Is it me or do the markets feel all jumbled up at the moment?
October has a reputation as a tricky month to trade at the best of times but we’ve seen some real eye openers in the last few weeks.
I thought we’d do a quick scan of the main suspects in this week’s eletter. They all link together to some degree so let’s see if we can make some sense of what’s been going on.
US Stock Indices
We’ll start with the US Stock indices – the Dow Jones 100 and the S&P 500.
Now these markets have received an ongoing shot in the arm from the Federal Reserve’s ‘quantitative easing’ policy. It’s basically been a case of them printing money on demand to prop up the decaying shell of a failing economy.
Stock indices have continued moving straight up off 2009’s credit crunch lows for one reason. And as far as I can see, it’s nothing to do with a real turn in the economic tides. It’s simply a case the money the fed prints gets pumped straight into the equity markets and gives them untold amounts of artificial buoyancy.
And it all looks too rosy for the US government. They can crow how strong the economy is as much as they like, but it’s all done being done with smoke and mirrors
The wheels will come off at some point, I’m sure. But at the minute it’s almost a game of dare – who’s prepared to hang on in there the longest?
When the bubble bursts the risk is a dramatic and ruthless crash. And things did look a bit wobbly in mid-October with an 8.5% sell-off in the Dow and a 10% sell off in the S&P.
“Is this finally it?” I wondered, gripping the arms of my chair as I watched wide-eyed…
The S&P eMini futures selling-off – this looked horrible as I followed in real-time!
But not to worry, because lo and behold the market made an immediate recovery! It actually went on to close back above the psychological resistance level of 2000 a mere 2 weeks later…
An strong V-shaped reversal has the S&P back above 2000
Check out the ferocity of the buying that blasted the S&P straight back up to its highs. No crash to see here, yet!
The fed announced an end to quantitative easing (for now!) last week and suggested a raise in interest rates might be on the cards for 2015. It all helped the stock indices puff their chests out even further.
I am watching this space closely because I just don’t see the strength in equities as sustainable. But I suppose I could be saying that for a long time yet. It is a ‘rigged’ system after all!
Gold and Silver
Meanwhile, over in the precious metals, it’s the opposite story.
Unloved as ever ‘real money’ – gold and silver – both continue to get hammered lower.
I’m hearing lots of talk about these markets being artificially manipulated.
Some prominent names are pointing out a disparity between demand for physical metals and the pricing of the ‘paper’ metals markets.
It doesn’t make sense that high demand is apparently in place yet prices are moving lower…
China continues to gobble up whatever gold it can get its hands on, and the Swiss are holding a referendum on November 30th to decide whether they should repatriate their holdings of physical gold from overseas.
They don’t want to risk the embarrassing situation of asking for their gold back at some point in the future only for the US to show them an empty dust-ridden vault.
They say that for every ounce of gold held in reserve, there are multiple futures contract issued against it. If all contracts needed to be settled there simply would not be enough gold in the world to do it. It all points to a market price detached from the true value of the underlying asset. Is it licence for unseen forces to move the ‘paper’ price around to suit their own ends?
It gives you food for thought doesn’t it?
Silver is even more interesting though…
I’m no expert on mining but I understand the cost of getting an ounce of silver out of the ground is currently around $15. The spot price of silver is currently $16.14 an ounce.
The risk here is if prices drop much lower silver mines will simply shut their doors until it’s cost effective to start digging again. And all this in the face of apparently increasing demand for industrial silver in the technology, green energy (solar panels) and automotive sectors.
It makes you wonder just how much lower the price of silver can be manipulated (if this is indeed the case).
And consider this… what might happen to the price of precious metals if the stock markets really do crash?
A panic driven flight to safety from declining stocks into hard assets like gold and silver might send the paper ‘illusion’ unravelling at speed and these markets could shoot up very quickly indeed.
$45 for an ounce of silver would only be testing recent highs; it would be nothing too out of the ordinary. Yet that’s three times the current market price per ounce. Imagine your profits if you’d stashed away a load of silver Britannias (legal tender bullion coins) just before the markets went parabolic. All free of capital gains tax too!
Monthly chart of spot silver – can it go much lower?
The Dollar Yen Halloween Massacre
But the real shocker in recent weeks was the crazy move the USD/JPY pair made over in the Forex markets.
Within 48 hours of the US central bank – The Fed – announcing they were ending the quantitative easing program, the Japanese central bank dropped a real bombshell and declared they’d actually be increasing theirs!
They were putting the pedal to the metal and getting ready to print 80 trillion Yen worth of government bonds. USDJPY jumped 3.7% higher on the week – its biggest weekly move since December 2009 – putting it up to its highest levels since 2007.
Here’s how it looked on the chart:
Daily chart of USDJPY – it recorded a 2.7% rise in one day
The actions of the Japanese added fuel to the fire in markets worldwide. It helped the S&P over that final hurdle back to 2000 and also fuelled the drop in Gold to $1161/oz on Friday.
It just goes to show you how everything can change in an instant these days. All markets are responding with a hair-trigger to the words and actions of their real masters – the bigwigs at the central banks.
But if you’re ready to jump in and get involved in these markets at least we can’t moan about low levels of volatility anymore. It’s hang onto your hats time!
Be Prepared: Market Moving Data Coming This Week (London Time):
Wednesday 5th November:
09:30 GBP Services PMI
13:15 USD Nonfarm employment change
15:00 USD ISM non-manufacturing PMI
Thursday 6th November:
09:30 GBP Manufacturing Production
12:00 GBP Interest Rate Decision
12:45 EUR Interest Rate Decision
Friday 7th November:
13:30 USD Employment numbers
Monday 10th November:
– no big reports
Tuesday 11th November:
– no big reports
So we’ve got some big economic reports due over the next few days. Interest rate decisions and US job numbers can easily add their own blend of chaos to proceedings!
Keep trading safely and I’ll catch up with you again next week.