Weekly Wrap
Market Commentary
A very nasty Swiss Roll
What a shocker! The Swiss central bank pulled a fast one on traders by letting the CHF float freely and dump the euro peg. That has created massive losses and margin calls all around – except for those few that were on the right side of that trade, of course. Most specs had believed the Swiss were determined to force the CHF lower and had bet short CHF/EUR. But Mr Market had other ideas – and he usually wins in the end. Deflation has triumphed!
The CHF printing presses simply overheated in their manic dash keep printing and selling CHF and buying euros to defend the undefensible 1.20 level – and a little birdie told them a big euro bazooka lies around the corner about to be fired next week by the ECB, unleashing mountians of euros. Too late to order new printing presses! Hence the shock move for a central bank to wake up to sanity (others will follow).
Several brokerages have gone bust already, and more could follow. I hope you are not a victim.
Moral: Don’t ever trust a politician/central banker when they make guarantees/promises. The head of the Swiss bank told reporters a day or so ago that the peg was 100% safe! That is on the same level of mendacity as Bernanke proclaiming that US house prices never fall. Those central bankers do have a great sense of humour!
And that, my friends, is one reason I have never traded the Swiss franc and would never do so. With the CB gone, it may become a tradeable currency again, though.
But while the Swiss CB was the dominant buyer of EUR/CHF, anyone on the same side of that trade was just asking for trouble – and they got it.
Swiss Central Bank rings a bell – at the top
One other point: as I have been forecasting, the era of central bank omnipotence in being able to wave magic wands and order the economy around and produce 2% inflation is ending with the start of the Big Bear Market. And this move by the Swiss simply is the most stark proof. Will anyone trust them again?
Final point: Bloomberg reports a mad rush into dollars following this Swiss roll. As I have been forecasting for many months, in this deflationary depression we are entering there will be only one currency left standing – the mighty US dollar. Moving all possible assets into dollars still makes it a smart move, in my opinion. A good option for liquid funds is to open a US dollar account with Citibank in London (you can withdraw paper dollars from their branches!).
DOW
Next week is one of the most intense periods for market-moving reports in the calendar. Obama gives his State of the Union address, IMF reports its latest global growth forecasts, Davos is on. It all reaches a climax on Thursday when Draghi reveals what his ‘whatever it takes’ promise actually means.
If you thought the past few days were volatile, just wait until next week (US stocks markets are closed on Monday for MLK Day). We have seen 200-300 pip swings within hours – but that will be child’s play compared with next week – and beyond.
As traders licked their lips in anticipation of what goodies Draghi will shower them with, stocks closed the week strongly, especially DAX and FTSE.
There is a wide divergence now opening up between US markets and European.
In the US, no more QE is expected (no help for stocks there), and with the strong dollar, corporation earnings from overseas will be hit, putting pressure on valuations.
In Europe, a massive QE boost to equities is eagerly anticipated and the weak euro is aiding exports.
Many traders will be jockeying for positions before Thursday and there is big money involved. Trading the swings will be much more difficult than normal. I have reduced positions into next week.
My target zone for the current rally is the pink zone – about 300 pips wide. But with momentum overstretched, I expect a dip early next week, followed by wild and woolly days Wed/Thurs.
This is no market for the faint-hearted.
T-BONDS
One of my Trades for 2015 is short Treasuries. The first two weeks of this year have been spent by the market in finishing up its mammoth year-long rally, which has taken 10-yr yields from over 3% a year ago to this week’s low of 1.7%.
Of course, everyone now is putting this down to deflation (where were they a year ago?). But with the deflation story now solidly mainstream, it is the ideal condition for the market to spring a massive surprise. Bullish sentiment on Treasuries remains off the scale.
But yesterday, the market made a new high at 151 (March contract) and reversed to close much lower in a key reversal. This should be at or near the start of the big bear.
No-body believes interest rates can rise hard this year. I do.
You can follow my T-Bond trades in my TTAlert service. Details here.
GOLD
Continued its strong rally last week and hit one of my major targets at the $1265 level – and exceeded it. We are in a third wave up, as I forecast weeks ago. The rally has much more to go as it squeezes the army of shorts who mistakenly believed the pundits who forecast gold would reach sub-$1,000.
The other mistake the bears are making is that in deflation, they believe PMs must decline along with crude oil, copper, and the other basic commodities. But this bullish action shows that gold is not a commodity! It is a store of value – and a safe haven in times of financial turbulence – and a reflection of the growing negative social mood (Europe is hotting up).
And silver, which has been the laggard behind gold, confirmed the PM rally yesterday with a strong push above the critical $17 level.
We are long from $1152 and from $1188.
You can follow my trades in gold in my TTAlert serice. Details here.
Have a great weekend!
