On track but slowly!

We continue to anticipate a stronger dollar, higher bond yields and a weaker stock market over the coming few weeks. Crude, precious and base metals will consolidate further during this time period.

Our central case remains that monetary expectations will remain focused on the Fed’s promise to adjust rates higher as economic expectations remain constructive. Global economic data continues to reinforce these expectations. Whether they will be fulfilled is another issue. The ECB and the BoJ are ahead of the Fed in disappointing market expectations of tightening. This is one factor in supporting a dollar recovery against the Euro and emerging market currencies. To give this forecast some perspective we expect the dollar index to rise to around 95 from the current 89-90 level and not to fall below 87. Some kind of base appears to be forming with a top formation reflected in the Euro.

In the broad fundamental context the US trade deficit is likely to shrink going forward – the opposite of some expectations due to the US governments fiscal deficit. Our reasoning for this is that the government deficit is offset by the corporate sector, which continues to run a massive surplus. Meanwhile the tax effects on investment should attract investment capital to the US.

In the equity markets our expectation that the next tradable move is a renewed decline to the recent lows remains. The driver for this should be a further rise in bond yields. The reason why 3% is so much in the news is not just because it is a round number but that it represents a point in the long-term downtrend of yields that once exceeded confirms the long term trend has changed. Thus a breach of this level should trigger another bout of equity selling. We also note that Warren Buffett is sitting on $110bn (and growing) in cash and waiting for cheaper prices. His latest letter reiterates his view that stocks are expensive and that there will be a lot of blood on the street from the tax driven bout of M&A deals currently underway.

We also note that European equity markets remain relatively weak with far less dynamic bounces off the sharp corrective move earlier this month. Emerging markets have held up better but all should decline together. Amazon remains the strongest company in the world and made new highs last week. We never recommend shorting the strongest but it looks close to a major top. An Amazon correction would support the general sell-off.

If we are right on the dollar it will be a headwind for commodities over the coming weeks. Crude’s rally since February 9th is corrective and new lows off the recent 71 high lie ahead. In the big picture it is hard to predict how US frackers will play the game but they have plenty of supply in the ground and an easy access to it so it is a matter of game theory as to how they will play the OPEC push to keep prices higher. We think the high is in for a while and would be short crude over the next few weeks.

Monitoring the corporate sector in commodities we noted the performance of Glencore which is one of the strongest. Its great performance is a function of composition but this is now discounted and the stock looks ready to correct with the sector. We will be looking for a buying opportunity about 10% lower from the 396 close.

Gold should test the 1300 level – a technical ideal would be 1290, which is below the 200 day, and thus take out stops. The next leg up should be impressive but patience is in order! Silver remains weak but we will watch for a buying opportunity. This may have a 15 handle. Platinum looks set to maintain its range and is currently at the high end while Palladium is in a steep correction with further to go.

Bottom Line: risk – off over the next week or two at least, perhaps into mid-March.

Malcolm Tulloch

The writer is director of the firm Tulloch Research. The company provides bespoke advice to clients on macro-opportunities in financial markets.

“Intuition is a product of accumulated experience”

Tobias Truman