“Although gold futures remain near-term overbought, momentum is decidedly higher. Fundamentally, the sharp downtrends in bond yields firmly support the bullish case for gold.” said Tom Essaye. Click here to read the full article.
What’s in Today’s Report:
- How the Bond Market Will Tell Us Whether the Fed Rate Cut is Preventative or “Too Late”
- Key Levels to Watch in Gold Today
Futures are tentatively higher ahead of the Fed this morning as AAPL earnings beat (shares up 4%+), economic data was mixed, and there were no real trade war updates o/n.
Economically, China’s CFLP Manufacturing PMI was slightly better than feared at 49.7 but importantly still below 50 pointing to contraction while EU data remained “Goldilocks” with in-line growth metrics but soft inflation readings.
Today, investors will clearly be keenly focused on the Fed but there are some other catalysts to watch. On the earnings front, GE ($0.12) reports before the bell while QCOM ($0.75) results will be released after the close.
Economically, the first look at July jobs data will hit this morning with the ADP Employment Report (E: 155K) and then Q2 Employment Cost Index (E: 0.7%) will be released shortly after.
Turning to the Fed, the FOMC Announcement will print at 2:00 p.m. ET, (E: -25 bp cut to 2.00-2.25%) and Powell’s Press Conference follows at 2:30 p.m. ET. The market has high expectations for the Fed today and even a mildly hawkish disappointment could trigger significant volatility as valuations remain as stretched as they have been in years.
What’s in Today’s Report:
- Dow Theory Update: The Transports Continue to Lag
- Gold Update
Futures are down slightly as the recent run to new highs in the S&P 500 is digested after a quiet start to the week.
Trade optimism faded modestly overnight amid several less encouraging news articles while there were no notable economic data releases overseas.
Today is lining up to be a busy day as there are a lot of potential market catalysts to watch ahead of the G20 this weekend.
On the economic data front, there are several housing numbers due out: Case-Shiller HPI (E: 0.2%), FHFA House Price Index (E: 0.2%) and New Home Sales (E: 680K) as well as Consumer Confidence (E: 132.0).
There are also multiple Fed speakers: Williams (8:45 a.m. ET), Bostic (12:00 p.m. ET), Powell (1:00 p.m. ET), and Bullard (6:30 p.m. ET). Powell will clearly be the most important to watch, however it remains very unlikely that his tone changes much (or at all) from last week’s FOMC press conference.
There is also a 2 Year T-Note Auction (1:00 p.m. ET) and if demand is soft (so yields rise) that could pressure stocks as it would show the market is dialing back expectations for a very dovish Fed in the back half of 2019.
Lastly there are a few companies reporting earnings today, but the FDX report after the close will be the key to watch as the release could offer insight (positive or negative) into the latest influence that U.S.-China trade tensions have had on global trade.
Tom Essaye, the founder and president of Sevens Report Research in Palm Beach Gardens, Florida, says last weekend’s G-20 finance ministers and central bank governors meeting produced no progress on U.S.-China trade, and there are no…Click here to read the full article.
Tom Essaye quoted in ETF Trends. “There can be no clearer message than that to the Fed: Rates are too high. This is the bond market’s equivalent of a bullhorn screaming it in Powell’s face.” Click here to read the full article.
“A firming dollar and sharply rising bond yields” were also reasons why gold saw such a big drop Thursday. Gold rallied too far too fast on the dovish shift in the…” said Tyler Richey, co-editor of the Sevens Report. To read the full article click here.
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Gold rallied 0.67% Tuesday, as political angst spurred a fear bid while strength in the Treasury market continued to help the “real-rate” argument for gold. British inflation data missed expectations, and that was the third release since Friday that showed below-expected price pressures.
That trend helped fuel dovish money flows, which ultimately bolstered the case for gold, because a lower pace of inflation changes the narrative of the world’s central banks. It’s also cause for recalculation of the real interest rate equation (which is simply interest rates minus inflation rates equals real rates).
If real interest rates are actually poised to move lower (as nominal rates fall and inflation remains flat/does not accelerate) that will be bullish for gold and the rest of the precious metals, as they are safe-haven assets that do not offer yield.
For now, we remain neutral on gold due to the technical support violation in early July. Looking ahead, it’s all about the fundamentals, which come back to real rates.
If real rates continue to fall, even because of soft inflation causing a slightly dovish shift in central bank expectations, that will be bullish for gold long term.
From a broader standpoint, if real rates fall further, that will mean that the economy is struggling, or at the very least not meeting expectations. That will be a concern for stock investors, and ultimately holding gold allocations would be a sound hedge against volatility.
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Turning to gold, we saw an unwind in the Trump Trade that has dominated the markets since the election yesterday morning. Reason being, the markets did not gain the clarity they were hoping to from Trump’s press conference Wednesday, so basically investors were left disappointed.
Stocks pulled back, the dollar declined and bonds rallied, all of which supported the early gains in gold. Looking ahead, if the dollar continues to grind lower and the bond bounce continues, gold will be able to extend recent gains. But until futures can establish themselves above the $1235 congestion area, this still needs to be considered a rebound in an otherwise downward trending market.
Gold futures declined yesterday, initially thanks to a stronger dollar; however, a reversal in the greenback saw precious metals close well off the worst levels of the day. Gold futures declined 0.34% on the day.
It is clear that the precious metals market, specifically gold, has gotten crushed since the election, and there are a lot of investors wondering if now is the time to buy.
The simple answer is, “Not yet.”
Longer term, given The Sevens Report is positive on inflation, gold will rally again, but The Sevens Report needs to see higher inflation to offset two strong headwinds on gold near term.
First, a lot of this reversal was thanks to the unexpected election outcome that initiated the rally in the dollar to multi-year highs. When the dollar rallies hard, gold will fall every time. Going forward, the dollar rally will need to level off in order for the gold market to materially stabilize. The Sevens Report long-term upside target for the Dollar Index is between 106 and 107, so until The Sevens Report see those levels (or signs of a significant reversal in the greenback confirmed by some sort of fundamental altering event) the outlook for gold is not very bright… until The Sevens Report sees an acceleration in inflation.
Aside from the dollar, the real interest rate (nominal interest rates minus the inflation rate) has offered the best fundamental read for the gold market.
In the wake of the election, inflation expectations did not materially change; however, nominal interest rates surged in a big way. That resulted in a spike in real interest rates, and that’s very bearish for gold.
When inflation accelerates, and starts to outpace rising interest rates again, The Sevens Report will see gold as an attractive investment like it did earlier this year.
Remember, Treasuries were trading sideways this summer and inflation was firming, which led to declining real interest rates (which is bullish gold). But if the trend in interest rates is materially higher and inflation remains well contained, gold will likely fall further.
To be clear, gold and the dollar can rally together, just not while the dollar is moving as swiftly as it did post-election. If inflation shows signs of getting out of hand, and the Fed is perceived to be “behind the curve,” then gold can rally (because real interest rates will decline as inflation accelerates despite a rally in the buck).
Technically speaking, the trend is lower in gold, and there is not much support before the $1130-$1140 area. To the upside, retracements to resistance at either $1210 or $1225 should be normal throwbacks in an otherwise downward trending market.
Bottom line, gold is not a buy now. But as market conditions settle, The Sevens Report will look for the two key components necessary for a new rally in gold… the dollar leveling off and real inflation rates showing signs of declining as actual inflation edges higher.
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