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5 Things to Watch This Week: The Crypto-Rally, US Inflation, the Russia-Gate, the Shaky Stock Market, and China

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1.            New Highs ahead for Cryptocoins?

Bitcoin’s Fork Day came and gone without a major earthquake, and the largest cryptocurrency surged to new all-time highs over the weekend in the aftermath of the August 1 events. The SegWit activation fueled optimism regarding the future of BTC, while the forked Bitcoin Cash has been losing ground ever since an initial rally. The other major coins also staged an advance last week, but most of them are still well off their prior highs. That said, the moves in the segment can turn from small to huge really quickly, and we wouldn’t be surprised on another strong wave of buying, especially after Ethereum finally left its declining trend. With only Ethereum Classic and Ripple being still in downtrends, it’s possible that we will see several coins trying to break-out to uncharted territory.

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Ethereum, 4-Hour Chart Analysis

2.           US Inflation in Focus after Bullish Jobs Data

With the Jackson Hole symposium just around the corner, this was the event where Ben Bernanke announced Quantitative Easing first, mind you; all eyes are on the “not-too-stellar” US economic numbers, which led to a protracted Dollar decline lately. As the market is pricing in a slower tightening cycle, last Friday’s decent Employment Numbers gave some relief for Dollar bulls, after the lackluster readings in the consumer segment in recent month. The Fed’s favorite inflation measure will be coming out on this Friday to shed some more light on the trends, as the CPI index was running below the central bank’s 2% target lately. The Dollar has become definitely oversold, but a huge negative surprise would likely push the EUR/USD above, or at least near, the key 1.20 resistance, while a higher than expected number could fuel the Dollar’s bounce.

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EUR/USD, Daily Chart Analysis

3.           Trump Feeling the heat: Impeachment in the Works?

Although impeachment is still a far-fetched idea, there have been signs recently of a bipartisan “coalition” against the methods of Donald Trump, and that could have important implications down the road. Special counsel Mueller summoned a grand jury in the case of the Russian involvement in the elections, pointing to a possibly long and damaging investigation for the Trump-campaign and the POTUS himself. Also, the markets are starting to react to domestic political developments in the US differently, as that could mean a source of volatility in the near future after a period of historically low risk during the “Trump Rally”. So any further news on the President’s weakness could lead to a sell –off in stocks and the already suffering Dollar.

4.           How Long will the Two-Faced Rally Last?

As the earnings season is getting close to its conclusion, stock investors still face several questions regarding the market’s health. While the Dow has been hitting all-time highs for a record-breaking 8 days straight, the broader indices are notoriously lagging the mega cap benchmark. That behavior is far from the ideal breadth, but this internal weakness has been persistent for months and months, without breaking the rally. That said, the Dollar’s weakness played a huge part in the latter part of the advance and if Friday’s bounce turns into a significant correction, US stocks might underperform the global indices just like European equities did for several weeks now. With that in mind, we wouldn’t jump on the stock-train right now, as the signs are all there that lower prices are ahead in the coming weeks.

5.           Commodities Focused on the Dollar and China

The Chinese CPI and PPI indices and the always crucial Trade Balance data will come out during the otherwise calm week regarding economic releases, and commodity traders are watching closely. Industrial metals have been rallying together with Chinese stocks lately, while precious metals and oil were mostly lifted by the decline in the Dollar. With the latter trend probably entering a correction, positive Chinese data would be needed to keep the bullish momentum. For gold, the long-term picture still looks promising, but oil has run into strong resistance at $50 per barrel, and although the top of its trading range is still higher, odds favor a decline in the most traded commodity.

WTI Crude Oil, 4-Hour Chart Analysis

Key Economic Releases Next Week

Day Country Release Expected Previous
Monday AUSTRALIA AIG Construction Index 56.0
Monday JAPAN Leading Indicators 106.2% 104.6%
Monday SWITZERLAND CPI Index -0.3% -0.1%
Monday UK Halifax HPI 0.3% -1.0%
Monday EUROZONE Sentix Investor Confidence 27.8 28.3
Tuesday CHINA Trade Balance 60.2 65.7
Tuesday CANADA Housing Starts 206,000 213,000
Wednesday CHINA CPI Index 1.5% 1.5%
Wednesday CHINA PPI Index 5.6% 5.5%
Wednesday CANADA Building Permits 54.4 54.3
Wednesday US Nonfarm Productivity 0.8% 0.0%
Wednesday US Crude Oil Inventories -1.5 mill
Thursday JAPAN PPI Index 2.3% 2.1%
Thursday UK Manufacturing Production 0.0% -0.2%
Thursday UK Goods Trade Balance -11 bill -11.9 bill
Thursday CANADA NHPI 0.5% 0.7%
Thursday US PPI Index 0.1% 0.1%
Thursday US Initial Jobless Claims 244,000 240,000
Friday GERMANY Final CPI 0.4% 0.4%
Friday US CPI Index 0.2% 0.0%
Friday US Core CPI Index 0.2% 0.1%
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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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