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Analysis and Charts of Global Markets

written by Gary Dorsch, Editor and Publisher
The mini Crash of October 2014
Oct 22, 2014
The long awaited downturn in the S&P-500 index finally began on Sept 19th and ended on October 15th. The S&P-500 index topped out at an all-time high of 2,015 and briefly fell to as low as 1,820, for a decline of -9.7%, or just shy of the -10% requirement to be regarded as a bona-fide correction. Such shakeouts are part of the normal cyclical movements in the stock market that wipe out the speculative froth from the market, and thus prevents the emergence of unsustainable bubbles that can burst into Bear markets later on. What’s unusual this time however, is the extraordinary length of time that the S&P-500 Oligarch index has avoided a correction of -10% or more. The Dow Jones Industrial index has gone 725 trading days without a correction, the fourth-longest streak since 1929. However, a correction in the S&P-500 index typically occurs about once every 18-months. But it’s been 38-months since the last bona-fide correction of more than -10%.
The Emergence of the US Petro-dollar
Sep 15, 2014
A less cited reason behind the recent strength of the US$ index and what could auger the beginning of a multi-year advance for the greenback, - the US’s output of crude oil and natural gas continues to surge to new record highs. The US’s production of crude oil has reversed years of decline thanks to the development of shale resources, which have boosted output by more than +65% in the past six years. The US’s shale boom has allowed producers to unlock thousands of barrels of reserves, putting the US on course to become the largest producer of oil globally, which would dramatically reduce its dependence on imports.
Russian Bear Rattles markets, but PPT Rides to the Rescue
Aug 14, 2014
There are very rare events that occur somewhere around the world, otherwise known as “Black Swan Events” that can befuddle “financial science” and the best designed computerized models. For example, heading into 2014, few traders could’ve predicted that the Kremlin would act to seize Crimea’s territorial waters along with the region itself, and that Moscow would deploy 20,000 to 45,000 troops along the eastern and southern borders of Ukraine, thus marking the start of the biggest confrontation between Moscow and the West since the Cold War, and triggering a round of economic sanctions with Europe and the US.
Which way is Inflation Blowing? Watch Commodities
Jul 15, 2014
In an age when governments of every political leaning and ideological stripe distort economic data to promote their parties’ interests, it is hardly surprising that the nation’s inflation rate is reported in a manner that best suits their political needs. By the same token, in an age of near universal cynicism on the part of citizens towards their corrupt politicians, - it is entirely natural for official inflation data to be wildly at odds with the reality faced by consumers and businesses, and in turn, to be regarded with utter disbelief.
“Least Loved” Bull market becomes Euphoric
Jun 6, 2014
After nearly six years of unprecedented intervention by the world’s top central banks, the world’s financial markets are hopelessly broken. What used to be accepted as market gospel that guided investors’ decisions in the marketplace, before the 2008 financial crisis, - no longer seems to apply in today’s marketplace. Wall Street is no longer the bastion of free and open markets, where the prices of bonds and stocks are determined by the collective judgment of millions of investors. Instead, market prices are determined by political appointees, called central bankers, who pull the monetary levers behind the scenes.
To view more articles click on Archive
Booming US Oil Output buoys US Petro-dollar
Updated 7:53 PM, Sep-22, Mon
Many analysts and traders were caught off guard by the US$’s recent bout of strength, and as George Orwell used to say; “To see what is in front of one’s nose requires a constant struggle.” ------------ The most obvious explanation for the US$’s resiliency is the Federal Reserve’s gradual withdrawal from its Quantitative Easing (QE) scheme. Last year, the Fed pumped $1-trillion of excess US$ liquidity into the money markets, through its QE-3 scheme. However, at its Dec ’13 meeting, - the Fed switched gears, saying it would gradually reduce its injection of monetary heroin to the QE addicted markets. The Fed has reduced its QE-injections by $10-billion /month at each scheduled board meeting this year, to a pace of $25-billion in Sept ’14. The Fed is now entering the homestretch of “Tapering” QE, and will turn-off the money spigot at the end of October, and thereby removing a major headwind for the US$. ----------------------------- Economists are now trying to pinpoint when the Fed would begin to hike the federal funds rate from its current range of zero to 0.25%. Expectations of a series of baby-step Fed rate hikes to begin sometime in 2015, were heightened on Sept 11th, with the appointment of the Fed’s #2 chief, Stanley Fischer to oversee the central bank’s all-important “financial stability panel” - otherwise known as the “Plunge Protection Team” (PPT). Fischer’s crisis management skills will be utilized in guiding the clandestine activities of the PPT – as it tries to cushion the US T-bond and stock markets from the fallout of the Fed’s exit from QE-3. A series of baby-step rate hikes to 1% could tip the US-economy back into a recession, or worse yet, trigger a -10% correction in the US-stock market. ------------------------------ Even if the Fed gets cold feet and decides to delay the series of baby-step rate hikes, the US$ could still win the reverse beauty contest, because the Bank of Japan (BoJ) and the European Central Bank (ECB) are also expected to keep their lending rates locked near zero percent for years to come. Better yet for the US$, - the BoJ is on a set course to weaken the yen by injecting around ¥5-trillion per month into the Tokyo money markets, through the end of March ’15, and the ECB is preparing to print anywhere from €500-billion to €1-trillion over the next few years, under its “Targeted” QE scheme, which is designed to boost bank lending in the Euro zone economy. Thus, the US$ has the winning edge in the arena of competitive currency devaluations with its trading partners. ----------------------------- Yet there’s another less cited reason behind the recent strength of the US$ index and what could auger the beginning of a multi-year advance for the greenback, - the US’s output of crude oil and natural gas continues to surge to new record highs. The US’s production of crude oil has reversed years of decline thanks to the development of shale resources, which have boosted output by +65% over the past six years. The US’s shale boom has allowed producers to unlock thousands of barrels of reserves, putting the US on course to become the largest producer of oil globally, which would dramatically reduce its dependence on imports.--------------- US oil output averaged 8.6-million bpd in August, the highest level since July 1986. “US-crude oil production will approach 10-million barrels a day (bpd) in late 2015, and will help cut US imports of fuel next year to just 21% of domestic demand, the lowest level since 1968,” the EIA says. In Q’1 of 2014, the US passed Saudi Arabia to become the world’s largest producer of petroleum liquids, with daily output exceeding 11-million bpd, including crude oil, hydrocarbon gas liquids, and biofuels. In fact, the US would account for 91% of the 1.3-million bpd increase in global oil output next year. ------------------------------ The shale revolution has enabled the US to reduce its imports of crude oil to 7.2-million bpd, or roughly -34% less from its peak in June 2005.--------------The US’s shale oil revolution has helped to narrow the overall US trade deficit to -$42-billion per month, on average. That’s far less than the average deficit of -$62-billion /month from 2005 thru mid-2008, when the US trade balance was at its worst. The narrowing of the US trade deficit is adding an estimated +0.6% to the US’s annual economic growth rate, compared with a few years ago. And looking towards the future, with the growth in world energy demand expected to increase around +35% by 2030, the US-economy could find itself at close to self-sufficiency in energy. The story line for the US Petro dollar is bound to get better in the years ahead. The US has more recoverable natural gas than any other country. This represents a century’s worth of output and can support peak production at more than twice the 2013 level. As such, the EIA forecasts natural gas prices will average below $5 through 2023 and less than $6 until 2030.
Archived Comments:
Booming US Oil Output buoys US Petro-dollar
Aussie dollar Tumbles below 90-US-cents, - weighed down by Slide in Iron Ore
Updated 7:56 PM, Sep-22, Mon
Aussie dollar Plunges alongside Meltdown of Iron ore market, - While the US-dollar is enjoying a renaissance as a “Petro” currency, - the Australian dollar finds itself on the slippery slope of a Bear market. For the week ended Sept 11th, the Aussie dollar fell -3.5%, skidding to the psychological 90-US-cent level. The price of iron ore, used to make steel, - and by far Australia’s most important export, - tumbled to five-year lows on Sept 11th, - settling around $82 per ton, and less than half its all-time high of $185 /ton. The Aussie dollar’s fortunes are influenced by gyrations in the world’s most heavily shipped mineral, which accounts for more than $1 in every $5 of Australia’s export income. -------------------------------- While demand from China’s steel mills continued to climb to record highs, Australia’s miners pumped billions of dollars into expanding the size of their iron ore mines and increased their export capacity, in order to capitalize on China’s high-speed urbanization. Demand for coking coal, which is used to fire the steel mills, and thermal coal used to generate electricity also played to Australia’s advantage as a large-scale coal exporter. Like all booms however, Australia’s mining bonanza has reached its zenith. China’s factory sector sputtered in August as its industrial output slowed to +6.9% in August, year -over-year, from +9% in July, - and the weakest since Dec ‘08. Housing sales in China have fallen -11% in the first eight months of 2014 leaving developers burdened with bulging inventories, and fickle buyers. As such, demand for Australia’s minerals could weaken in the months ahead. --------------------------Softening iron ore prices, combined with the Fed’s tapering of QE-3, have weighed heavily on the Aussie dollar - the world’s fifth most actively traded currency. Ironically, it’s been Australia’s mining giants, - Rio Tinto and BHP Billiton that are contributing the most to the supply-side pressure that is bearing down on the price of iron ore. They are the lowest-cost iron ore miners (break-even at $45 /ton) and are flooding the market, in order to push higher-cost miners out of business. With its spending reined in, RIO has lifted annual production at its mines from 240-million tons to 290-million tons in a year. It is aiming at 360-million tons, and a supply-side squeeze is under way. If the price of iron ore falls below $80 /ton for ‘‘an extended period,” higher-cost miners, could close down quickly. Rio, BHP and Brazil’s Vale are cash positive even if the iron ore price falls to $50 /ton. It is why they are boosting production. ------------------------ According to RIO, about 85-million tons of iron ore production has already been shut down in China, - where the average cost of iron-ore production is around $120 /ton. China used to source 50% of its iron ore domestically. Now it sources 20% domestically: it’s not hard to guess which miners are filling the gap. Smaller miners in Australia are on the edge at $80 /ton, if their lower-grade ore sells for less than the high-grade ore that Rio and BHP dig up. The RBA is banking on a tighter Fed policy to weaken the Aussie dollar over the longer term, perhaps into the 85-cents to 90-cent range. In the meantime, Aussie$ traders will track the wild gyrations in iron ore, coking coal, copper, gold export prices. In the wild and whacky world of commodity trading, sentiment can often turn on a dime. For example, on Sept 15th, the spot price of iron ore suddenly jumped +4% higher to $85.20, /ton, and helped to brake the Aussie’s fall at 90-cents.
Archived Comments:
Aussie dollar Tumbles below 90-US-cents, - weighed down by Slide in Iron Ore
ECB Engineers Devaluation of the Euro to below US$1.300
Updated 7:59 PM, Sep-22, Mon
ECB knocks the Euro below psychological $1.300, While the US$ appears to be benefiting, either directly or indirectly, from its evolving status as a “Petro” currency, and psychology behind the Australian dollar has long focused on its status as a “Commodity” currency, it would be short sighted to omit that the vast majority of foreign currency transactions are earmarked for buying and selling bonds and stocks listed in the world’s capital markets. Nowadays, the movement of capital across borders happens with the click of a mouse, from a legion of traders ranging from such diverse groups, such as of lower-tier banks, carry traders, pension funds and mutual funds, hedge funds, central banks, sovereign wealth funds, and high-frequency traders, to the private retail investor. ----------------------------------------- In the foreign-exchange market, roughly $5.6-trillion changes hands each trading day, between the spot, forward, and derivatives markets. The Euro is used in 33% of these transactions, or about $1.85-trillion per day. However, the use of the Euro in the settlement of commercial transactions is just a fraction of the overall amount of trading in the common currency, compared to what’s earmarked for investment in financial markets, or what’s utilized by speculators, such as carry traders. As such, the Euro’s exchange rate has been mostly influenced by the actions of the major central banks. For example, the Euro was climbing higher in an erratic fashion from the $1.300 area to as high as $1.400 during the 15-months ending in May ‘14. The Euro was deemed to be the least ugly currency because the Fed was injecting $85-billion per month of freshly printed greenbacks into the US-money markets, and the BoJ was simultaneously injecting ¥7-trillion per month into the Tokyo money markets, under the respective QE schemes. Although the ECB was lowering its repo rate to undermine the Euro’s advance, the central bank was still resisting the nuclear option of QE. --------------------------However, that perception began to change, when in late August, ECB chief Mario Draghi suggested the ECB would start to unleash “Targeted” QE - aimed at the asset backed markets, rather than the sovereign bond markets, but with the same net results, - a massive increase in the supply of Euros. In a battered regional economy further shaken by a mini trade war with Russia, the Euro began to tumble more steeply towards $1.300, and surrendered its gains of the previous year, as the yield on France’s 2-year government notes turned negative to as low as minus -3-basis points (bps). Yields on Germany’s 2-year schatz fell to minus -7-bps, and have been below zero percent since August 25th.--------------------------------------- In this upside-down world, lenders pay borrowers to take their money. It’s a result of the ECB’s move to impose a penalty of -20-bps on banks that park money in the central bank’s vaults. The radical move is an attempt to force banks to lend excess Euros on hand, to businesses and consumers, and end a long drought of credit in crisis countries like Greece, Italy and Portugal. However, in many cases, commercial banks, would rather lend Euros to Paris or Berlin at zero percent or less. ----------------------------------- The ECB says it will provide as much as €1-trillion of cheap 0.15% loans to banks, on the condition that they lend the money to businesses or to individuals, - “Targeted” QE. The ECB will begin dispensing that money on Sept 18th. These loans would be bundled together into packages called “asset backed securities’ (ABS’s), and the ECB has offered to buy the ABS’s with freshly printed Euros. It’s a more intelligent way of trying to jump start an economy, rather than the QE policies in England, Japan, and the US, which are mainly designed to inflate the wealth of shareholders in the local stock markets. And targeted QE increases the supply of Euros floating in the banking system, which has the side effect of weakening the Euro’s exchange rate, in order to help boost the fortunes of exporters.
Archived Comments:
ECB Engineers Devaluation of the Euro to below US$1.300

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