Dollars, Gold, and Bonds – Oh My!

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The market remains at a precarious level and I think if we can’t hold these support levels into the close we could be setting up for a small correction of a couple of percentage points. On the other hand I am not looking for a full sell-off back to the August lows just yet, with an FOMC meeting and a mid-term on the horizon, there are still some cards that can be played to halt any market pressure.


Dollars, Gold, and Bonds – Oh My!

There is certainly some interesting action in the dollar, gold, and bond markets. The dollar rally was fueled by the ECB’s surprise announce of a rate cut to 5 basis points and the launch of their own rival QE program. The flow in the currency trade moved swiftly from euros to dollars, buoying the dollar index as we saw the euro snap the 1.30 exchange rate. Currencies can move fast and in significant volume.

Dollars!


courtesy of wikipedia

The dollar strength has an inverse relationship to all commodities priced in dollars. As the dollar rises, it forces down the price of commodities priced in dollars. Oil, gold, silver, corn, pretty much anything. Sure supply and demand of the physical asset plays a crucial role in pricing power, however we also can’t simply ignore the impact of the dollar’s value and how it too impacts value. Yet as oil prices decline, global oil demand continues to increase. I believe the recent dollar rally is playing a bigger role in this decline move in commodity prices across the board vs. the actual supply & demand issues of the physical that usually impact commodity prices.

I remember a decade ago a long-time currency trader told me once; “Currencies are just another commodity!”


Gold!


courtesy of wikipedia

Gold prices have come under pressure and a visit to the 1200 level is certainly in the cards and becoming a critical support level. Goldman (a big player in gold) on Monday set another price target of 1150. I have also noticed the spread between the futures and ETFs (non-redeemable) widening as well, there is some significant selling pressure in the non-redeemable vs. the actual deliverable contracts. This seems to be moving in tandem with the dollar strength and also the ECB announcement. While the paper gold is under pressure, the physical demand remains strong. Amazingly deliverable demand remains elevated. Our gold positions own extra puts at this point, in case we get a strong move lower and would love to buy more down at 1150 – if we can get there.


BONDS!


courtesy of wikipedia

Then we look at bonds and what seemed like strength has quickly turned into weakness. Looking at the action it looks like longs are selling to take profits on unrealized gains, which is now pushing back up the yield. This morning the 10-year looks like it might even break 2.6% after recently falling below 2.4%. One would think we would see a rush into treasuries from the exit of the euro, but it is just not happening.


Happy Consumers!

This is all fantastic news of U.S. consumers and the timing couldn’t be more ironic. The strong dollar is pushing down import prices and energy prices. The fall in bond prices are pushing back up yields for the savers. Consumers should certainly feel their dollar go a little bit farther.

One should expect this trend to continue for the next couple of months, well at least until November 4th. However, the problem with the trend in the stronger dollar and the rise in bond yields is going to hurt exports (international firms), the trade gap, and the public debt (with higher yields). It will also have a negative impact on the equity market if left to go unchecked, as investors will be forced to take profit.

It’s a balancing act, by allowing the basic consumer to feel they have a little buying power as prices are dropping, the equity market, manufacturing jobs, and exports will all decline. If this trend moves too fast and spurs a trigger for the exits in the equity market we could see the Fed step up sooner, because a falling equity market heading into the mid-terms is not going to be good for the Democrats or incumbents either.

I think the next FOMC meeting, coming up quickly, may be a little bit more interesting than I initially thought. I thought they would wait until just before the election before making any actual monetary changes. It’s a high-wire act and if we see the market cracking supports and investors heading to the exits, they will try to halt the dollar rally and also push back down the yields – forcing flow back into equities.


Support & Resistance

INDU 17,000
We could test the 17,000 today. I would watch the close. I wouldn’t expect we would see too big of a sell off if we broke, but panic can also feed on itself.

NDX 4050
I think many thought the Apple release would help keep the tech heavy index rally going, but it has certainly stalled. I would look at 4050 as short-term support.

SPX 2000
We are below the 2000 level and I would look at the 1980 level as short-term support. If the market can get above that 2000 level with some volume and strength we may yet avoid a short-term sell-off. The VIX is moving higher and any move down to 1980 will spike the VIX to 15 easily. For the record we have on some NOV put spreads in the SPY.

RUT 1160
The one saving grace is seeing the RUT rally yesterday as the other indices looked weak. It looks like it might come under pressure today, but watch the 1160 level closely. For me this index will be the indicator of any huge trend changes.


FOMC could get interesting.

The next Fed meeting is going to be interesting, does it keep the status quo and allow for the buoying dollar help the domestic consumer, at the risk of the market coming off, a drop in manufacturing jobs, widening trade gap, and higher interest on debt? Or do they step-in and stop the sell-off in the market and start devaluing the dollar again to boost exports and supposedly create jobs?

I don’t envy Yellen and I would love to be a fly on the wall at the next FOMC meeting. I really don’t know what to expect, she has two meetings before the mid-terms. Does she wait or take action now?

Seems like her Keynesian plans have been sidelined in order to help the mid-term elections.

One Response to “Dollars, Gold, and Bonds – Oh My!”

  1. McRocket says:

    Thanks for this