I think that this Wednesday, the Fed is going to threaten to raise interest rates in September. Why? Three reasons. First, the Brexit shock has evaporated. Second, stock markets have just made new all-time highs. Third, the economic data hasn’t been as bad as expected; we have seen a second quarter bounce after a terrible first quarter.
Wednesday was a big down day for gold and the gold stocks. Both broke below important support levels, as noted in my July 20 post below. Yesterday gold and gold stocks bounced and I got a number of calls suggesting that the correction was over…another one day wonder.
Gold has broken down from the trading range it has been in since late June, breaching key support at $1320. It could have gone either way but a break down is not surprising given the extended COMEX speculative long position that has been hanging over the metal for the past two months. If gold had broken higher, it would only have delayed a correction that was long overdue based on previous bull market history.
You could agree with JP Morgan’s July 13 note that stocks have gone to new all-time highs because: (1) they are not quite as ridiculously expensive as bonds; (2) corporate earnings are about to roar higher after four straight quarters of declines; and (3) investors are taking more risk, rotating out of safe haven stocks into underperforming cyclicals and financials, tech hardware, semis, materials, autos and airlines. Or you could wise up and smell the coffee.
Visual Capitalist helps us to understand why you should never believe a bank. Here are the highlights since 2009 for Europe’s largest and most important bank:
Why yes we did. Having failed three times over the past year, always falling just short, Brexit finally pushed the S&Ps over the top to new highs on both an intraday and closing basis on Friday (July 8, 2016).
As we noted in our posts on June 25 and July 1, the real consequences of the Brexit vote are not economic…they’re financial. The vote was a surprise and it caught many people leaning in the wrong direction. Because today’s financial system is levered to the eyeballs, wrong bets are not easily corrected and can quickly lead to a crisis.
As reported earlier this week, Brexit’s impact on the world economy, while unknown, is likely to be very little. But the impact on the financial sector is another matter, especially the banks. The Brexit losses in the equity markets have been recovered. It is as if the vote never happened. But not in banks stocks. Here is the one year daily chart of the ratio of European bank stocks (EUFN) to European equities generally. Using the ratio makes the underperformance of the banks easy to see. The Brexit-induced bank stock collapse is clear and there has been NO recovery.
Talking heads say the Brits have left the EU. They say that the economic consequences are devastating. They are wrong. Economically, nothing has happened yet and not much may happen as a result of this vote and if it does, it won’t be any time soon and we certainly don’t know what it is. Maybe less money will be invested in UK businesses for the next few months while we wait to sort things out but maybe that’s about it.
Is Brexit a trap for gold bulls? The uncertainty over the Brexit referendum vote next Thursday has caused a flight to safety in Treasuries, the yen and gold since the first of the month. You can see this move in the latest gold COT data (through June 14, 2016) which shows a huge spike in the speculative long position to a new high at 347,000 contracts. The open interest since then has soared on massive volume, so the speculative long position has surely set new records over the past three trading days. This long position is a threat to the market because it is certain to be on a hair-trigger.