mutual funds are most overweight in financials across all sectors, according to a Goldman Sachs analysis of 597 equity mutual funds with $2.6 trillion of asset under management, based on their positions by the end of the second quarter. They were long consumer discretionary the most in the first quarter, the report said. The fund managers’ positions on mutual funds may have changed during the third quarter.

“The decline in interest rates has also been a drag on relative fund performance because managers are overweight Financials … the largest overweight across all sectors,” Arjun Menon, U.S. portfolio strategist at Goldman, said in a note.

Interest rates plunged this month with Treasury yields dipping below historic levels as investors rushed to the safety of government bonds amid the escalated trade war. Bank stocks took a big hit this month on profit worries as the spread between the rate banks collect from borrowers and the rate they have to pay out to savers shrinks.

(Bloomberg) As the likelihood of Britain crashing out of the European Union without a trading agreement rises, Citigroup Inc. estimates that such an event could cut domestic banks’ earnings by as much as 25%.

A “no-deal exit” would curtail the revenue of high street lenders as economic growth slows and interest rates remain depressed, analysts including Andrew Coombs wrote in a note to clients Friday.

That said, it wouldn’t necessarily lead to downside for the share prices of banks’ focused on their home economy.

“What is different to June 2016 is that implied equity risk premiums are already at elevated levels, so one could argue this risk is already captured in existing U.K. domestic bank valuations,” they wrote.

(ZeroHedge) Based on preliminary data, global credit impulse – the second derivative of global credit growth and a major driver of economic activity – is giving signs of life. It is still in contraction, at minus 3.8% of GDP, but slowly moving upwards. Currently, more than half of the countries in our sample, representing 69.4% of global GDP, have experienced an acceleration in credit impulse over the past quarter.

The improvement in global credit impulse is mostly due to slightly better China credit impulse and strong credit push in the United States.

All the best!

Tony

 Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index. 

 

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