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View from Toronto: Plays on Global Markets Ahead of Powell Wednesday

09/25/2018 3:50 pm EST

Focus: MARKETS

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

Either way we slice it, it likely boils down to a statement from Powell that suggests growth risks are here. The question we’ll need answered: will a weaker USD and lower yields be enough to keep interest in Emerging Markets (EEM) and Int, Developed Markets (EFA) going.

View my Market Strategy Session for this week here.

video

Recorded: Sept. 21, 2018.
Duration: 1:39:55.

Commodity-Market set-up into the FOMC statement
Dr. Copper (CPER) and related equities took-off into the end of last week, tied to the out-performance we’ve seen from Emerging Markets (EEM). However, Copper did close into resistance of $2.84 forcing us out of longs; a break above points it up to $2.93 otherwise expect a retest of the 50-day average ($2.72); with markets jittery ahead of the Fed we expect the latter

• Oil was slammed down by Trump on Thursday Sept. 20 as he pumped out headlines to manage prices at pumps before midterms. Despite a slight rise on Sept. 21 Oil remained in a 3-candle bearish reversal pattern suggesting to remain short (HOD-T, SCO) while WTI Crude stays below $71.81; above this level a rise to ~$73 is more likely before a more pronounced decline

Precious Metals (Gold, Silver) held support despite a rising USD (Gold support $1,202-$1,197, Silver $14.13); Wednesday will be Decision Day on precious metals and the backdrop is more positive than negative

Natural Gas gave us a great bounce last week up to resistance at $2.99 but it remained under to close the week; we closed our HNU-T position. A break above $2.99 implies a move to $3.05 or higher ($3.12); a break below $2.92 implies a move to $2.79

From a longer-term perspective Commodities are over-valued (regressions against equities back to 2009). From a shorter-term perspective Commodities are cheaper readying to continue the bounce starting on Sept. 7: DBC vs. ACWI (DBC Global Commodity-Complex vs. ACWI Global Equity Market).

The most important Commodity of the bunch, Oil, remains in a bullish pattern, however is likely to be manipulated lower into midterm elections.

Commodity Summary: This week we see Oil inventories as negative for price action, but it’s all about Fed-Day Sept. 26. If Powell is less hawkish and the USD weakens, the current -82% correlation between Oil/USD would create a pop higher (HOU-T, UCO).

Otherwise we can easily see a re-test of the 200-day average ($65.92) (HOD-T, SCO).

Precious Metals are going get a lot shinier if Powell is less hawkish, we’re getting ready to play the oversold precious metals market long on Sept. 26. (GLD, UGLD, SLV, USLV, GDX, SIL, XGD-T).

While the Global Commodity Market (DBC) remains above its 200-day average ($17.09) we’re net-bullish commodities in the short-to-mid-term (week-to-a-month) but we note the long-term up-trend channel broke, hence we’re going to keep playing swings vs. being invested.

chart

Bond-Market & Defensives set-up into the FOMC statement
• As Government Bond yields confirmed swing-high formations (10-year Treasury yield) to end last week we saw the Global Bond Market bounce up off an incredibly important support structure with long-duration Government Bonds leading the way (TLT).

We got long Bonds (TLT, LQD, XBB-T) and Preferreds (PFF, CPD-T) on Sept. 20 and will maintain positions into Fed-Day Wednesday with the goal being to build our positions. However, Jerome Powell and Mr. Market must give us weaker Government bond yields.

The current chart-setup on the 10-year and 30-year Treasury yield suggests a higher probability for yields to keep pointed down through Fed-Day.

The recent “rotation” we’ve seeing into Defensives (Bonds, Utilities, Staples, REITs, Telecoms, Healthcare) has been underpinned by a weaker global growth outlook driven by Trump’s trade war, combined with inflation metrics remaining at bay.

Investors have prized Defensive/Value Equity Sectors (IVE, XLU, XLP, IYZ) much more so than Growth-Based Equity-Spaces (IVW, QQQ, IWM) and Long-Duration Government Bonds (TLT v SPY, TLT Long-Term Regression).

This leaves us with two key implications: Long Duration Government Bonds are readying for a bounce, but Defensive Equity Sectors are less likely to participate. Which in turn dampens the idea that Powell can engender a “total reflation rally” akin to Janet Yellen’s from early-2016 (Shanghai-Accord).

Bond Market Summary: The Global-Bond-Market (BND + BNDX) is holding above a key long-term support structure, where if broken, can easily destabilize the Global Equity Market (ACWI); this outcome is likely if Mr. Market perceives Powell’s Wednesday statement as more hawkish than the last. This known-fact makes it more likely that Bonds bounce this week and yields continue to tilt down.

Add to this that the Global-Bond-Market is dislocated and cheap relative to U.S.-Value-Based-Defensive Equity Sectors (BND+BNDX vs. IVE) and we’re likely to see a rotation out of sectors like Utilities, REITs & Telecoms in favor for long-duration government bonds (TLT) this week (XLU vs. TLT).

Global Currency Market Summary: Will Powell keep markets thinking growth is good and inflation isn’t a concern? Or will he admit that growth risks are here and inflation isn’t coming?

Currency market charts suggest that the yen is readying to gain against the USD (USD/JPY), euro (EUR/USD) and Swiss franc (CHF/JPY).

This implies the message we hear Wednesday introduces “growth-risks,” and we’re readying to buy the Japanese yen (FXY).

• If the USD weakens from Powell’s statement Commodities (DBC) have a better than fair chance to bounce, however, a statement that introduces growth-risks would effectively reduce the demand side of the commodity equation.

Hence, we’re not looking to engage with commodity-laden currencies, U.S. dollar/Canadian dollar (USD/CAD) and Aussie/U.S. dollar (AUD/USD).

Current chart formations suggest the $CAD (FXC) and Aussie$ (FXA) have a better chance of actually weakening this week. We are expecting a move back up to 1.302 to 1.306 on the USD/CAD.

• The most important currency pair in the USD Index (UUP) is the EUR/USD, which sits in a highly over-bought position and has reason to weaken (Eurozone PMI Data Sept. 21). However, a less-hawkish statement from Powell, would effectively engage the inverted head & shoulders pattern on the EUR/USD currency pair pointing it up to 1.1945 (200-day average).

We anticipate the EUR/USD to soften (i.e. stronger USD) in the front half of the week, but are looking for a strong bounce (i.e. stronger euro in the back-half of the week and even more so the week after.

The current oversold position of the USD Index (UUP) supports this thesis, and the break-down below the USD Index’s 50-day average supports the outlook for a stronger euro over the next two weeks.

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