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September 6, 2020
STOCKS – None
Macro – SPY, GLD, EWG, UUP, TLT
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It will be a shortened trading week with the Labor day holiday. But the big event this week will be the ECB meeting on Thursday. The ECB chief economist already noted last week that the euro rate absolutely mattered, and if it does matter, then the ECB may look to try to weaken it. A weaker euro is bullish for the dollar and bearish for risk assets and anything linked to inflation. Now, the ECB may not choose to take aggressive action at this meeting, but it is the language or jaw-boning, they choose to use is what will matter most, putting the market on notice.
This may be a crucial meeting, in that context, for the ECB to get out ahead of the Fed and try to turn the tied in what could become a race to devalue currencies. The dollar index has been hanging around the 92 to 92.50 level but has been showing signs of turning with an RSI that is diverging higher. It will take a move above 93.50 to get the dollar into rally mode.
Meanwhile, the market may already be getting ahead of the curve because you can see the rates to borrow overseas dollars are on the rise, with the eurodollar futures appearing to have broken out potentially.
The euro has been challenging the 1.20 level vs. the dollar, but to this point, it has been unable to break out. But a reversal may be on the way, with an RSI that is dropping and diverging from the rising euro. A break below 1.17 in the euro gets it moving lower back to the trend line, and potentially to 1.14.
Not only that, but non-commercial holds on long euro futures have risen to their highest levels ever. It means an unwind would be swift and sudden.
Now a more strong dollar should be positive for European equities, as a weaker euro will make the export economies like Germany more competitive, while also helping to boost inflation and growth for the region. But, at the same time, this a negative for US dollar quoted ADR’s.
If the ECB takes on a more aggressive monetary stance, it is likely to widen the spread between US and European interest rates. The spread between the US and Germany 10-year bonds are ready to surge and break out. If that should happen, we could see the spread rise to around 1.42% from 1.20%, further strengthening the dollar vs. the euro.
That will result in Gold prices likely dropping significantly from their current levels. For now, gold has been able to hold steady around $1,925, and it feels as if there is a giant buyer there. But once that buyer gets cleaned up, the run for gold could be over, aided by a stronger dollar. It could result in the gold falling back to $1790.
Meanwhile, oil looks like it could ready to move back to $34.
Finally, a stronger dollar hurts US equities because it makes multi-nationals less competitive and hurts the revenue and earnings; when converting back into US dollars for reporting purposes, it acts as a drag on earnings.
The worst thing that can happen is a sudden and aggressive move higher in the dollar index over the coming weeks. What happens this week with the ECB will matter a great deal.
-Mike
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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