June 20th - The FTSE broke below the 55-period moving average, this average is now acting as a resistance. While the main focus of the trade tensions has been on the US stock market, the Chinese stock market is going down fast due to worries a trade war between China and the US will hit Chinese firms.
The Shanghai composite index broke a key support and is now trading at a near two-year low. I believe the sell off in 2015-2016 was the first leg of the correction, the rally from 2016 to 2018 was the second leg, we are now in the third leg down. The Chinese stock market could fall another 20-30% before this third wave ends.
So it would appear Trump’s strategy is to weaken China through a trade war. Trump believes China has more to lose than the US. Of course China is a big country with large resources and a large investment portfolio denominated in US dollar, mostly US treasury bonds. China could hurt the US by selling these Tbonds, China has the power to move bond yields up and the dollar down by selling massive amount of Tbonds. You can imagine how the stock market will react if bond yields surge (stocks will go down). You can also imagine why a trade war with China would get messy and this would prompt a sell off in the stock market. If the dollar goes down oil and commodity prices will spike up, inflation will accelerate, stocks will go down.
A sell off in stocks is what we expect, whether it is caused by a trade war or something else. I believe the dollar is near the top of its counter trend rally, in the next few days the dollar will turn down to start a long term decline. This will help GBP/USD and gold rally. The FTSE trend will turn down.
May 31st - In the last week we have seen softer economic data while at the same time inflation is on the rise on a global scale. Today France and the EU released stronger than expected consumer price index (CPI).
In the US the latest data on GDP and employment was lower than expected. The stagflation scenario is on track and this is before a full blown crisis erupts in Italy, which would spread to the rest of the world.
Luckily sentiment is positive, this is why investors are not focusing on the risks. In the short term the rally could extend. I recommend you subscribe to my reports for regular updates, I give long term and short term forecasts, if you are a short term trader my reports will help you navigate the markets with the odds in your favour.
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May 24th - Yesterday we noticed something different about the FTSE, GBP/USD was sharply down but the FTSE was falling too. I guess the natural forces were at work, the market cannot rise for ever, at some stage even good news will fail to rally the market.
We need to think in terms of valuations, if the market goes up too far stocks become expensive and the market will go down to re-adjust. You can see the surge in mining and oil stocks over the last couple of months, yesterday these stocks were sharply down. Mining and oil stocks were leading the advance, now they are leading the decline because they are overbought. Elephants don’t galop, when you see a company like BP rallying 26% in the last two months you know we are near the top.
As noted the pound was down yesterday, we continue to see low inflation in the UK, the CPI number was below estimates. But yesterday the focus was on the FOMC statement, in the statement Fed officials signalled they are set to raise interest rates at their meeting in June. That was expected. What is not expected is cutting interest rates and it seems that if the economy does not strengthen the cycle of rising interest rates will come to an abrupt end. Fed officials are less confident the economy will strengthen and we know why, we have seen weak numbers recently. This is why they did not say whether they would hike one or two more times this year following the June hike. This was interpreted as dovish and the dollar, which had been surging prior to the announcement, pulled back.
Indeed, I think the Fed will not hike anymore after the June hike, by that time it will become clear that the combination of slow growth and rising inflation will take its toll on the economy and the Fed will have no choice but to stop hiking rates. The Fed is not concerned by rising inflation but that would be expected, the central bank does not want to disrupt financial markets, they know rising inflation is a problem but they won’t admit it.
Going forward and based on my scenario we can expect the dollar to fall and GBP/USD to rally. Today we have UK retail sales at 9.30, last time the number was well below forecast, will the number be in line or higher this time? This would help GBP/USD rally. The UK economy and in particular the retail sector is struggling, we can’t rule out another weak number today. But GBP/USD has completed five waves down, if the low 1.3305 is not the bottom, we are not far away from a bottom.
There are two potential scenarios on FTSE, the first one is shown on the chart above. The second scenario is a decline to the 7400 area followed by a rally to new highs.
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May 16th - We continue to see weak data in the UK and rising inflation in the US, this combination is bearish for GBP/USD. GBP/USD made a new low and this explains why the FTSE is not moving down yet. Yesterday’s weaker than expected UK average earnings index is also a sign of low inflation in the UK. But this will change as oil prices make multi-year highs. The pound is facing headwinds on two fronts, weak economy and strong dollar. The dollar is rising because inflation is expected to rise, this means US interest rates will rise which is positive for the dollar.
But there is another problem for the US economy which is the threat of stagflation. We have seen a deterioration in the US economic numbers while inflation is rising, the combination of low growth and high inflation is called stagflation which is bearish for the stock market. Yesterday the S&P fell sharply after the release of the latest US retail sales data. The number was weaker than expected, I said that any weakness in the US economy will be accompanied by a sell off in the stock market because at the same time inflation is rising. Yesterday bond yields made a new high, the rise in bond yields is associated with rising inflation. Right now there is no sign inflation will cool, and no sign the US economy will strengthen, therefore I really believe the S&P has turned down.
If the S&P has turned down the FTSE should go down too, the only problem with the FTSE is the bearish influence from the S&P is offset by the bullish influence from the declining GBP/USD, this is why the FTSE is not moving. I suspect GBP/USD will continue to decline because the UK numbers are not going to get better in the short term. Unless we see rising inflation in the UK. Also because the dollar index does not appear to have completed its rally. I think the dollar index is not far away from a top, may be it will peak early next week. This means GBP/USD will probably fall to 1.3400 and the rally will start next week. On the chart it looks like we are in the fourth wave and the next decline will be the fifth wave to 1.3400. Therefore the real decline in the FTSE will probably start next week when the pound rallies.
Longer term rising inflation is bearish for the dollar. A bit of inflation is good for the dollar but too much inflation is bearish for the dollar as the dollar will lose purchasing power. When investors figure this out the dollar will collapse, the pound will soar and FTSE will collapse. This should happen when bond yields rise above 4%.
May 2nd - The index pulled back to 7500 yesterday’s after 4.30pm and I thought the decline had started. But once again good news came to rescue the markets, this time it was Apple’s results that beat expectations. The stock surged in after hours and when a large company like Apple rallies the market will rally. It’s unbelievable how the news has been good to the FTSE 100 in the last two weeks, normally over a period of time you get good and bad news but here it’s only good news.
The other good news was weaker than expected UK manufacturing PMI, this pushed the pound to new lows. A weaker pound is bullish for the FTSE. Statistically it is impossible to have only good news so I expect some bad news at some point and it could happen in tonight’s FOMC statement. Meanwhile GBP/USD has broken below the previous low.
When wave B ends above the top of wave A and wave C ends below the bottom of wave A we have an expanded flat [A,B,C]. This suggests the decline in GBP/USD is over and the pound will rally to start a new five wave rally. This rally could start at any time and a bit of bad news like a dollar decline would help. I mention the dollar because if the dollar goes down GBP/USD will rally and I expect a pullback in the dollar index because the rally is in five waves.
People expect the Fed to raise rates but the economic data in the US has soften recently. The March nonfarm payrolls were well below estimates and yesterday’s ISM manufacturing PMI came in below forecast. At the same time people expect higher inflation, this is why the dollar is rising and hurting GBP/USD, higher inflation means higher rates which is positive for the dollar. But the economic number are weakening and that is the problem. People fear the US will enter a period of stagflation, a combination of low growth and high inflation which is negative for the stock market. This is the US stock market fell sharply after the ISM manufacturing numbers. If the economy is weakening the Fed won’t raise rates and this is bearish for the dollar and bullish for GBP/USD. In tonight’s statement any mention of lower growth forecast or no more rate hike would send the dollar lower. The statement could coincide with the start of a rally in GBP/USD.
With regard to the FTSE nothing has change, the FTSE has been ready to turn down for a week but each time it is about to turn good news comes and pushes the FTSE higher. Even a declining S&P is not enough to drag the FTSE lower. The other thing is that when two markets are correlated and the correlation is broken (the FTSE not following the S&P) this is only temporary, the correlation will return to normal, this could happen at any time and only when the pound stops declining
April 26th - The FTSE 100 declined to 7334 yesterday before rebounding, the S&P is rebounding too. The rebound in the S&P accelerated in after hours after some more earnings reports that beat expectations. It is a regular feature of the earnings season, earnings reports tend to beat expectations because analysts tend to underestimate the earnings. It is another manipulation to make sure share prices go up. In a bear market this manipulation presents an opportunity to short the market. Despite the better than expected earnings, there are some bearish developments to take into account. Bond yields will rise more, earnings may have peaked, inflation will spread fast and it will decrease the dollar purchasing power, US GDP will tumble as a result. This latest point also explains why earnings in the US may have peaked and we were reminded of this the other day when Caterpillar warned first quarter results could mark a “high water mark for the year”.
The bounce in the dollar index is counter trend, investors have not yet realised that inflation will reduce the dollar purchasing power. Right now they think higher inflation and higher interest rates is good for the dollar because it will attract foreign investors. Investors look at the long term trend and right now the trend in the dollar index is down, foreign investors are losing because their dollar denominated assets are down and they are not buying more. There is a loss of confidence in the dollar, once the current bounce ends, the dollar will plunge to new lows and GBP/USD and gold will soar. This will put more pressure on bonds and yields will rise more.
Elliott wave analysis also points to a long term decline in the stock market, this decline will be probably caused by a dollar crisis. Stock markets have completed the first and second wave of a new bear market, this time the S&P is leading the way because the FTSE has been propped up by the declining GBP/USD. This relationship is about to change, when the dollar resumes its downtrend and GBP/USD surges, the FTSE will collapse faster than the S&P. The weak GBP/USD explains why the FTSE is strong right now.
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