Volatility could rise in all asset classes

Abraham George Macro View

I did not write any report for the past few days due to the holiday season. But the markets have been active. In the last two days Fed Chairman Powell and Treasury Secretary Mnuchin have been on Capitol Hill. Powell said that “ in the medium term there is upside risk.”

Upside risk to the economy means faster growth and higher inflation. When trillions of dollars in government and Fed stimulus meets the hopes of a return to normal ( via a vaccine ) we could get an asymmetric risk to top side.

We are already witnessing inflation in asset prices. This could soon spill over into daily living expenses which should force wage inflation to rise as well. This could have major implications in all the asset classes that we follow. Lower bond prices ( higher yields ) and higher gold prices should be the stand out trades.

Equities

The pattern that is displayed is that of an ending diagonal. However there is divergence between the two major indexes that we monitor. The S&P has risen to 3678.45 to make a new high while the Dow hasn’t. Under the present scenario the maximum upside potential for the Dow is 30,352. In the S&P 500 the potential remains to 3705. A move below 3592 will indicate that the diagonal structure is complete. Will have more in-depth analysis by the weekend.

Bonds

Bonds could be threatening for a major fall.( rise in yields ). The recent rise to 175^10 on Nov 10 could have been a significant top. The comments from Fed Chairman, the day before also supports our technical view. Immediate resistance may be as close as 173^05 or 173^30. Greater bearish potential exists and do be prepared for it.

Euro

Euro has shown more strength than we originally anticipated. There could be a pull back from current levels but think we should move higher to 1.2140-50.

Gold

Gold has made a significant recovery from our initial line of support at 1760. Since Aug of this year Gold has dropped about 15% . From the highs of 2080 to 1765. We were looking for more weakness but that might not be the case. The rise from 1765 looks very impulsive meaning after some small pullback prices could rise to 1880-1890. Will come up with a more detailed analysis over the weekend.

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.