1. Further Escalation between the US and North Korea?
Last week delivered a huge surprise for those who thought that the North Korean situation will stay dormant after the saber-rattling earlier on this year. While the progress that the communist country made in its missile program is, in fact, huge, Donald Trump’s reaction and the “verbal escalation” that followed, took the attention away from the Russia-investigation that entered a new phase just a few days before. While we still think that the military option is a very unlikely, with no real incentive on either side whatsoever, one diplomatic mistake could trigger a real nuclear standoff that would send shockwaves through the financial system. With that in mind, the next steps of the involved powers will be closely watched, and further escalation could push risk assets even lower once again.
S&P 500, 4-Hour Chart Analysis
2. Bitcoin above the $4000 Level
The tensions concerning North Korea, the SegWit lock in and the waning fork-fears created a perfect environment for the most valuable cryptocurrency, and BTC took the opportunity. The coin surged as much as 70% since in August and it more than doubled off the late-July correction lows. Bitcoin left the other major coin behind since breaking out to a new all-time high at $3000 only one week ago, as safe haven flows favored the safety of the largest decentralized currency. While the long-term picture is definitely overbought now, the short-term momentum could still carry the currency higher maybe even to the $5000. That said, long-term investors should be selling into the rally, as better buying opportunities will emerge in the coming weeks.
Bitcoin, Daily Chart Analysis
3. US Retail Sales and the Dollar
The Consumer Price Index missed the consensus estimate for the fifth month in a row on Friday, and Retail Sales are usually following in suit, so we wouldn’t be surprised by another bearish release that would be an interesting development before the Jackson Hole symposium. The Fed will be under pressure to dial back on the hawkish rhetoric even more, especially if the correction that started this week deepens. The Dollar will be on the center of attention for sure, and given the recent volatility, more fireworks are baked in the cake. The Euro could spike above 1.20 if Retail Sales miss big time, with the FOMC meeting minutes also being released during the week.
4. Gold or Stocks?
Gold crept higher in its long-standing trading range between $1200 and $1300 in the past weeks, and the Shiny Metal is just shy of the upper boundary after Friday’s crazy session. The long-term picture definitely favors precious metals against the overvalued stock market, and a move above the range could indicate that long-term technicals are finally turning fully bullish. Stocks, in the meantime, rolled over on the war mongering, and given the historically high valuations and the internal weakness of the market, the Fed remains the only real safeguard against a significant correction.
5. The VIX and the “Short-Volatility” Trade
Some of the most experienced observers have been advocating that the recent low volatility environment is as dangerous as the housing and the tech bubbles have been. Together with the distorted global bond market (Italian junk bonds yield less than US Treasuries…) there is a huge time bomb ticking under the calm surface. A lot of the positions that have been built up in the past few years are directly or indirectly (passive index funds) short-volatility trades which would quickly turn negative even with a (historically) small bear market, turning the sell-off into an outright massacre, as lot of the holders of these “safe” positions would run for the exits at once. While Jim Paulsen himself said the bull market could last forever thanks to the central banks, we believe that valuation will actually matter with time, and this time it’s NOT different.
VIX (Volatility Index), Daily Chart Analysis
Key Economic Releases Next Week
|Tuesday||AUSTRALIA||RBA Meeting Minutes||–||–|
|Tuesday||US||Core Retail Sales||–||-0.2%|
|Tuesday||US||Empire Manufacturing Index||–||9.8|
|Wednesday||US||Building Permits||–||1.28 mill|
|Wednesday||US||Housing Starts||–||1.22 mill|
|Wednesday||US||Crude Oil Inventories||–||–|
|Wednesday||US||FOMC Meeting Minutes||–||–|
|Thursday||AUSTRALIA||Core CPI Index||–||–|
|Thursday||EUROZONE||ECB Meeting Minutes||–||–|
|Thursday||US||Philly Fed Index||–||–|
|Friday||CANADA||Core Retail Sales||–||–|
|Friday||US||UOM Consumer Sentiment||–||–|