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Analysis

5 Things to Watch Next Week: NASDAQ, Cryptocurrencies, China, Euro & Trump

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Asset Current Value Weekly Change
S&P 500 2398 0.88%
DAX 12675 1.76%
WTI Crude Oil 46.47 -5.75%
GOLD 1228.00 -3.21%
Bitcoin 1570 16.11%
EUR/USD 1.0998 0.91%

 

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  1. Will the NASDAQ carry stocks higher again?

The schizophrenic state of the US market continued to dominate trading this week, with the tech sector clearly emerging as a leader on Wall Street, while the S&P 500 and small caps kept on dragging the broader indices lower. While Apple, Amazon, and a few other names in Europe names are still pushing higher, a lot of stocks are much weaker, and usually, these situations resolve in the direction of the majority. That said, with no major economic releases coming out, the low volatility period could definitely last longer, but the market seems vulnerable to negative triggers.

  1. Will the cryptocurrency correction continue?

Bitcoin and Litecoin are under pressure this weekend and the other majors are also struggling, with the exception of the relatively strong Ripple and NEM. Asian demand has been driving prices higher lately, while the growing attention from the broader investment public also helped the broad rally in the coins. We have seen several such euphoric periods in Bitcoin, but the recent rally in coins is unprecedented. It’s very hard to guess if the current correction will be a sustained one, but next week could prove crucial.

  1. Have we seen the top in the Euro?

The common currency got a huge boost from the French election, as Macron is good news for those fearing the worst after the Brexit vote. That said, the structural problems that the Eurozone faces are here to stay, and the “natural” trend of the Euro is bearish compared to the USD. The speculative positions against the EUR have been significantly reduced in recent weeks, and that might mean that the market will soon run out of buyers. The unknown factor in the equation is the ECB, which routinely lags the Fed with its interest rate policies, so a late hawkish turn in the central bank’s approach could push the currency even higher.

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  1. What’s next for the Chinese market?

Shanghai Composite Index, 4-Hour Chart Analysis

Chinese stocks dropped further in the beginning of the week after the scary period in April, but as the interbank market settled down a bit, the local stock market recovered most of its losses and finished virtually unchanged. Does that mean that the country’s problems are fixed? Of course not, but the short-term trend might have turned. Credit crises usually are slow processes, as the market realizes the extent of the problem, so several sentiment waves are likely to form before a full-fledged crunch. This week might decide if we only saw a brief stop in the sell-off or a longer “relief-period” has started.

  1. Will Trump drop another bomb?

The new POTUS fired FBI director Comey this week, and the surprising move caused a small dip in risk assets, but it didn’t change the underlying trends. It seems that these kind of unusual decisions are the new normal, with investors still not putting a huge weight on the political scandals. Having said that, there are several areas which could still have a large impact on investor portfolios globally. That is especially true or the North Korean situation that can escalate any time, despite the recent quiet period.

In Focus: Cryptocurrencies

Monthly performance comparison of the major cryptocurrencies, Hourly Chart

The cryptocurrency market didn’t even blink as it crossed the $55 billion mark this week, and the total capitalization now grew 10% more to $55 billion. Bitcoin, even after its epic rally, accounts for a mere $30 billion out of that, showing how quickly the other players have been expanding lately. Ripple has definitely been the winner of the recent period, as it overtook Ethereum regarding capitalization, as it recovered quickly after the early-week correction. Litecoin was the second most active coin thanks to the huge price swings throughout the period, while trading volumes increased across the board, as the market exploded higher. Ethereum, Dash, Monero, and Ethereum Classic were lagging both in volume and performance, while NEM got close to Litecoin regarding market value.

Currency Weekly Volume Monthly Volume Market Cap
Bitcoin 5,104 15,791 29,540
Ripple 964 2,361 8.428
Ethereum 968 4,425 8,294
Litecoin 1,137 3,500 1,519
NEM 80 151 1,129
Dash 116 505 654
Ethereum Classic 159 1000 580
Monero 70 313 415

Key Economic Releases of the Week

Day Country Release Expected Previous
Monday CHINA Industrial Production (yearly) 7.0% 7.6%
Monday SWITZERLAND PPI Index 0.00% 0.10%
Monday US ES Manufacturing Index 7.6 5.2
Tuesday AUSTRALIA Montery Meeting Minutes
Tuesday UK CPI Index 2.6% 2.3%
Tuesday EUROZONE Flash GDP 0.50% 0.50%
Tuesday GERMANY ZEW Economic Sentiment 22.3 19.5
Tuesday US Building Permits 1.27 mill 1.27 mill
Tuesday US Housing Starts 1.26 mill 1.22 mill
Tuesday US Industrial Production 0.4% 0.5%
Wednesday UK Average Earnings 2.4% 2.3%
Wednesday UK Unemployment Rate 4.7% 4.7%
Wednesday EUROZONE Final CPI 1.90% 1.90%
Wednesday CANADA Manufacturing Sales 0.40% -0.20%
Wednesday US Crude Oil Inventories 55.0
Thursday JAPAN Prelim GDP 0.4% 0.3%
Thursday AUSTRALIA Employment Change
Thursday AUSTRALIA Unemployment Rate 5.9% 5.9%
Thursday UK Retail Sales 1.2% -1.8%
Thursday US Initial Jobless Claims 240,000 236,000
Thursday US Philly Fed Manufacturing 18.9 22.0
Friday CANADA CPI Index 0.5% 0.2%
Friday CANADA Core Retail Sales 0.20% -0.10%

 

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Analysis

Long-Term Cryptocurrency Analysis: Bitcoin Outshines Altcoins Again

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The most valuable coin had another encouraging week, as it emerged from a brief but violent correction, just to reach new highs towards the end of the week, draining capital from altcoins. The total value of the market is stagnating near the all-time high, but BTC crossed the $100 billion mark as it surged past the $6000 price level, controlling 58% of the market.

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With the long-term MACD clearly being overbought, and as the long-term target has been hit, investors should now be looking for exit points, even as the short-term uptrend is intact. The range projection target of the recent correction is found at $7000, but correction risks are already high, and only small positions should be kept in the current setup.

BTC/USD, Daily Chart Analysis

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Most of the major altcoins are trading in narrow ranges this weekend after a slightly bearish week, as the optimism surrounding Ethereum’s major update faded and the second largest coin re-entered its previous range.

Litecoin, Dash, and Monero are still looking encouraging despite the lengthy correction, while the recently, while the relatively weak Ethereum Classic IOTA continue to show worrying signs. As the Bitcoin long trade is getting stretched,  let’s see the how the daily charts of the altcoins are shaping up.

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Analysis

Will Crude Oil Reach $68 a Barrel in 2018?

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Crude oil prices are likely to climb close to $68 per barrel mark in 2018. We believe that oil supply will be hit due to a few geopolitical issues if they play out as we expect. Additionally, though high crude prices will be a strong incentive for the shale oil drillers to pump more, their increase is unlikely to tilt the deficit into oversupply.

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Key observations

  1. The OPEC production cut is tilting the crude oil markets to a balance
  2. Rise in the shale oil production is unlikely to equal the increase in demand in 2018
  3. The geopolitical issues can tilt the markets into a deficit
  4. If crude oil breaks out of $55 per barrel, a move to $68 is likely

What are the current market conditions?

OPEC oil production cuts

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The November 2016 production cut by OPEC and its allies is helping the market stabilize. The US crude stockpiles have been decreasing over the past few months, which indicates that the OPEC cuts are having their desired effect, albeit slowly.

The stockpiles in the Organisation for Economic Co-operation and Development (OECD) nations is down to just under 3 billion barrels, which is roughly 171 million barrels above the 5-year average. The OPEC wants to bring the inventory levels below the 5-year average.

Reports suggest that the OPEC and its allies will extend the deal, which is set to expire in March 2018 by another 9-months. However, the oil cartel is unlikely to deepen the cuts. In the September quarter, it had produced 32.9 million barrels per day (bpd), as against 33.4 million bpd production in November 2016, prior to the production cut agreement.

In the fourth quarter of this year, the OPEC production is expected to further decline to 32.7 million bpd.

US shale oil production

The main threat to any recovery in crude oil prices is the ever-increasing production of the US shale oil drillers. US crude oil production, which averaged about 9.2 million bpd in the first quarter of this year has increased to 9.56 million bpd by the third-quarter.

The US Energy Information Administration (EIA) expects the average US crude oil production to increase to 9.9 million bpd in 2018, compared to 9.2 million bpd in 2017. That is an addition of 700,000 bpd of supply.

On the other hand, Investment bank Tudor, Pickering, Holt & Co (TPH) expects US crude oil production to reach 10.2 million barrels in 2018.

So, on an average, crude oil production by the shale oil drillers is expected to increase by 700,000 bpd to 1 million bpd.

Demand increase in 2018

The global economy is growing at a decent pace, which is expected to increase the demand for crude oil. The US EIA expects the global demand to increase by 1.6 million bpd in 2018.

Therefore, with everything else being equal, this will lead to a faster reduction in crude oil inventory and an improvement in sentiment, but not a large increase in price.

So, why do we expect crude oil prices to increase next year?

What are the events that have changed in the recent past that warrant a change in our view?

For the past two years, oil prices have not responded to geopolitical tensions because of the supply glut.

However, next year, when the markets are in a balance, any geopolitical event that can have an effect on the supply side will tilt the market to a deficit, resulting in a rally in oil prices. What are these events?

The Iran sanctions

President Donald Trump has been a critic of the deal between the US and Iran, which led to lifting of sanctions on the Islamic nation. The deal is called the Joint Comprehensive Plan of Action (JCPOA). As a result of this deal, Iran was able to resume its exports, which have skyrocketed from about 1 million bpd in 2013 to about 2.3 million bpd in September 2017.

President Trump decertified the deal on October 13 but has still not quit the deal. He wants the deal to be renegotiated, however, the remaining countries who were party to the deal and Iran are unwilling to do so.

This creates a tension between the US and Iran. Chances are that President Trump will withdraw from the deal sometime next year to fulfill his pre-election promise of ripping the deal apart.

What are the repercussions if the US quits the deal?

Presently, the EU nations are not in favor of scrapping the deal with Iran. If the US unilaterally withdraws from the deal, Iran’s exports are unlikely to have an immediate effect, until the EU decides to support it. After all, EU has been the major consumer of Iranian oil since sanctions were lifted.

However, Iran’s fields are aging. They need fresh investments to keep the oil flowing at the current rate. If the US quits the deal, it is unlikely that major oil companies, that have operations in the US will enter Iran. This can limit the capital flows to the Islamic nation’s oil sector.

As an immediate effect, the US sanctions will “put at risk a few hundred thousand barrels of Iranian exports,” Goldman Sachs wrote in a research note. However, these are only estimates and the real impact will be known only after the US withdraws from the deal. Due to the uncertainty, the markets are likely to boost prices higher, until it gets a clear picture of the effects.

Geopolitical tensions in the gulf can lead to a severe shortage of oil

The northern Iraq region – Kurdistan – is a semi-autonomous region, which recently declared Independence from Iraq. This has led to a conflict between the two. While the Iraqi forces have declared their victory in the important oil-rich region of Kirkuk, the victory is not final because the Kurdish army did not put up a fight initially to defend the oil-rich region.

However, both the Kurdish peshmerga and the Iraqi army have been trained by the US. Therefore, if the conflict is not resolved quickly, through a dialogue, it can turn bloody and lead to disruption of about 600,000 bpd of oil supply.

“Oil prices could spike a lot higher on this development because this time is different, after years of war in the region. The battle, finally, is for the oil, and no other reason. In other words, here we go,” John Kilduff, partner at energy-focused investment manager Again Capital, told CNBC.

Unless a permanent solution is reached, we expect these issues to linger on and again crop up in 2018, propping prices higher.

What does the chart forecast?

The WTI crude has been broadly trading in a range of $42 and $55. Oil has taken support close to the $42 levels four times in the past year and a half. Therefore, this is a strong support level and can be used as a stop loss for our positions.

On the upside, the zone between $50 and $55 has been a strong resistance. Oil has struggled to breakout of this zone. However, if any geopolitical event triggers a breakout above $55, a rally to $68 levels is likely, which is the minimum target objective of a breakout from the range.

How can we benefit, if crude rallies according to our expectations?

The best way to benefit from the rise in crude oil is to trade the oil futures, but due to their volatility, it is not advisable to hold it for the long-term.

The oil-based ETFs can offer an opportunity to take a position in oil. Individual energy stocks are also another means of benefitting from a rally in crude oil.

We shall soon identify the best oil-based ETF and stocks that can offer good returns in 2018.

Risk to our analysis

Our analysis is based on the assumption that the existing geopolitical issues are unlikely to be sorted out within the next year. However, a good dialogue can easily put an end to these, thereby invalidating any risk-premium to crude oil.

Also, consistent high prices above $50 can increase the US shale oil production, much higher than the currently anticipated levels. This will prevent the markets from balancing out.

Due to infighting among its members, the OPEC and its allies can opt out of the production cut deal,  which will boost supply and can lead to a crash in crude oil prices.

Featured image courtesy of Shutterstock. 

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Analysis

Daily Analysis: Stocks Shoot for the Moon as Senate Passes Budget

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2574 0.53%
DAX 12991 0.05%
WTI Crude Oil 51.60 0.25%
GOLD 1283.00 -0.49%
Bitcoin 6038 6.40%
EUR/USD 1.1776 -0.64%

Financial markets got very active today thanks to the US Senate’s decision to pass the 2018 budget, paving the way for the tax reform plan that’s been welcomed by investors in recent weeks. The Dollar, equities, and Treasury yields all got substantially higher with the Dow and the S&P 500 scoring yet another all-time high. The NASDAQ and the Russell 2000 failed to follow the former benchmarks to record highs, but the short-term rally is still definitely intact, despite the overbought readings and the overvaluation issues.

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Dow 30, Daily Chart Analysis

Forex markets were also very active as the Dollar cruised higher against all of its major counterparts, with the exception of the Great British Pound that rebounded strongly after the optimistic words of Angela Merkel regarding the Brexit process. The New Zealand Dollar continued yesterday’s negative trend, while the Canadian Dollar was also hit hard amid the early decline in the price of oil and the negative economic surprises from the country.

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Gold is down yet again, as it failed to reclaim the $1300 level amid the improved global sentiment that also weighed on the Japanese Yen as well. The Yen’s weakness helped the Nikkei to another two-decade high, as the USD/JPY pair surged to 113.50 for the first time since July.

USD/JPY, 4-Hour Chart Analysis

Cryptocurrencies

Bitcoin’s new all-time high made headlines in the segment today, as the most valuable coin surged past $6000 for the first time ever, even as the currency traded as low as $5100 just a few days ago. BTC also reached $100 billion in market cap, and the coin accounts for more than 57% of the total value of the crypto segment.

The other majors are virtually unchanged despite Bitcoin’s rise, with only IOTA losing significant ground and Ripple trading in a volatile fashion after its crazy week. Litecoin and Monero also performed relatively well, while Ethereum got stuck below the $315 line yet again, and NEO finally settled down, although it continues to trade below the crucial $30 level.

BTC/USD, 4-Hour Chart Analysis

Key Economic Releases on Friday

Time, CET Country Release Actual Expected Previous
14:30 CANADA CPI 0.2% 0.3% 0.1%
14:30 CANADA Core Retail Sales -0.7% 0.3% 0.2%
16:00 US Existing Home Sales 5.39 mill 5.32 mill 5.35 mill

Key Economic Releases on Monday

Time, CET Country Release Expected Previous
14:30 CANADA Wholesale Sales 1.1% 1.5%

Featured image from Shutterstock

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