Euro

DAX vs EURO

Hamilton

dax vs euro

We happened upon this particular chart on Bloomberg that we thought is instructive in these modern times in which QE, in one form or another, is the rage. Currency swings have been around for a long time and were often larger in magnitude than they are now. For instance in the mid-eighties US$/DeutschMark moved from 3.50 to 1.50 and back again in a little over a year. Sterling had similar swings earlier and our own Canadian dollar has moved from 1.04 to .61 to 1.10 against the US$, albeit over an appreciable longer period of time. Yet the respective stock markets did not appear to have the large gyrations they do today. Perhaps this time is different as most capital mobility constraints have long gone and we now have a huge pool of “homeless” (hot if you prefer) money sloshing around.

    The recent  rise in the Swiss Franc caused by the Central Bank abandoning the currency peg, led, initially at least, to a corresponding drop in their stock market, see below;

smi march 17 2015Swiss franc march 17 2015

Because one event occurs immediately after the other we will use the post hoc ergo ….. fallacy to assume there is not just correlation but causation, even if in this particular example it seems to dissipate rather rapidly to contradict that same assumption. Debasing the currency is, by the way, an excellent way of making the rich richer and the locals poorer.

Back to the DAX. If you are wondering what the leading stocks were to push the Dax up, they are Volkswagen, BMW and Daimler (Mercedes), all three big exporters and all three from an industry that was down and out not too long ago. Time to buy Peabody Energy (BTU) perhaps???

Euro update , FXE or XEU and the March future

Hamilton

fxe jan 1 2015xeu jan 1 2015

As pointed out previously, year-ends are focal points for the markets and it is therefore not unusual that changes in the course of events occur, more or less, at that time. This is particularly true for foreign exchange rates. Here we have the Euro by way of either the FXE or the XEU, we actually prefer the latter but recognize that neither one is a true representation of the real FX market, if for no other reason than that FX trading never stops as it moves around the World. Gaps do not exist in this kind of an environment and are created only by the artifice of a straightjacket that we impose on it by insisting that it fit our timetables. Here we have a gap in each of these charts and using the tried and true gap-in-the-middle approach it is clear that we are done.

    Furthermore, the largest part of the move up in 2014 can best be described as a diagonal or wedge in EW terms. Typically these retrace to their starting points. Add to that that the RSI and the MACD are decisively suggesting a turn at about this time. Fundamentally, there was a time immediately after the Great Recession that everybody simple new that the US dollar would be pulverized by excessive money creation by the Fed. Everybody simple got that one wrong. Now, with equal zeal , everybody professes to know that the US dollar will continue it’s upward trajectory at least through 2015. This too may prove to be simple wrong. If for no other reason this 120-ish level poses a lot of resistance so a reversal of sorts would not be all that abnormal. See somewhat longer chart below;

euro jan 1 2015

Just to be redundant we have added the March Euro future below;

Euro mar future jan1 2015

The TSE, the Liquidity Trap and Commodities.

Hamilton

Euro Nov 2010 CRB nov 2010

 

The TSE has a lot of commodities underlying it and these tend to be the last things to peak in bull cycles. The reason for that is that at zero interest rates it is the only game in town. I will add two more just to drive home the argument.

moo nov 2010 cow nov 2010

The “liquidity trap” occurs when interest rates are so low that the demand for money becomes perfectly elastic, which also happens to be the point where the Fed. has rendered itself irrelevant and impotent as monetary stimulus ceases to work. Put another way, you can open the flood gates but you cannot control where the water will flow. It flows into commodities as they constitute a real asset that may rise in value if for no other reason than that everybody is buying them. This is all the more so when commodities represent just a fraction of the capitalization of all investible assets and  works exceptionally  well when the funding currency, the US $ , is expected to drop in value. It is perfectly circular and consequently it is hard to say where it will stop. Certainly in this  environment , in which misinformation is rampant (see last weeks payroll number trumpeted with great fanfare as up by 159K, while the broader, barely mentioned,  household stat. was down 330k !) and where the prevailing investment philosophy seems to be entirely predicated on a ‘’ après nous, le déluge”, which may be exactly what we should expect sooner than later.

Given the equitization of commodities and the consequent artificial increase in demand it is hard to say when this has to stop. What we do know is that regardless of the  level of equilibrium between demand and supply in the end the marginal cost of production will be what the market will gravitate to (for gold that is about $400 or so, natural gas about $4 as so many have learned the hard way). Alternatively the income affect of ever higher prices over extended periods, like now with oil, will outweigh other stimulus factors and the whole thing will collapse The TSE is the single greatest recipient of these factors and now that QE2 has been formally launched ( perhaps that was the deluge?) it could be hurt the most.

Just look at how well all these charts correlate. Pork-bellies are of course the classical cyclical asset that performs with text-book precision every time. Also, the financials particularly the best one, RY, appears to have completed its a-b-c correction and has started its next down leg as anticipated a little while ago.