Thursday, August 16, 2018

The Morning Call--Will trade talks solve the currency problem?


The Morning Call

8/16/18

The Market
         
    Technical

The Averages (DJIA 25162, S&P 2918) faded again yesterday as currency issues returned to center stage.  Volume was up; breadth deteriorated.  Nevertheless, they remain strong technically; and as I noted previously, last Friday’s gap down will almost surely be closed.  On the other hand, the VIX spiked back above its 200 DMA (now resistance; if it remains there through the close next Monday, it will revert to support) and  the Dow’s 100 DMA continues to sit right on its 200 DMA.  A cross to the downside would be a negative signal. 

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 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)?  In the meantime, TLT continues to advance and is now above its 200 DMA (now resistance; if it remains there through the close next Monday, it will revert to support).  The gap (pennant formation) between the declining upper boundary of its short term downtrend and the lower boundary of its long term uptrend continues to narrow; TLT is nearing the top of that range. But this story isn’t over.  Stay tuned.
                       
          The dollar was unchanged but remains very strong, likely reflecting its function as a safety trade.  GLD continues to get hammered---I have to wonder if this is the result of those countries with dollar funding problems selling their gold reserves to raise money to defend their currencies.

            Bottom line: currency problems in Turkey/emerging markets returned to center stage.  This remains a very fluid situation whose outcome is highly uncertain.  To be clear, it could go either way.  But until there is some clarity, most of the indicators that I follow will likely continue to be effected by the need for safety.   On a shorter term basis, the downside gap in the Averages will likely be closed.
                 
             Yesterday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic data was a bit confusing largely because the two primary indicators included major revisions: (1) July industrial production was lower than anticipated, but the June number was revised up, (2) July retail sales were quite strong, but June’s reading was revised down.  In addition, Q2 nonfarm productivity rose while capacity utilization fell significantly but the first quarter figure was revised equally so; and June business inventories were up slightly but sales were up much more.  The remaining datapoints were mixed: weekly mortgage/purchase applications declined, the July housing market index decreased while the August NY Fed manufacturing index was better than estimates.  In other words, a lot of information, some of it somewhat confusing but none of it pointing to an accelerating economy.

            As I noted above, Turkey/emerging markets currency problems returned as the center of investor attention.  As of the close, the news isn’t getting any better

            Turkey’s economy on a collision course with reality (medium):

                Turkey has more than a currency problem (medium):

                Hong Kong has a problem (medium):

                 Contagion spreads (short):

                ***overnight, China announced that trade talks with the US would resume.  Plus it barred banks from lending yuan offshore.  The two moves brought relief to the yuan,
                   
                 Bottom line: the issue remains as to whether or not the current dollar funding shortage is or soon will spread beyond a couple of small, poorly run countries.  I am not smart enough to know the answer.  But this is a potential problem that I have been focusing on for months; and it will probably only get worse, the tighter monetary policy becomes.  That said, it is way too soon to think ‘major crisis/major sell off’.

            Second quarter corporate results (medium and a must read):

            Counterpoint (also a must read):

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            July industrial production was up 0.1% versus expectations of up 0.3%; however, June was revised from up 0.6% to +1.0%.

            June business inventories were up 0.1%, in line; but sales were up 0.3%.

            The August housing market index came in at 67 versus consensus of 68.

                        July housing starts were up 0.8% versus estimates of up 7.0%; building permits were up 1.0% versus forecasts of up 2.6%.

            Weekly jobless claims declined 2,000 versus projections of up 3,000.

            The Philadelphia Fed manufacturing index was 11.9 versus an anticipated 22.5.

     International

    Other

            Freight costs are on the rise (short):

            China has serious trade cards (medium):
                
            China not happy with new US defense budget (medium):

               Reflections on the small business optimism index (medium):

           How close is QE4? (medium):

What I am reading today

           

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