1. What’s Next for the Fed?
All eyes will be on Wednesday’s FOMC meeting, as the central bank is expected to provide the details of its tapering plans. While the bond market predicts no rate hike from the Fed next week, the future of the bank’s balance sheet is at least that important for risk assets and the Dollar.
The Bank of Canada raised its benchmark rate two weeks ago while the Bank of England also took a surprisingly hawkish turn last week, so the global environment definitely favors tightening. Also, the major US stock indices are at or near all-time highs so, despite the mixed economic numbers, the Fed might be comfortable with even a bolder quantitative tightening schedule that would surely cause some turmoil in the main asset classes.
TLT (Long-Term US Bond ETF), Daily Chart Analysis
2. Bitcoin After a Bubble or Still on the Way Up?
The crypto segment has been shaken by this week’s crash, as the Chinese crackdown on ICOs and crypto-exchanges spread uncertainty in the sector. The previously soaring market was ripe for a correction, but the speed and extent of the move caught a lot of investors off guard, amid the growing chatter on a bubble in the coins. While the stellar gains in the segment do in fact resemble a speculative bubble, and Bitcoin already experienced several boom-bust cycles, whether or not we are after a multi-year top is yet to be seen. For now, the long-term trends in most of the majors are intact and the continuation of the boom is more likely. The next few weeks will be crucial in deciding where we are in the current cycle, as bulls and bears will battle for control amid the accelerated blockchain adoption.
Bitcoin, Daily Chart Analysis
3. Equities Continue to Defy Valuations
The North Korean escalation, tightening central banks, another miss in US Retail Sales, and so on… A weak stock market would have definitely tumbled in recent weeks, but conversely US equities have been edging higher towards their all-time highs. The Dow closed on a new ATH on Friday and the S&P 500 finished right at the 2500 level, with only the Nasdaq lagging slightly after the mixed reception of Apple’s new IPhones. The Fed might be able to stir things up next week, but despite the extremely high level of the most valuable valuation measures (CAPE, P/S…) and the weak market internals, the price action makes a break-out to new highs very likely here. Calling an exact top in equities is almost impossible but we still think that for anything more than short-term trades, investors are too late to the stock-party now.
4. Strong Trends in the Major Currencies
FX volatility, which incredibly enough took over stock volatility lately, exploded in some of the major pairs thanks mainly to diverging monetary expectations. The Pound surged by several percents against its most important peers, while the Canadian Dollar continues to be among the strongest majors. That said, the focus is still on the Dollar that lost significant ground compared to the Euro lately, but it showed some strength in recent weeks. With the looming Fed meeting, we expect a two-faced week, as the run-up towards the rate decision is usually choppy while the aftermath tends to be violent. The Bank of Japan’s monetary meeting could also add volatility to the mix, as the Yen also experienced strong moves in both directions in recent weeks.
5. How low will the Gold-Correction Reach?
As the tensions regarding North Korea eased somewhat (although the crisis is far from being over mind you), despite another missile launch by the country, the primary safe-haven asset entered a slightly overdue correction. The recent key break-out in the precious metal carried it to overbought territory, and although the long-term is clearly bullish now, a move to test the $1300 level is likely, especially if the Fed joins the hawkish central bank trend. But as stocks are near all-time highs, and stock volatility is near record lows, the creeping strength in gold is something to note and increasing one’s holding still seems the way to go.
Gold Futures, Daily Chart Analysis
Key Economic Releases This Week
|Tuesday||AUSTRALIA||Monetary Meeting Minutes||–||–|
|Tuesday||GERMANY||ZEW Economic Sentiment||12.3||10.0|
|Tuesday||US||Existing Home Sales||5.46 mill||5.44 mill|
|Wednesday||UK||Crude Oil Inventories||–||5.9 mill|
|Wednesday||US||FOMC Press Conference||–||–|
|Thursday||JAPAN||BOJ Rate Decision||-0.10%||-0.10%|
|Thursday||AUSTRALIA||Trade Balance||0.95 bill||0.86 bill|
|Thursday||EUROZONE||ECB Rate Decision||0.00%||0.00%|
|Thursday||EUROZONE||ECB Press Conference||–||–|
|Thursday||US||Philly Fed Index||17.2||18.9|
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