Fickle Nature Of The Weather And Markets

The past year or and more have seen some strange behaviour by global weather. Countries in the southern hemisphere have endured extended drought while the northern hemisphere suffered weather extremes – extreme and often non-seasonal heat and cold. New records for high and low temperatures were set in a number of countries, either in absolute terms or out of season; such as a lowest temperature in Holland for June while the UK has suffered one heat wave after another during this summer. The northern US this year suffered the second above average winter storm season with an icy blast as late as the end of April. What is going on?

We have for decades heard about the trend to global warming that requires drastic action from governments to slow down if not reverse before calamity strikes. The average global temperature has to change by not much more than 1 degree C to have far ranging climatic consequences. The US has not subscribed to the anti-global warming coalition, probably mainly for economic reasons. However, recent research on the sunspot cycle and associated effects implies this might just have been the correct response to the global warming panic. It now seems possible that the bigger threat might be not a long hot global summer, but a new ice age.

Astronomers have known for a long time that there are ‘dark spots’ on the sun – areas that are only a little cooler than the surrounding surface, therefore appearing dark against the bright background. It has also been known the number of sunspots vary over an 11 year cycle. There is also a longer cycle of about 400 years and an even longer one five times as long. We are approaching a normal solar minimum between 2030 and 2040, which is anticipated to begin a grand solar minimum.

The dispute used to be firstly between those who accepted the rising annual global temperature as a sign of the effect of using fossil fuel on a large scale and people who disputed that burning fossil fuel is the primary cause of rising temperatures. Now it is developing into a debate on whether the grand solar minimum – the low in what is seen as the 400 year cycle – will have a greater effect than the use of fossil fuel and manage to cool the earth down into a period of deep cold.

The low of the previous grand cycle was between about 1645 and 1715, a span that covered about 5 normal 11 year cycles. It coincided with the period today known as ‘The little ice age’, when average temperatures were lower than today. During this time, the river Thames was frozen hard during the winter; shopkeepers then built structures on the ice to tempt the crowds that gathered on the frozen river into spending their money.

It is still being debated whether this extended period of low temperatures was the result of the solar minimum – when years passed with fewer than 10 sunspots by comparison with the tens of thousands during a normal year – or whether it was mainly the effect of volcanic activity. If the latter, that is a long time for constant volcanic activity and my thought is that the low solar activity is the main reason.

Not long after this period, in 1816, the year known as ‘the year without summer’. Mount Tambora in today’s Indonesia blew its top in one of the largest eruptions for more than a 1000 years. The ash cloud and chemicals blown into the stratosphere may have dropped the global average temperature by between 0.4 and 0.7 degrees centigrade, with some estimates as high as 1 degree C. It was enough to severely reduce crops in the northern hemisphere and caused heavy frost in mid-summer to below the latitude of New York in the US. Europe was especially hard hit and food riots broke out in many countries.

With a solar minimum that lasts 50-60 years, time of the actual sunspot low might be preceded and followed by a period of unsettled weather conditions – as we are experiencing now. This could get worse as the time of the real low in the solar cycle approaches, even without any contribution from volcanic activity, which also shows signs of waking up. One new theory has that there are mechanisms associated with the condition of the sun that influences magnetically induced currents in the magma – the melted rock below the earth’s crust – to result in higher volcanic activity.

Meanwhile, there is nothing going an as yet as far as the Trade Tariff stand-off is concerned. On the principle that “No news is good news’ and in anticipation of the promised cut in rates, which definitely is seen as is good news by the market, the DJIA, the Nasdaq and SP500 all set new all-time highs on Friday. This despite the rather negative news as economic statistics paint a picture of an economy on the brink of stagnation at best and possibly recession. But why spoil euphoria by facts when feeling good about life and the stock market is so easy to be.

To me it still seems premature to accept or believe that the outcome of the tariff war will be soon and will be favorable for the US. In a drag down bare knuckle fight as I think this one will be, there is no winner. In Trump and Xi, individually and as representatives of their different cultures, we have two tough men facing off on a matter that is of cardinal personal interest and of their standing in their respective communities. Whoever is clearly seen to blink first will have a pretty difficult local battle to regain popular support – if that does prove possible, which is unlikely.

The actual reasons for the trade dispute, as important as these are to the countries involved, are becoming irrelevant in the clash of personalities and what each stands to lose if they fail to achieve a conclusion to the dispute that ‘saves face’ within in and from the perspective of their constituencies. In ‘the winner takes most’ face-off such as this one appears to be – unless very carefully managed and negotiated – it seems unavoidable that one of them emerges as ‘the loser’. And will pay the price.

The question to ponder is how the loser will react, given that he does not lose all or most political power immediately, but has the authority to retaliate by other means, probably with the support of the people.

Euro–Dollar

Euro–dollar, last = $1. 1271 (www.investing.com)

Usually, a break from a narrowing formation, triangle, wedge or pennant, in the correct direction, but happening prematurely, is followed by a strong and sustained move – evidence of building pressure, be it bearish of bullish, that had prevented the fourth leg from completing. Here, leg 4 all the time remained in close contact with line W ($1.1023) and never descended to complete the leg by reaching line P ($1.0961). The upward pressure, be it strength in the euro or of dollar weakness, held along the support of line M ($1.1189) to break above pennant PW.

However, rather than extending the break into a new rally, the euro essentially only held the break by moving sideways, also holding above line L ($1.1182). Last week, line L was again tested, but held – so far. After the euro’s weakness to remain in channel JKL, the euro later only slowly gave way to the effects of its near zero rate and is now ready to challenge the dollar as the Fed informs the world that US rates are going lower.

Perhaps it is what is happening at Deutsche bank that is keeping a tight rein on the euro, but this could change if the Fed does cut US rates. That might make it difficult to sustain the value of the dollar, which, in turn, could place some pressure on Wall Street should foreign investors in the stock market decide to get out before a weak dollar eats too deeply into their profit.

DJIA Daily close

DJIA, last = 27332.03 (money.cnn.com)

The DJIA again achieved a new all-time high close at 27332.03 on Friday, extending the Powell rally in anticipation of lower rates. Of the two reasons for buyers to step up, the knee-jerk reaction that lower rates causes the return on Wall Street to be more attractive, which attracts speculators first of all, appear the more likely. Long term investors who anticipate that lower rates will boost more spending while costs of production are reduced, thereby improving profits, are likely to be more hesitant to rush in before there is some evidence that fundamentals have really changed.

Yet, still hanging over expectations for lower rates we have the Tariff War that has gone into remission while everyone wait to hear how the new negotiations proceed when they get down to it. Both side undoubtedly have grounds for their complaints on what the other side is doing wrong, perhaps not only motivated by questions of trade. I believe that both the US and China is trying to estimate firstly how much damage to their respective economies will be sustained if they remain obdurate in the negotiations. Secondly, how their respective populations are likely to react if called upon to make economic sacrifices in order to continue the Trade War.

The break above megaphone GF (27 077) is bullish, and the trend has to extend into steep channel JK (27 437) to confirm the break higher. This week should show whether the break was just knee-jerk or whether there is substance in the rally.

Gold London PM fix – Dollars

Gold price – London PM fix, last = $1407.60 (www.kitco.com )

It is not such good news that the rally was halted short of the technical resistance at line Q ($1455). But that is balanced by the fact that after initially failing to hold above the psychological resistance of $1400 the price of gold did not collapse in a saw-tooth descent of serial failed rallies. Instead, it is holding close to if not a little mostly above that key price level – while Comex open interest holds around 600k contracts, not much below the all-time highs.

Long or short positions are not being closed, but are in effect traded between the major players. Every attack by the bears to take the price lower soon invites fresh demand that see the price returning to hold just above $1400. Similarly, every rally to take the price higher, runs into selling resistance that drags it back to $1400. It is a battle likely to continue this week and could be influenced, in favor of a higher price for gold, should the prospect of lower rates gain further ground.

Euro–gold PM fix

The euro price of gold is still range bound between lines D (€1256) and K (€1235) – a sign of how quiet the euro and gold markets have become. Technically, the odds favour a break above line D after the break above steep bull channel JK; that would call for the price of gold to outperform the euro relative to the dollar which, in turn, is expected to be influenced by the prospect of lower US rates. The global financial system is getting more convoluted all the time.

Euro gold price – PM fix in Euro, last = €1251.5 (www.kitco.com)

Silver Daily London Fix

Silver daily London fix, last = $15.14 (www.kitco.com)

Interesting how silver again, multiple times over a span of six years, accurately reached line M and then either reverses immediately or else sits on the line for a few days before changing the direction again. Obviously, there is nobody who is in a position to carefully observe the price of silver over such a long time and with the capability of influencing the London silver fix to such a degree of accuracy. This is a rather extreme example of how prices react to certain straight trend lines, but there are others which are less glaringly obvious.

We should know quite soon whether this is going to be the time of the break higher above line M ($25.27) to extend the new rally. A break below line D ($15.14) would be a warning that another trend reversal is due and the time is running out fast for silver to set the new direction.

U.S. 10–year Treasury Note

U.S. 10–year Treasury note, last = 2.124% (www.investing.com )

Is the yield on the 10-year Treasury note telling us that there will not be a rate cut?

Recently, the yield declined steeply off line D (2.453%) to reach a low of 1.948% at line L, presumably in reaction to Trump’s pressure on the Fed to have lower rates. Not only would lower rates boost spending, but the gap between US rates and the rates in US trading partners favour their exports over US exports.

Then, as soon as Powell capitulated and could see reasons to lower rates, the yield shot steeply higher. An example of ‘buy the rumour and sell the fact’ perhaps? Not making sense at first sight. But then, I am not a macro-economist and this does not have to make sense. But it still seems strange.

West Texas Intermediate crude. Daily close

After rebounding off support at line E ($51.39), the price of crude is now holding firmly within the very steep bull channel QR ($57.72. The value of line R increases by about $1.40 in a week.

While the prospect of lower rates must please the Trump administration, they cannot be too happy by what the oil price is doing in response to the tug of war going on between oil producers on where the price of oil should be. So far, it seems the bulls are winning – but it is a steep trend to maintain. 

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