Equities rebound, dollar higher, yields higher
Abraham George: Thursday sell-off is a wake up call
Markets plunged on Thursday but recovered sharply on Friday and closed almost to the middle of its rise on Friday. The sell-off was a volatility wake up call. An acknowledgment that the pandemic and its economic impact are far from over.
Following the Fed’s cautious tone about the US economy, the IMF issued a gloomy warning about the global economy. Reports of spikes in COVID-19 infections in about 14 US states freaked out the markets. The rise in numbers need to be viewed in context.
On June 11, the authorities ran about 450,000 tests. For comparison purposes, on Apr 11 that number was only around 139,000. Despite 3.2 times more tests, the daily new cases number continues to drop. With states reopening and testing on the rise, more infections are inevitable. However, as US Treasury Secretary Mnuchin stated, a sustained economic shutdown is very damaging to people’s livelihoods and could not continue indefinitely.
The fall in markets on Thursday was the 4th biggest single day fall of all times. So, a pullback should not have been surprising. But let’s look at how it could play out in the coming week.
Equities
At serious tops in the markets, the major indices can get into non-confirmations. What do I mean by that? Last Tuesday and Wednesday, the Dow and S&P 500 stalled and were showing signs of weakness while the NASDAQ surged to new record highs.
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In February too we saw these non-confirmations which resulted in a 38% plunge. Given all the above supporting factors, think the current non-confirmation is more compelling and should be resolved with a bigger drop.
We believe any further pullbacks in the S&P 500 should be capped under 3090. A resumption of the down move can start anytime during the week.
Bonds
Though we warned about a rise in bond prices, the move up was much sharper and stronger than we thought. The main reason could have been investors moving into the safety of bonds when stocks sold off. Think prices can now drop down to the 174-176 window. While we look for much lower levels in bonds, price action in the coming weeks will determine its future trajectory.
Euro
The Euro probably saw a significant top at 1.1423 on June 10 but it is too early to confirm. Think a move down to 1.1025 - 1.1100 is on the cards.
Gold
Gold and Silver are like Batman and Robin of the commodities market. Most of the time, they operate in tandem but there are long periods of non-confirmations. The current non-confirmations go back a year.
Gold went above its July 2016 high on June 20, 2019 but Silver has not made a corresponding high. In 2011, the divergence lasted nearly five months. Silver topped on Apr 25, 2011 and Gold on Sep 6, 2011. Based on Gold’s longer-term price structure and its top in 2011, we have been arguing that a bigger fall in gold is on the cards. We think the recent top at 1766 should contain that but there is a chance that it can overshoot to 1800.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.