One Down; One to Go

The big day ( One Down) that we have been waiting for this week has finally arrived with the ECB taking some steps to provide a sort of monetary stimulus to the flagging Eurozone economy. They lowered rates from 0.25% to 0.15% and actually pushed the deposit rate into negative territory, the first time it has ever done so. The idea of the latter is of course to "penalize" banks for NOT lending or perhaps more accurately, to incentivize them to do so.

They are in effect, conducting an experiment to see how much pain banks are willing to endure before they decide that it is more feasible to lend to consumers or business. One has to wonder however if banks are capable of forcing people, whether in business or the consumer, to borrow against their will. In other words, if potential borrowers are not inclined to go into debt because of their particular set of circumstances, they are not going to rush out and initiate loans merely because "we feel your pain big banks".

The Euro is wobbling all over the place as a result of the action, which really came as no surprise since the Central Bank has been pretty good at telegraphing their intentions going into the meeting. The market was led to expect something and that is what it got. The question now becomes how effective it will or will not be in accomplishing their goal to generate that same magical number, when it comes to inflation, of 2%.

The Euro dive bombed on the news but then worked its way up nearly a full point as the session has worn out. It is currently a wee bit lower as I type this. The price action is one of those "sell the rumor, but the fact" sort of things. I will say however that the ECB must certainly not be happy to see the Euro moving higher at this point. They DO NOT WANT a stronger Euro.

I should note here that for the moment, German bunds are the losers while riskier Italian and Spanish bonds seem to be the winners. This is probably welcomed by the ECB as it is a sign that investors are inclined to take on more risk. It will be interesting to watch the future progress of some of the regions stock markets as we move ahead.

Traders took the Euro currency down into a strong level of chart support but apparently are of the opinion that the action by the ECB is not sufficient to justify taking it into a sharper move lower. Note the support level. Of course the rebound higher in the Euro forced the US Dollar to fail at its overhead resistance level.

And the Dollar chart - notice how it broke through its resistance level only to fall back below it as the Euro rebounded higher. I guess traders are not going to get too aggressive either way ahead of that big payrolls number tomorrow morning. Tomorrow? That is going to be an entirely different matter. The "One to Go" day will have come and gone and traders are going to revel in that.

The Dollar has been trending higher however although that trending move is a rather slow and steady one. To accelerate it, the Euro would have had to lose its support at the 1.35 level. That would allow the Dollar to move on up towards 81.50 - 81.60 which is a stronger level of resistance. I would be very concerned for gold were the Dollar to breach this level.

Gold was essentially tracking the Euro moving up with it and backing off with it. So far it is holding $1240 but the rebound looks to be coming mainly from short covering and not from a huge throng of eager new buyers. To become any more than a bounce in a larger ongoing bear market, the price would have to recapture $1280 at a bare minimum. There are traders who are caught on the long side of this market who want to lighten up and have been looking for a rebound in order to do so. I suspect we will see them beginning to lighten up if this market can make it back to $1270. Again, tomorrow will be a very big day. That is why anyone making predictions as to whether gold has bottomed is simply rolling the dice. They might get it right; they might get it wrong. I personally am wanting to see the data before figuring out what to do with the metal for a short term play. Longer term, I think it is headed lower barring any surprises on the currency front - at least that is what the charts are currently saying and we need to respect those.

Something will have to change on the inflation-expectations front to get gold going.

Here is that TIPS spread chart I have been maintaining detailing the movement in that spread and the gold price. As you can see, the spread is moving in a steady to lower pattern, exactly as is gold for the moment.

Copper did not get much of a bump out of the news, unlike silver, which seemed to like the new policy. Copper is still fearing Chinese authorities investigating copper-backed loans and that practice of possibly double or triple counting the metal for use in additional loans. The idea behind the move lower in the red metal is that traders are worried about excess supply hitting the market if the authorities find irregularities. It also would confirm suspicions that demand behind copper is not for actual industrial use but has rather been for speculative purposes in order to secure loans used for other purposes. If they were to move to put an end to this practice, that copper would be sold as the loans are closed out. Again, as I noted yesterday, we will have to watch this closely to see if the authorities shift their focus to gold for any reason. So far I have seen nothing along this line but this is not something to be ignored in my opinion. Remember, Chinese demand for copper, and for gold, and for any metal has been significant as far as traders gauging the strength of the overall demand.

While the focus of many of the markets  has rightfully been on the actions and statements of the ECB today, it is all going to pale by comparison to what we get in the US payrolls data tomorrow. Some are already banking on a disappointing number based off of the ADP numbers were got yesterday. I have not done any research to see how closely the numbers from ADP might or might not track the actual US numbers so I am unable to comment as to whether or not that is a good bet. It seems a bit risky to me however as one never knows we are going to get with these employment numbers.

Suffice it to say, by tomorrow morning, no one is going to be uttering a word about the ECB as it will have been forgotten and consigned to that huge abyss where all market moving data is destined to end up after the obligatory 24 hours focus. Gold, and the Dollar, are going to be moving totally off of that number that the magicians provide for us. Traders are going to also be on the look out for any backward revisions to previous months.

I am noting that crude oil fell through support on its chart near the $102 level but it has managed to pop back above that level again. Once again the $105 region has been a hill too high to climb. Traders are citing the huge supplies as the culprit but all of us have been citing those for some time now. It has not seemed to matter as hedge funds have been drinking up all of the black gold that their computers will let them. There is a growing concern over all that speculative length piled into this market which has been stymied in its upward progress. Stale longs + huge exposure generally makes for some nervous traders. As many years that I have been at this I am still amazed at the sheer size of positions that these gigantic hedge funds can accumulate. Talk about a bottomless pit of buying ( or selling for that matter). I have watched this group defend their holdings time and time again, even when fundamentals become iffy. Doesn't matter - they are the market - don't forget that.

It looks to me like there is some additional chart support near the 100.80 - 100.90 region for the WTI should $102 fail.  Below that is 100.25 on down to $100. Unleaded gasoline has chart support near the 2.90 region. So far it is holding above that level.

The grain markets continue to weaken which is good news for consumers but especially for livestock and poultry producers. So far there does not appear to be any weather threats on the horizon. Old crop beans have once again run into selling near the $15.00 level. They are retreating lower but are still not breaking down on the charts. I would need to see them fall through and remain below $1440 to feel that we have finally gotten this tight carryover story off of the front burner. I still am concerned that the commercials might try to squeeze the shorts in that month as we head into the July delivery process but that is a way off for now.

New crop beans are flirting with the $12.00 level. They have not traded below that level for two months.

Just today Informa raised their Brazil/Argentina Corn Production forecast. Also, El Nino chatter is resulting in sentiment shifting in favor of larger S. American bean production later this year as well as good growing weather here in the US.

The overall commodity sector is moving a bit lower today. The GSCI has broken a short term line of support on the chart, further evidence that at least as far as the sector is concerned, there is no apparent inflationary pressures evident at the moment. Just today alone, both wheat and corn prices hit three month lows.

Looking over at the world of equities -  the Dow made yet another all time high ( as did the S&P 500). The Dow looks like it might make a try at 17,000 believe it or not. The S&P? Who knows how high that is going to go. The Russell 2000 is lagging however and thus far is not confirming those moves. Does that matter? I used to think it did at one time. Now? I do not know. What I do know is that investors continue to chase equities higher as that is where the gains are to be made. Central Banks are undoubtedly quite happy as they observe this.

The lesson to be learned is very simple - In a near zero interest rate environment, one in which there is little to no apparent inflation as far as investors are concerned, the place to be is in stocks. Write this one down for your children and grandchildren as an axiom.