8/7/2019 Risk On: Investors Demand High Yields

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RiskOn:InvestorsDemandHighYields

Itseems,finally,thatinternationalmarketsaredigestingQ1s(ongoing)MiddleEastcivilwarsandtheJapaneseearthquake,oratleastturningablindeyeforthemoment.Withthisweeksclichsetofupbeateconomicdataandexpectation-shatteringQ1earningsreportsholdinginvestorshands,itlookslikeeconomieshavebeguntoputtheirmoneywheretheirmouthis.

9-monthchartoftheS&P500withFibonacciretracements.ThemostrecentFibotrendstartedinDecember2010andbeganacyclicalcorrectionintoaninvertedhead-and-shoulderpatterninFebruarywhenMiddleEastfearhitmarkets.Withequitiesreachingpre-correctionlevelsthisweekandcrudeoilbackunder/aroundthemanageable$110/bbllevel,investorsfocusedontwopiecesofnewsthisweek:USbudgetuncertaintyandsuccessfulSpanishbondauction.

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USD

InvestorsendedQ1withatasteforrisk-aversion,especiallylongtheJapaneseyen,butitseemsthatQ2isembracingtheoppositenotion.Thesafe-havenUSDhasbeenthescapegoatformuchoftherecentrisk-aversion,fueledbythe(insignificantinmyopinion)debateoverapossibleUSgovernmentshutdown.BudgetdebatehasinstigatedthepushfromtheUSdollarandyields,buthigheryieldsaroundtheworldhavebeenpullingmoneyintoriskier(commodity)currenciessuchastheCanadiandollar,Australian

dollar,BritishPound,andsurprisingly,theeuro.

TheUSdollarindex($DXY)sinceApril5th.RemindersofprevailingUSbudgetandtradedeficit,inflationconcerns,andtheFedsdevotiontonear-0%interestrateshavecontributedtoemaciatingtheUSDtotermlowsagainstthemajorsixcurrenciesofthe$DXY.TheUSdollardoesnotseemtohaveacrutchinsight,especiallywhilecentralbanksaroundtheworldareraisingratesoffofamixofinflationreportsandconfidenceindomestic/internationaleconomicrecoveries.ItseemsthatweareexperiencingthebeginningofasustainedabandonmentoftheUSdollarforeuro.

EuropeanRates

WednesdaysSpanishbondauctionwentunexpectedlywell,firingcapitalflowsintotheeuro,andevensendingSpanishrateshigheroffofincredibledemand.Thesuccessofthebondauctionbolsteredconfidenceintheeuro-zoneandconvincedmanyinvestorstosellthesafe-havenUSdollarandgolongmuchhigher-yieldingEuropeandebt.TheauctioninfusedthespiritofitsnotthatbadintotheEuropeandebtpre-crisis,andinvestorsarerealizingthattheeurohasbeenover-soldoffofspeculation.

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20-dayEUR/USDchartwith50/100DMA.BollingerBandsarethreestandarddeviationsfromprevious20-daypricesmovements.A200-pipmovefortheeurobeganafterthecrossbreachedthelowerbandonTuesdayinanticipationforSpainsbondauction.Gold

Historicand31-yearhighshavebeenthenormforgoldandsilverpricesrespectivelyoverthepastfew

weeks.Markedbythisweeksrisk/yieldappetite,ittookgoldpriceslessthantwomonthstocloseabove$1,500/ozafterbreakingthroughthe$1,400/ozlevelinFebruary.Goldpriceshavebeensupportedbyinternationalinflationconcerns,MiddleEast/quakesafe-havenbuying,andadepreciatingUSdollar.GoldpricesmaybefurthersupportedbythisriskcyclethatdrawsmoneyoutoftheUSdollar(sansrisk)andintogold(risk);adepreciatingUSdollarevenfurtherelevatesgoldprices,sogoldmaygetcaughtinashort-termbubbletrendwithriskforseriouscorrectionontheincidenceofrisk-aversionand/orconfidenceflowstotheUSdollar.Thisweekhasgivenrisetoapossibleriskcorrelationbetweentheeuroandmetalsprices.BothhavesurgedoffoftheEuropeanriskparadigmshitandafallingUSdollar.Watchforthistrendtocontinueinthenear-term.Pricesmovesforthepairmaybestrong,butabreakdowncouldsendgoldpricesdownto

themid-$1,400s,asanalystsnotethatphysicalgoldexchangehasnearlystoppedduetorecentvolatilepricemovesinthefuturescontracts.njb