5 Things to Watch Next Week: Saudi Arabia and Iran, Bitcoin in Correction, Stocks Left Behind, Junk Bonds, and the Dollar Rally

1.            A New King in Saudi Arabia and a New Order in the Middle East?

The restructuring of the Saudi Arabian leadership by crown prince Mohamed bin Salman entered the next stage in the last couple of weeks, and the implications of the “Game of Thrones” of the Middle East won’t stop on the borders of the country or the region for that matter. With the conflict between Iran and the Kingdom escalating in an accelerating pace in Yemen, Qatar, Syria, and now Lebanon, things could get chaotic quickly, especially if the prince fails to cement his power in the coming period.

The superpowers, the US, China, and Russia have vast interests in the region, and with Israel also thrown in the mix (as an ally for the Kingdom, for the time being), it’s not hard to imagine a broader conflict. As the Saudi-US relations are boiling under the quiet surface, with the ongoing shale oil war, the coalition-lines are blurred at best. Oil would be the knee-jerk bet to hedge against an escalation in the region, and sure enough crude prices are on the rise recently, but the questionable fundamentals in the energy segment could steer capital towards the traditional safe-haven of gold and the Yen.

2.           Bitcoin Tanks as Traders Run for the Exits (and into Bitcoin Cash)

Bitcoin spiked as low as $5600 today in early trading as the quick and deep correction that we have been anticipating in the coin arrived. This time around altcoins were mostly left out form the crash, with Bitcoin Cash being in the center of the action. The forked coin briefly surged past Ethereum in market capitalization as the tectonic shift away from its Big Brother fueled an unprecedented speculative rally in BCH, pushing its value above the $30 billion mark.

While the real value of Bitcoin Cash is questionable, the correction in BTC was baked in the cake, and the current trading-theme of BCH could evaporate quickly as selling dries out in Bitcoin. That said, the most valuable coin reached a severely overbought state and more downside is likely for it in the coming week. With that in mind, altcoins still look like a safer bet, even after the bullish move in several of the major coins.

BTC and BCH, 4-Hour Chart Analysis

3.           The Narrowest New All-Time High Ever

Last week marked another record high for the most important US stock indices, but there is a catch; the recent rally was the weakest in history regarding market breadth, with the fewest stocks above the 50-day Moving Averages. While passive investment funds and momentum players amplified the leadership of the most valuable companies, the self-reinforcing cycle is successfully hiding the weakness under-the-hood, at least for now.

That said, the end of this week brought an increase in volatility to Wall Street, and together with other signs, an important top might already be in. The constructive setup that developed in August in equities is a thing of the past, and now the short-term outlook is also negative, together with the hostile investment conditions. While outright shorting is not an easy strategy, further reducing one’s exposure to stocks and gravitating towards tangible assets is advised here.

 Stocks Above the 50-day MA, Daily Chart

4.           High Yield Bonds Smashed Lower but There is Much More to Come

Junk bonds, corporate bonds with the worst outlook, have severely underperformed the US stock indices lately, and that is usually an early sign of risk aversion among smart money investors. This coupled with the internal weakness is a major red flag, and a much more imminent one than the overvaluation that we have been observing for a long time now.

The epicenter of the current “everything bubble” is definitely the global bond market, with absurd valuations across the board. As an example, the European junk bond market now implies a -1.2% chance of default in the segment (yes, negative). Granted, another analyst says that the methodology is wrong, so it is actually 0.5%… Whichever is correct, the monster bubble that the central banks created will collapse, it’s only a question of timing.

HYG (Junk Bond ETF), Daily Chart

5.           Dollar Rally or Just a Bounce?

The Dollar recovered some of its deep losses in recent weeks, but the GOP’s struggle with the tax reform, and especially the likely delay of the corporate tax cut weighed on the currency this week. Despite the two days of losses the uptrend that developed this autumn remains intact, and the continued hawkish outlook regarding the Fed’s monetary policy could fuel another leg higher in the Greenback. Also, the Euro’s strength is at least in part, built on sand, as the structural problems are nowhere near solved in the monetary union, and the Dollar’s investment outlook still looks way more promising.

Dollar Index (DXY), Daily Chart

Key Economic Releases Next Week

Day Country Release Expected Previous
Monday JAPAN BOJ Governor Kuroda Speaks
Tuesday AUSTRALIA NAB Business Confidence 7
Tuesday CHINA Industrial Production 6.3% 6.6%
Tuesday GERMANY Prelim GDP 0.6% 0.6%
Tuesday UK CPI Index 3.1% 3%
Tuesday UK PPI 0.8% 0.4%
Tuesday EUROZONE ECB President Draghi Speaks
Tuesday EUROZONE Flash GDP 0.6% 0.6%
Tuesday GERMANY ZEW Economic Sentiment 19.8 17.6
Tuesday US PPI 0.4% 0.1%
Wednesday JAPAN Prelim GDP 0.4% 0.6%
Wednesday AUSTRALIA Wage Price Index 0.7% 0.5%
Wednesday UK Average Earnings 2.1% 2.2%
Wednesday UK Unemployment Rate 4.3% 4.3%
Wednesday UK Claimant Count 2,400 1,700
Wednesday US CPI Index 0.1% 0.5%
Wednesday US Core Retail Sales 0.2% 1.0%
Wednesday US Retail Sales 0.00% 1.6%
Wednesday US Crude Oil Inventories 2.2 mill
Thursday AUSTRALIA Unemployment Rate 5.5% 5.5%
Thursday AUSTRALIA Employment Change 18,900 19,800
Thursday UK Retail Sales 0.2% -0.8%
Thursday CANADA Manufacturing Sales -0.4% 1.6%
Thursday US Unemployment Claims 236,000 239,000
Thursday US Philly Fed Index 24.3 27.9
Thursday US Capacity Utilization 76.3% 76%
Thursday US Industrial Production 0.5% 0.3%
Friday EUROZONE ECB President Draghi Speaks
Friday CANADA CPI Index 0.1% 0.2%
Friday US Building Permits 1.25 mill 1.23 mill
Friday US Housing Starts 1.19 mill 1.13 mill

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Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.