Fri, 09/25/2020 – 14:32
Since the equity market topped a few weeks ago, bears have been going around the room taking turns punching various assets in the face.
It started with equities and moved into Bitcoin which was rejected at $12,000 and promptly collapsed into support around $10,500.
Then it was oil’s turn, which three weeks ago broke down below $40 Brent Crude for the first time since May.
The music finally stopped for copper, gold, silver and the euro. All of them got bushwhacked like they were old people wearing a MAGA hat in Portland this week.
All of this occurred because the U.S. dollar first stopped falling and then had the temerity to put in a weak rally. The USDX, as flawed a measure as anything coming out of pollsters or the BLS, popped off its recent lows to break out definitively above 94.
And as we finish this final full trading week of Q3 we have to ask ourselves are we setting up for another dollar whirlwind in Q4 or will the winds of political unrest keep the dollar weak as the Fed re-enters the market and make the magic money machine go Brrr…?
But given that even the Fed is finally admitting that all this QE is actually deflationary do we really think there’s a real choice in this?
Because if the weekly chart didn’t convince you the next dollar bull wave is in process, then let’s go out in time and see what’s what?
Let’s take this one-step further in time to to complete the picture, because none of this means anything if the long-term chart is bearish. That would just imply a mild reaction rally which will likely fade in Q4 or Q1 2021.
None of this is a done deal since Q3 and September do not close until Wednesday, but the markets are primed for this to occur. That monthly bearish engulfing reversal bar that the USDX is tracing can be seen all across important markets at this point — AAPL, Silver, and the NASDAQ are all flirting with this most bearish of signals.
But the most important one, in my opinion, is the euro as news this week of increasing odds of a no-deal Brexit coupled with breakdowns of the European banking sector and FinCEN releases of turning a blind-eye to money laundering put big pressure on the currency that just won’t die.
This is looking for all the world like a classic false-move in the euro to $1.20 on news of the European fiscal package which gave tax and spend authority to the European Commission for the first time. And while that is a major ‘accomplishment’ for the EU it is also not, at this time practical or germane to the very real problems existent within the European economy.
As COVID-19 news goes against Europe, which feeds The Davos Crowd’s plans for a Great Reset, the euro will come under even stronger pressure in Q4 as economic data worsens.
This is especially true as Donald Trump’s odds of re-election rise, which they are daily. A Trump victory should send the euro into a real tailspin which could breach the March low if things get disorderly.
From shifting polls to collapsing narratives about racially-motivated police killings, the malfeasance surrounding Obamagate and garnering enough votes to replace Ruth Bader Ginsburg on the Supreme Court, Trump looks to be in control of things with forty days to go until election day.
I fully expect at this point for U.S. Attorney John Durham to deal Obama et.al. a massive October Surprise which will offset any weakness in equity markets thanks to a rising dollar.
The markets have traded all summer betting on a Biden victory and political unrest keeping in question the future of investor capital in the U.S. That has kept the dollar weak and the euro falsely strong. It has guided the Yen higher on renewed Chinese economic strength but it hasn’t done anything to whet real appetites for the dollar or dollar-denominated assets.
The 10 year US Treasury has pushed backed towards 65 basis points, the yield curve is flattening because there’s no where to go on the short end of the maturity curve. Mnuchin and the Treasury can still sell record levels of long-dated U.S. debt at record high prices and the auctions not tail badly.
But the most telling thing about all of this is that we haven’t seen any inkling yet of real turmoil in the financial plumbing and yet these bearish technical signals are already happening.
Foreign central banks are still holding their purchases in trust with the Fed in New York, reloading for the next round of currency defense.
From the latest Fed Balance Sheet report, there’s no stress on their balance sheet. Repos are still at zero. Central Bank Liquidity Swaps are still falling, now down over 90% from their peak of $455+ billion in April.
This isn’t to say all is well or anything it is to say that nothing seems imminent and yet, we’re seeing headline-grabbing volatility, a $150 drop in gold prices, a $7 drop in Silver and a 4% move in the euro in a two-week period.
And these are supposed to still be the good times where the economic data is holding up, Pelosi and the Democrats are in full-on “holding our breath until we turn blue and pass out” mode and every day seems one day closer to a permanent fracturing.
If this is what good times look like, the real question we should be asking ourselves now is, “What happens when things get real?”
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Author: Tyler Durden