The Averages (DJIA 25187, S&P 2821) had another rough day on deteriorating breadth but lower volume. However, they remain strong technically. Plus as I noted previously, Friday’s gap down will almost surely be closed. On the other hand, if the Averages continue to decline, the Dow’s 100 DMA will likely fall below its 200 DMA---and that is not a positive signal. In addition, the VIX continues its bounce off the lower boundary of its short term trading range and has closed above its 200 DMA (now resistance; if it remains there through the close on Thursday, it will revert to support).
TLT’s battle with its long term uptrend’s lower boundary remains on hold as it has become a safety trade while investors try to digest the turmoil in the currency markets. The question remains, is the Turkish (emerging markets; see below) crisis a short term problem (and the Market’s focus will return to the earlier dispute over the long term direction of interest rates) or is it a sign of more dollar funding problems for the global banking system (in which case it will remain a safety trade)? Stay tuned.
The dollar rose again likely reflecting its function as a safety trade. GLD was once again hammered, apparently having lost all appeal as a safety trade.
Bottom line: investors again focused on global currency problems as the dollar funding problem in Turkey appears to be spreading to other markets. Until that issue fades in investors’ minds, most of the indicators that I follow will likely continue to be effected by the need for safety. That said, it is way too soon to be drawing any long term conclusions. On a shorter term basis, the downside gap in the Averages will likely be closed.
Yesterday in the charts.
No economic releases yesterday, though this week will be more active than last.
In the forefront of investors’ minds was the currency (dollar funding) problem being experienced by Turkey.
In addition, contagion appears to be spreading to Latin America (medium):
And China (medium):
***overnight, Trump signed the defense portion of the FY2019 budget---an eye popping $700 billion. To be clear, I served in the Army, I am in favor of a strong defense and I believe the pay raise which was part of this bill is a plus. But $700 billion? At a time that the US needs to be watching its nickels and dimes. Clearly, this is not going to help economic growth---remember, defense spending contributes nothing to increased productivity because all those goods and services are intended for destruction.
Bottom line: I have no idea how long currency/dollar funding crisis will last. I do believe that the central bankers have proven that they have no idea how to control it. And I believe that the tighter monetary policy becomes, the more difficult it will be to control. I also believe that equity markets are not priced to reflect the damage that could be done to the banking system should this problem get out of control. On the other hand, Turkey’s problems by themselves are not big enough to do much harm to the global financial system. It will only become an issue if the dollar funding shortage starts impacting the big boys in a meaningful way.
Market risk update (medium):
The latest from John Mauldin (medium):
News on Stocks in Our Portfolios
Home Depot (NYSE:HD): Q2 EPS of $3.05 beats by $0.21.
This Week’s Data
The July small business optimism index was reported at 107.9 versus estimates of 107.1.
July import prices were flat versus forecasts of +0.1%; export prices were -0.5% versus consensus of +0.2%---the latter a bit surprising when the dollar is rising.
July Chinese retail sales and industrial production were below consensus while unemployment rose.
June Japanese industrial production fell less than anticipated.
June UK unemployment was less than expected, while home prices declined for the fifth month in a row.
CBO downgrades growth forecast for the second half of 2018 and projects lower growth still in 2019.
Larry Summers on Fed policy (a bit long but worth the read):
Trump’s trade policy and corporate investment (medium):
What I am reading today
Five ways to increase your retirement nest egg (medium):
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