David M Glassman, President

3055 Harbor Drive, Suite 1101

Fort Lauderdale, Florida 33316

Email: Stockmarketdoc@comcast.net

June 27,  2017



       Sector Allocation Changes Sold Oil Trust                                      Models Rolling Over

                                  Avoid Bond Funds                                                       Financials  Have To Hold


The 3 Reasons Why Goldman Just Turned Bullish On Gold

Following this morning's flash crash in gold, in which a "fat finger" - usually a euphemism for any trade that can not be logically explained yet one which reprices a given asset class substantially lower as happened with gold - suddenly sold $2.2 billion worth of gold in under a minute, taking out the entire bidside stack, we were expecting banks to immediately come out with bearish reports on gold, piggybacking on the latest central bank-facilitiated smackdown, and allegedly allowing their prop desks to load up on the yellow metal on the cheap.

We were surprised, however, when moments ago Goldman came out with a report explaining why the bank is now bullish on gold, Further, in the note from Goldman's x-asset strategist, the bank laid out three specific reasons why gold may trade well above the bank's commodity team year-end target of $1,250.

This is what Goldman said moments ago:

Across asset classes last week copper was the best performing asset (+2.5%), while oil was the worst performing asset (-4.3%, Exhibit 3). Gold's performance was flat (+0.1%) over the same period, but had an intraday min at 1.6% today. Much of the focus has obviously been on oil where concerns are that expanding supply in the US and Libya will counter OPEC cuts. Gold has received less focus, although its cross-asset correlations have quietly been rising to new extremes (Exhibit 1).

Our commodity team's view is gold at $1250/oz over 12 months as higher real rates from Fed tightening could put further pressure on gold, but this may be offset by 3 things:

  1. 1lower returns in US equity (as we expect) should support a more defensive investor allocation,

  2. 2EM $GDP acceleration would add purchasing power to EM economies with high propensity to consume gold, and

  3. 3GS expects gold mine supply to peak in 2017.

Gold has been increasingly trading as a "risk off" asset, with its correlation with global bonds at the 100th percentile since 2002...

... and should thus be sensitive to our expectation of rising rates from here. However, with global growth momentum likely having peaked, gold could represent a good hedge for equity, in particular in currencies with low and anchored real yields.

Gold implied vol remains attractive for investors' of either view: it trades at its 0th percentile relative to the past 10 years (Exhibit 28).

While Goldman's arguments are sound, the fact that the bank is urging its clients to buy gold, ideally from Goldman, suggests that the selloff is most likely nowhere near done

Hindenburg Omen Reappears As Main Market Supports Get Kicked Away

In the last week, the controversial Hindenburg Omen has started to cluster ominously once again.

Combined with divergent market internals and rates off the zero-bound (and global central bank balance sheets actually shrinking), John Hussman warns of the rising likelihood of an interim market loss on the order of 50-60% over the completion of the current cycle.

As Hussman Funds' John Hussman explains,

On the basis of the most reliable valuation measures we identify (those most tightly correlated with actual subsequent 10-12 year S&P 500 total returns), current market valuations stand about 140-165% above historical norms. No market cycle in history, even those prior to the mid-1960s when interest rates were similarly low, has failed bring valuations within 25% of these norms, or lower, over the completion of the market cycle. On a 12-year horizon, we project likely S&P 500 nominal total returns averaging close to zero, with the likelihood of an interim market loss on the order of 50-60% over the completion of the current cycle.

As I’ve observed for decades, even a richly overvalued market can move higher, provided that investors remain inclined to speculate, which we infer from the uniformity of market action across a broad range of market internals (when investors are inclined to speculate, they tend to be indiscriminate about it). In prior market cycles across history, however, even favorable market internals were overruled once extreme “overvalued, overbought, overbullish” syndromes emerged. The half-cycle since 2009 was different. In the face of zero interest rates, yield-seeking speculation persisted even after those extreme syndromes emerged. The best indication of that speculative mindset is that market internals remained uniformly favorable during most of the period prior to mid-2014. Importantly, even since 2009, the S&P 500 has lost ground, on average, in periods when extreme overvalued, overbought, overbullish syndromes were accompanied by deteriorating market internals. That’s the situation we observe at present.

Put simply, with market internals unfavorable and interest rates off the zero bound, the two main supports that made the half-cycle since 2009 “different” have already been kicked away. From here, we expect the dynamics of this market cycle to resemble other periods when offensive valuations and extreme overvalued, overbought, overbullish syndromes were joined by deteriorating market internals (particularly when interest rates were off their lows). Short term market outcomes are anybody’s guess, but across history, that overall combination has typically defined crash dynamics.

Notably, we’ve observed a widening of internal dispersion in recent weeks. For example, weekly NYSE new lows have averaged about 4% of traded issues recently, with nearly 6% last week, even with the S&P 500 near record highs. Meanwhile, nearly 40% of stocks are already below their 200-day averages. I’ve noted before that raw “Hindenburg Omens” (days when both NYSE new highs and new lows exceed about 2.5% of traded issues) are typically not ominous at all. The exception is where they are accompanied by a broader syndrome of tepid market breadth even with the major indices still elevated, when multiple signals appear in close succession, and when market internals are unfavorable on our own measures. On that note, we’ve observed 4 such daily signals in recent weeks, with two last week alone. We saw similar widening of internal dispersion in December 1999, July and November 2007, and July-August 2015. Still there are a few signals such as 2006 and 2013 that were followed by only minor hiccups. That improves the average outcome, though the average is still negative overall.

Overall, our current market outlook remains strongly negative, but we would be inclined to adopt a more neutral outlook if our measures of market internals were to improve. As I’ve often observed, the most favorable market return/risk profile we identify typically emerges when a material retreat in valuations is joined by an early improvement in market action. Whether that occurs after a moderate correction, or after a market collapse, that’s the combination most likely to move us to a constructive or aggressive outlook, depending on the status of valuations and other conditions at that point. The most extreme overextended syndromes we identify are now accompanied by deteriorating market internals and interest rates that are well off the zero bound. My impression is that without a shift back to uniformly favorable market internals, the continued faith in monetary support may prove to be the same awful bet it was during the 2000-2002 and 2007-2009 collapses, both which were accompanied by aggressive monetary easing all the way down.

We’ll take our evidence as it arrives.

Finally, we note that two things are different than the last time the market flashed numerous 'failed' Hindenburg Omens: 1) as the chart above shows, The Fed is no longer printing money ad nauseum like it was during QE3 (and in fact is heading towards unwinding its own balance sheet), and 2) the global central bank balance sheet has actually begun to shrink - the most since December - in the last 8 days...

It’s going to end ‘extremely badly,’ with stocks set to plummet 40% or more, warns Marc 'Dr. Doom' Faber

  1. Marc Faber, the editor of "The Gloom, Boom & Doom Report,' isn't backing down from a dire prediction that would send stocks free-falling by 40 percent or more.

  2. He argues the stock market could see another "lurch" higher, but then investors may want to run for cover.

Why Marc 'Dr. Doom' Faber sees an 'epic' decline ahead 

Friday, 23 Jun 2017 | 4:46 PM ET | 01:33

If the man often hailed as the original "Dr. Doom" is right, the stock market could see another "lurch" higher — at which point investors may want to cash out quickly and run for cover.

Marc Faber, the editor of "The Gloom, Boom & Doom Report' and a perennial bear, isn't backing down from his latest dire prediction that would send stocks plummeting by 40 percent or more.

A drop of that size could take the S&P 500 Index down from Friday's closing price of 2,438 to 1,463.

He used the meteoric rise of FANG stocks, which reflects Facebook, Apple, Netflix and Google (Alphabet), as a glaring bearish signal.

"We've had more than eight years of a bull market. The Nasdaq is being driven by very few stocks," said Faber on Friday's "Trading Nation." That rally "is not a particularly healthy sign from a technical point of view, and valuations are very high," the investor added.

Faber's comments come exactly two weeks after the Nasdaq set its latest intraday record high of 6,341.70.

"You know we have a lot of volatility, and when things will start to go down, they'll go down a lot," he said.

Faber is deeply concerned that wealth has flowed to big corporations and affluent people. He believes the imbalance could eventually disrupt the markets as we know it.

"Either people with money will be taxed heavily ... or we'll have a massive deflation in asset prices — I repeat: massive," he warned. "Eventually the system will break."

Faber is known for correction calls over the years which have never materialized. But he's sticking by his latest call, acknowledging critics have "questioned my sanity."

"We could print enough money that the Dow goes to 100,000. All I'm saying is it will end very badly, extremely badly," he said.

But it's not all gloom. Faber notes it could also give investors a rare "out-sized" buying opportunity similar to 2003 and 2009, when deep corrections gave traders a chance to load up on cheap assets.

Top money manager says gold may hit $1,500 for the first time since 2013

Published: June 26, 2017 5:06 p.m. ET

U.S. Global Investors’ Frank Holmes talks about gold’s outlook and a new ETF

AFP/Getty Images

What will the path for gold look like in the second half of 2017?





Gold prices have climbed by around 8% year to date—close to what they gained for all of last year.

That comes as no surprise to Frank Holmes, chief executive and chief investment officer at U.S. Global Investors, and he sees lots of reasons why prices could rally further—potentially to as high as $1,500 an ounce. That would be a 20% rise from its current level of roughly $1,250.

In fact, a positive outlook for the gold is a key reason why U.S. Global Investors, whose Gold & Precious Metals Fund USERX, -0.41%  has a 4-star rating from Morningstar, plans to launch its first gold exchange-traded fund this week.

USERX was among the top 10 performers for equity precious metals funds, based on its five-year total return of -7.3%, according to data from Morningstar. Gold futures GCQ7, -0.17%  rose 8.6% last year, but tallied a loss of about 37% from 2012 to 2015.

“The metal is responding to the typical demand drivers that I always discuss, like geopolitical uncertainty, a weak dollar, low interest rates,” said Holmes. “Perhaps one of the most shocking things is that last week, for the first time since the November [U.S. presidential] election, gold was outperforming the U.S. dollar.”

Gold futures settled under $1,250 an ounce Monday, but they are up about 8% year to date. They haven’t traded above $1,500 in more than four years.

“The weakening of the U.S. dollar DXY, +0.18% [as President Donald] Trump’s policy agenda continues to get derailed by all kinds of distractions” has been one of the biggest influences on the gold market, said Holmes.

Holmes said he believes the Fed is taking a more dovish approach to raising interest rates than expected. The Fed, however, is still penciling in another hike in 2017 and more in 2018, and plans to begin reducing the size of its balance sheet before the end of this year.

U.S. Global Investors

Frank Holmes

And “geopolitical risk and uncertainty, from Brexit to Trump’s policies to unrest in the Middle East,” he said, have given gold an added boost.

The “fear trade”—the idea that factors such as geopolitical turmoil, both here and abroad, and low-to-negative government bond yields drive the demand for safe-haven assets—is likely to continue to support gold, said Holmes.

“Right now, with rates still historically low and inflation in the 2% range, government bond yields are low to negative, in some cases,” he said. “Why would investors want to lock in negative yields for the next two to five years?”

“In light of this, I think haven investors see gold as a much more reliable store of value,” he said.

Physical demand for gold has reached record levels in both China and India, according to Holmes. The devaluation of the yuan and a slowing real-estate market has helped to drive demand in China, while India saw its gold imports rise fourfold in May from the same time a year, he said, as traders fear a higher tax rate on jewelry.

Meanwhile, central-bank purchases of gold are still “robust” in China and India, Holmes said.

“Currently gold only represents 2% of China’s foreign reserves. Compare that to the U.S. where gold represents 75%,” he said. That means “there is still an enormous opportunity for China to continue to accumulate the yellow metal.”

Investor strategy

Right now it’s a buyers’ market for high-quality gold-mining stocks, said Holmes.

That’s come on the back of a rebalance this month of the VanEck Vectors Junior Gold Miners exchange-traded fund GDXJ, -1.32% he said.

The market didn’t see junior gold miners follow through with the gains in gold because the GDXJ cut nearly half of its exposure to the space, with lots of high-quality and small- and midcap names getting pushed out—offering an opportunity for investors to pick up some the stocks at a discount, Holmes said.

Against that backdrop, U.S. Global Investors will offer its very first gold ETF this month. It already runs two gold-related mutual funds, the Gold & Precious Metals Fund and the World Precious Minerals Fund UNWPX, -0.64%

So far this year, the VanEck Vectors Gold Miners ETF GDX, -0.79%  is up around 8%, while the VanEck Vectors Junior Gold Miners ETF has climbed 7%. The physical gold-backed SPDR Gold Trust GLD, -0.90%  has also tacked on roughly 8%.

Shares that U.S. Global Investors’ prefers include Klondex Mines Ltd. KLDX, -3.04%Wesdome Gold Mines WDO, -0.95% and Kirkland Lake Gold KL, +2.88% which are “all frugal, small- to midcap names,” said Holmes.

While he contends gold could climb to as high as $1,500 an ounce, he also said that a low of $1,000 is a possibility. The low so far for 2017 was $1,162 at the start of the year.

Managing your expectations is essential, particularly when it comes to gold investing, said Holmes.

He said he’s “encouraged” by the gains that gold has seen in the first half of 2017, but “nobody can say what the future holds, so hope for the best but prepare for the worst.”Stock Doc

Italy Bank Bailouts Send European, Global Stocks Higher; Gold Flash Crashes

S&P futures point to a higher open following gains in Asian markets supported by stronger commodities but mostly European bourses, which are sharply higher following the €17 billion bailout of the two Veneto banks in Italy, the biggest taxpayer funded bank rescue in modern Italian history, as well as Dan Loeb's activist campaign of the world's biggest food company, Nestle which sent the stock up 5%, and finally Germany's Ifo business climate index which hit new all time highs.

Risk sentiment is broadly higher thanks to European equity markets which have rallied strongly from the open led by the Italian banking sector following the Veneto banks resolution. As shown in the chart below, EutoStoxx banks are about 2% higher as markets celebrate the return of taxpayer bailouts and the apparent death of Europe's bail-in regime.

The bailout capped a weekend in which Italy's center-right parties were the big winners in mayoral elections on Sunday, in a vote likely to put pressure on the center-left government ahead of national elections due in less than a year. In the most closely watched contest, the northern port city of Genoa - a traditional left-wing stronghold - seemed certain to pass to the center-right for the first time in more than 50 years. The candidate backed by the anti-immigrant Northern League and Silvio Berlusconi's Forza Italia party will get around 54 percent of the vote, compared with 46 percent for the candidate backed by the ruling Democratic Party (PD), according to final projections based on the vote count.

However Italian BTPs rallied with domestic banks, ignoring mayoral election results, BTP/bund spread tightens 2.0bps and iTraxx Crossover tightens 2.5bps. As a result of Italy's historic bailouts, default probabilities across virtually all Italian banks tumbled.

The Stoxx Europe 600 Index rallied 0.7% led by food and beverage shares and Nestle SA after hedge fund Third Point announced on Sunday it had amassed a $3.5 billion stake in the region’s biggest company and was going activist. Nestle (25% of SMI) rose ~5% after Third Point took a $3.5b stake, providing further lift to risk sentiment.

The MSCI Asia Pacific Index rose 0.2 percent, with Hon Hai Precision Industry Co. jumping 6.7 percent to lead an advance among technology shares. Taiwan’s Taiex index rallied 1.3 percent to the highest since 1990, while South Korea’s Kospi increased 0.4 percent to a record. Markets in India, Singapore and throughout much of Southeast Asia were closed for a holiday.

Sterling declined as battle lines appeared to harden just a week into Brexit negotiations, and as Theresa May prepared to spell out how EU citizens living in the U.K. will be protected in Brexit.

Large spike lower in spot gold, amid little news, became a market focus with USD rallying in tandem. USD/JPY well supported breaking towards 100DMA at 111.80. USTs consequently pressured lower with Eurodollar curve bear steepening. As noted earlier, the big story in commodities this morning was the larger order in Gold futures going through the CME, with up to 20k contracts hitting the yellow metal USD20.0 lower to hit levels just under USD1240.

The timing of the move created the volatility, as in terms of volume, this was a relatively moderate amount when taking into account daily volumes, and many see this little more than an exercise in tripping stops through some notable levels on the charts. The 200dma circa USD1237.00 held firm though. On the day, we are still down net 1%, as is Silver, with Platinum and Palladium are also lower by a similar amount.

Crude futures hold overnight gain, up 0.8% to trade around $43.35bbl.

In FX, the yen fell 0.4 percent to 111.68 per dollar. The pound increased slipped 0.1 percent to $1.2710. The euro weakened 0.1 percent to $1.1182. The Bloomberg Dollar Spot Index rose 0.1 percent after three days of declines.

In economic news, the German June IFO Business Climate rose to new all time highs, hitting 115.1 vs 114.5 est; Expectations also beat (106.8 vs 106.4 est); as did the Current Assessment  at 124.1 vs 123.2 est.

Over in the UK, a deal between Theresa May and the DUP was finally confirmed according to Bloomberg.  Brexit Minister Davis stated he opposes EU demands that its judges retain ability to safeguard 3.2mln EU nationals living in UK after 2019 Brexit. Davis added that tourists will be guaranteed free health cover when they are on holiday in the EU. UK Press also reports that PM May will ensure that thousands of EU criminals will face deportation after Brexit as a key demand when she publishes a 15 page document detailing how she intends to protect the rights of 3.2mln EU nationals residing in Britain. 

ECB's Weidmann said an extension of QE has not been discussed and that the time may be approaching for the ECB to exit stimulus if the Euro area economy develops as expected.

In rates, the yield on 10-year Treasuries rose one basis point to 2.16 percent. U.K. benchmark yields were little changed at 1.03 percent. Italian yields fell three basis points to 1.88 percent.

Bulletin headline Summary from RanSquawk

  1. European equities begin the week on the front foot led by Italian banking names and Nestle

  2. GBP has pre-empted source reports suggesting a deal between the Conservatives and the DUP will be announced later today

  3. Looking ahead, highlights include German IFO, US Durables and ECB's Draghi

Market Snapshot

  1. S&P 500 futures up 0.2% to 2,440.75

  2. STOXX Europe 600 up 0.7% to 390.32

  3. MXAP up 0.2% to 155.45

  4. MXAPJ up 0.6% to 507.53

  5. Nikkei up 0.1% to 20,153.35

  6. Topix up 0.05% to 1,612.21

  7. Hang Seng Index up 0.8% to 25,871.89

  8. Shanghai Composite up 0.9% to 3,185.44

  9. Sensex down 0.5% to 31,138.21

  10. Australia S&P/ASX 200 up 0.08% to 5,720.16

  11. Kospi up 0.4% to 2,388.66

  12. German 10Y yield fell 0.3 bps to 0.252%

  13. Euro down 0.03% to 1.1191 per US$

  14. Brent Futures up 1% to $46.01/bbl

  15. Italian 10Y yield rose 1.0 bps to 1.627%

  16. Spanish 10Y yield rose 0.4 bps to 1.385%

  17. Gold spot down 0.9% to $1,244.94

  18. U.S. Dollar Index up 0.08% to 97.34

Top Overnight News

  1. Italian banks: govt. commits up to EU17b to clean up failed Veneto banks; will be split into good and bad banks, Intesa Sanpaolo acquires good assets for token amount

  2. Italy: Berlusconi party and center right allies perform well in second round of local mayoral elections; of 16 larger cities which had Renzi party-backed mayors, 12 switched to the centre-right

  3. German Jun. IFO Business Climate: 115.1 vs 114.5 est; Expectations 106.8 vs 106.4 est; Curr. Assessment 124.1 vs 123.2 est.

  4. Fed’s Williams: transitory factors have been pulling inflation lower recently; very strong labor market actually carries with it the risk of the economy overheating

  5. ECB’s Weidmann: ECB must resist any outside pressure to continue loose monetary policy longer than needed; council hasn’t discussed possible extension of bond- buying program

  6. U.K.: Deal between Conservatives and DUP expected by “lunchtime” today: BBC

  7. House Defense Panel Proposes $18.4b Boost to Pentagon Budget

  8. Modi Meets Top U.S. CEOs Including Apple’s Cook, Amazon’s Bezos

  9. Fed’s Williams Sees Interest Rates Rising as Inflation Moves Up

  10. EU Said to Decide on EU1B Fine for Google on Wednesday: FT

  11. These Are the U.S. Cities Where It Costs Too Much to Build

  12. Corporate Tax Rate at 28% Seen as More Likely Than Historic Cut

  13. McConnell’s Health Bill Gamble Hinges on Converting GOP Holdouts

  14. Lithuania’s LDT Buys LNG Cargo From U.S. Cheniere Marketing

  15. Enterprise’s Seaway Legacy Crude Pipeline Said to Resume Service

  16. Bristol-Myers Phase 3 Follow-Up Shows L/T Efficacy of ELd

  17. U.S. Asks Supreme Court to Overturn Microsoft Email Ruling

  18. Nasdaq Offers Data on Russell Reconstitution for Listed Shares

Asian equity markets traded higher across the board, following the mostly positive Wall St. close on Friday where tech outperformed and energy snapped a 4-day losing streak. In Asia, Nikkei 225 (+0.1%) saw minor upside after USD/JPY recovered from opening losses and ASX 200 (+0.1%) was also in the green as utilities and consumer staples kept the index afloat. Elsewhere, Shanghai Comp. (+0.6%) and Hang Seng (+0.4%) led the positive tone in the regions as financials outperformed, despite the PBoC refraining from OMOs for the 2nd consecutive session. 10yr JGBs saw minor gains amid the BoJ's presence in the market for JPY 550b1n of JGBs mostly concentrated in the 5yr-10yr range, while the curve was mixed with outperformance in the belly. BoJ Summary of Opinions from June 15-16th said that Japan's economy has been turning towards a moderate expansion and that the most effective way to reach inflation goal is to continue with the current monetary policy.  BoC skipped open market operations

Top Asian News

  1. As Airbag Crisis Spirals, Takata Files for Bankruptcy Protection

  2. Rio Backs Yancoal’s Improved Offer for Coal Mines Over Glencore

  3. Naver, Mirae Asset to Buy 500b Won of Shares in Each Other

  4. Japanese Banks at Risk as Dollar Borrowing Doubles, BIS Says

  5. Takashimaya Reports 1st Qtr Group Earnings Result

  6. China to Step Up Scrutiny of Outbound Investments, Xinhua Says

  7. Nomura CEO Nagai Gets Record Pay After Reviving Overseas Profit

  8. Thai Airways Aims to Buy Almost 30 Planes to Modernize Fleet

  9. Toshiba Chip-Unit Bidders Said to Push Back Final Agreement

European equities begin the week on the front foot led by banking names after Italy began winding up two failed regional banks over the weekend in a deal that could cost the state as much as EUR 17bIn. Elsewhere, Nestle shares are at record highs this morning following reports that Third Point have purchased a USD 3.5bIn stake in the Co., also supporting L'Oreal shares as Nestle holds a 23% holding. This comes despite reports that Third Point may urge Nestle to offload their stake in L'Oreal. Across fixed income markets, EGB's have been slightly dented by the risk on appetite, which the German curve has seen some modest underperformance in the belly of the curve. Within peripheral markets, BTP's are outperforming Bono's following the weekend bailouts of the troubled Italian banks.

Top European News

  1. Nestle Targeted by Activist Third Point With $3.5 Billion Stake

  2. NN Mis-Selling Case May Require EU500m in Compensation, CS Says

  3. Romanian Ruling Party Head Says He Has 5-6 Candidates for New PM

  4. ‘Overvalued’ U.K. Bonds Running Out of Reasons to Rally Further

  5. Hammerson Rises After Report That Whittaker Builds Stake

  6. What One Premier’s Demise Says About Who Runs Europe’s East

  7. Russia Tycoon to Buy Holland & Barrett for $2.3 Billion

  8. Investment Funds Said to Show Interest in Cortefiel:Confidencial

  9. Morgan Stanley May Add 200 Jobs in Frankfurt Over Brexit: WamS

In currencies, Monday has seen the usual order testing flow in the markets, with few leads to go off as the bulk of the data slate is stacked up towards the end of the week. Early EUR/USD tests through 1.1200 have failed to generate any fresh momentum, but this has come through a fresh bid in USD/JPY, taking the lead over the cross rates to a modest degree. GBP has pre-empted source reports suggesting a deal between the Conservatives and the DUP will be announced later today, Cable has struggled through the 1.2750 level as there is plenty of interest to sell on the upside with such a lengthy period of uncertainty ahead. EUR/GBP is pushing back to 0.8800 also, but in both cases, we can only see tight ranges — in relative terms playing out, but any announcement alluding to the above will see a GBP bid, temporarily at the very least. In the commodity linked currencies, we have seen some early signs of exhaustion in the NZD, but this may be coming through the AUD/NZD rate as we suggested, but the move above 1.0400 is sluggish as yet. NZD/USD continues to struggle ahead of 0.7300, but AUD/USD also faces resistance closer 0.7600.

In commodities, the big story in commodities this morning was the larger order in Gold futures going through the CME, with up to 20k contracts hitting the yellow metal USD20.0 lower to hit levels just under USD1240. The timing of the move created the volatility, as in terms of volume, this was a relatively moderate amount when taking into account daily volumes, and many see this little more than an exercise in tripping stops through some notable levels on the charts. The 200dma circa USD1237.00 held firm though. On the day, we are still down net 1%, as is Silver, with Platinum and Palladium are also lower by a similar amount. Copper has given back some ground, but only after tipping USD2.65 in the move higher. Zinc and Lead outperform on the day however. Oil prices stabilising thankfully, with WTI now settling in the mid USD43.00's, with Brent back above USD46.00 for now. No change in the overall drivers (US shale) in sentiment however, so we remain wary of the sustainability in current levels.

Looking at the day ahead, this afternoon in the US the most significant release is the May durable and capital goods orders reports, while the Dallas Fed manufacturing survey will also be released later this afternoon.

US Event Calendar

  1. 8:30am: Durable Goods Orders, est. -0.6%, prior -0.8%; Durables Ex Transportation, est. 0.4%, prior -0.5%

  2. 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.3%, prior 0.1%; Cap Goods Ship Nondef Ex Air, est. 0.3%, prior 0.1%

  3. 8:30am: Chicago Fed Nat Activity Index, est. 0.2, prior 0.5

  4. 10:30am: Dallas Fed Manf. Activity, est. 16, prior 17.2

  5. 1:20am: Fed’s Williams Speaks in Sydney

  6. June 26-June 28: ECB Forum in Sintra With Draghi, BOE’s Carney, BOJ’s Kuroda

  7. June 26- June 28: ECB’s Draghi and Former FRB Chair Bernanke Gives A Speech

DB's Jim Reid concludes the overnight wrap

As we approach the dog days of summer it's a real struggle to get very excited about much in financial markets at the moment with volatility so low. However there are a few things to watch for this week outside of the usual data points discussed at the end in the week ahead.

One of the things to watch out for this week is a potential vote on the Republican’s healthcare bill. According to the FT the non-partisan Congressional Budget Office could release its assessment of the bill as soon as today. The Republican Senate majority leader McConnell suggested a vote could follow later this week. However it remains to be seen if McConnell has enough Republican senators on board with 5 senators supposedly still against the bill in  its current form (can only afford 2 dissenters). One of the dissenters, Susan Collins, confirmed that she will wait to see what the CBO analysis today shows.

So it’ll be interesting to see how this plays out. It’s worth noting that this also follows calls from House Speaker Ryan last week to push ahead with tax  reform. So a potential spotlight is being placed back on Washington.

Oil is another one to watch with all sorts of micro and macro consequences. WTI is now down -20.72% since closing at its YTD highs towards the end of  February and actually -16.13% in the last 23 trading sessions (it is up 1% in the early going this morning however). Obviously this has huge medium term implications for the economy and central banks and with it asset prices. However of more immediate concern is the impact it's having on US Energy credit again. The sector has now given up 6 months of tightening over the last month with our US strategist Oleg Melentyev detailing that spreads have widened by 55bps over the last 2 weeks adding to their previous widening of 50bps from early-May. Ex Energy there are small signs of contagion with US HY spreads 5bp wider over the last two weeks. However pretty much all of this is in effect driven by retail.

At $43 oil, Oleg's model shows fair value energy HY spreads being about 50-75bps wider from here. Every further $1 move lower in oil should produce 10bps in energy HY spread widening on top of the stated move to fair value. In their note from Friday they discuss how much lower oil can go before it becomes problematic to the broader HY market? To answer this question, they use a model they created in late 2014 to estimate the breaking point  between WTI and potential pickup in credit losses and scatter the oil price to HY Energy Debt/ Enterprise Values. This relationship shows that D/EV is expected to stay inside 50% with oil over $40, and it could reach 55% at $35 oil. Historical evidence suggests that D/EV ratios at 60% or higher lead to a material jump in expected credit losses. See the following note for more on this. A reminder that in Europe we much prefer IG over HY on a valuation basis so perhaps the recent weakness in US HY may help this trade a little.

Away from Oil the main piece of news to report from the weekend is the rescue of two Italian Banks. Both Banca Popolare di Vicenza and Veneto Banca are to have €5bn of taxpayer money pumped in to them with their “good” assets transferred to Intesa Sanpaolo for a token price. The vast majority of  the €5bn will be for Intesa to allow it to maintain capital ratios. In addition Italy’s government confirmed that the state will make a further €12bn in additional guarantees available. The European Commission has since approved the plan. Italy’s PM confirmed that the lenders will be split into “good” and “bad” banks. Remember that this comes two weeks after Spain’s Banco Popular was rescued by Santander which presented the first test for Europe’s new European bank resolution mechanism. Bloomberg is reporting that senior bondholders for the 2 failed Veneto Banks will be protected while retail sub bondholders (who can be reimbursed up to 80% according to rules) will be fully refunded with Intesa filling the gap. The FT is reporting that around €4bn in shareholder equity and €1.2bn in junior debt will be kept in the liquidated bank and wiped out.

Staying with Italy, exit polls and early projections from vote counts reveal that candidates from the centre right including former PM Berlusconi and  Salvini (leader of far right Northern League) have won contests for muni elections in the cities of Verona and Genoa (a traditional left-wing stronghold) amongst other smaller towns. The early counts appear to mark a setback for the ruling Democratic Party with the Berlusconi bloc running at about 30% in nationwide polls and tied with the PD, although there is no suggestion yet that Berluscino and Salvini would be willing to form a coalition at the national level.

In terms of other things to keep an eye on this week, one event which could be interesting is the annual ECB Forum on Central Banking in Sintra. The forum kicks off this evening and continues through to Wednesday and is more or less equivalent to the Fed’s Jackson Hole event. Mario Draghi is due to speak 3 times over the next couple of days however perhaps the most interesting part of it will be a policy panel on Wednesday afternoon (1.30pm BST) between the ECB’s Draghi, BoE’s Carney, BoJ’s Kuroda and BoC’s Poloz. Given that two of these Central Banks (ECB and BoE) have been the subject of much debate of late this could perhaps throw up one or two interesting snippets.

Also of note on Wednesday is the results of the second part of the Fed’s annual bank stress test. The results of this test determine whether or not banks can increase dividends and share repurchases. As a reminder all 34 banks passed the first part of the stress test last week.

So all that to look forward to. Before we get there though, the highlight of an otherwise fairly quiet session last Friday was the release of the global flash PMIs for June. Driven by a steep fall in the services reading (-1.6pts to 54.7; 56.1 expected), the composite reading for the Euro area declined to 55.7 for June versus 56.8 in May. That is in fact the lowest reading since January. That said the manufacturing PMI did surpass expectations after rising another 0.3pts to 57.3 (vs. 56.8 expected) and to the highest since April 2011. Regionally services sector declines saw composite readings for both Germany (-1.3pts to 56.1) and France (-1.6pts to 55.3) edge lower while the implied read-through to the non-core countries is an average 0.4pt decline. Our economists in Europe note that the data is however consistent with 0.7% to 0.8% qoq GDP growth in Q2 in the Euro area which represents upside relative to their 0.5% forecast. They also see the weaker June PMIs as a normalisation from elevated levels that overstated the underlying domestic momentum. That said, with evidence of some upward revisions to Q1 GDP data it may be that the survey-hard data gap is closing from both sides.

Across the pond the flash PMIs in the US were also a little disappointing. Both the manufacturing and services readings slipped 0.6pts to 52.1 and 53.0 respectively, which resulted in an equal decline in the composite reading to 53.0 which matches March’s level. The only other data in the US on Friday was new home sales for May which rose +2.9% mom and a little less than expected. The end result of that data for markets was a modest gain for US equities with the S&P 500 closing up +0.16% and snapping a run of three consecutive declines.

A more stable session for Oil prices (WTI +0.63%) was enough to help energy stocks bounce back and lead gains however in Europe we did see markets close a little off the pace with the Stoxx 600 ending -0.23%. This morning in Asia we’ve seen most bourses kick off the week on the front foot, helped in part by that further bounce back for Oil. The Nikkei (+0.12%), Hang Seng (+0.39%), Shanghai Comp (+0.56%), ASX (+0.06%) and Kospi (+0.37%) are all currently up while US equity index futures are also pointing towards a small positive start.

With regards to the other news from Friday, there was a bit more Fedspeak to take note of. The Cleveland Fed’s Mester said that the recent soft inflation data had not changed her view that inflation is on a “gradual path upward”. The St Louis Fed’s Bullard spoke again and reiterated his concerns about the Fed’s projection of another 200bps of policy tightening, but indicated that the Fed could kick off the process of reducing its balance sheet as soon as September.

Over to the week ahead now. This morning in Europe we’re kicking off in Germany where the June IFO survey is due out. This afternoon in the US the most significant release is the May durable and capital goods orders reports, while the Dallas Fed manufacturing survey will also be released later this afternoon. Tuesday kicks off in China with industrial profits data. In the UK we’ll then get the CBI retailing sales data before we then get the conference board consumer confidence, Richmond Fed manufacturing index and S&P/Case-Shiller house prices readings in the US. Turning to Wednesday, the early data in Europe includes France consumer confidence and Euro area M3 money supply. Over in the US on Wednesday we are due to get the advance goods trade balance for May, wholesale inventories for May and pending home sales for May. Thursday kicks off early in Japan with the latest retail trade report. In Europe we’ll then get consumer confidence in Germany, UK money and credit aggregates and confidence indicators for the Euro area. The afternoon will then see Germany release its flash June CPI print while in the US we’ll receive the third and final Q1 GDP report revisions and initial jobless claims data. We end the week on Friday with Japan employment data and CPI along with the China PMIs for June. It’s a busy end to the week in Europe too on Friday with CPI in France, unemployment in Germany, Q1 GDP in the UK (final revision) and a first look at Euro area CPI in June. A busy day concludes in the US with personal income and spending in May, core and deflator PCE readings, Chicago PMI and the final University of Michigan consumer sentiment reading for June.

Away from the data the Fedspeak this week consists of Fed Chair Yellen tomorrow evening along with Williams, Harker and Kashkari also at various  stages tomorrow, and Williams again on Wednesday and Bullard on Thursday. China Premier Li Keqiang speaks early tomorrow morning. Meanwhile the ECB forum which kicks off today will see Carney, Draghi and Kuroda all speak on Wednesday. Other things to note this week is the UK PM May’s speech this afternoon, US Supreme Court decision on Trump’s travel ban today, BoE stability report on Tuesday, the result of the second part of the Fed’s bank stress tests on Wednesday and UK House of Commons vote on Thursday.

Gold Flash Crashes As "Someone" Dumps $2 Billion, "Fat Finger" Blamed

One minute after 4am EDT, as the European market was warming up for trading, Gold suddenly plunged $12, or 1%, to $1,242 an ounce, on a surge in volume with 18k contracts, or just over $2 billion notional, trading in a one-minute window; as of 9:20am London, volumes running around 150% of recent averages. As so often happens, the gold plunge dragged silver down with it as well.

A better chart of the move comes courtesy of Nanex which shows how the sudden selling soaked up all the liquidity in the gold market in seconds, with the clear intention of repricing gold lower.

With no clear driver for the move, Bloomberg has suggested it may be a "fat-finger" mistake, although many are skeptical and see either algo or central bank intervention, as the gold plunge was offset by the usual USDJPY spike, which jumped as high as 0.35% to Y111.66.

The sharp move in gold sent Treasurys to session lows as the "unexplained drop" in gold pushes the dollar index to session high

Gartman Turns Bullish On Oil

There has been a distinct shift in sentiment when it comes to oil this morning: after plunging 22% from its February highs, many commentators are suggesting that the bottom is finally in and that it is time to turn "contrarian."

One among them is GS Banque's Loic Schmid, who posits three ideas on why oil is weaker:

  1. Is it the hedge funds? They have massively cut back their net exposure.

  2. Is it supply? There is currently too much output.

  3. Is it demand? Recent US macroeconomic figures have been rather disappointing.

Which prompts him to ask if this is the time for a logical bounce, as oil at $42.50 is a problem for the industry and OPEC, and shows that we are currently close to the bottom of the range and technical indicators suggest that oil is oversold, noting that "we would not be surprised if OPEC trims output in the next few days..."

For now OPEC is not budging, because as Bloomberg reported overnight, discussions on Tuesday at the OPEC, non-OPEC Joint Technical Committee focused how to deal with resurgence of Libyan and Nigerian crude output, rather than deepening production cuts by other members.

That said, another factor, however temporary, may be Tropical Storm Cindy, which will likely mothball US production for at least a few days, leading to several million bbls in production losses.

Which leads us to the point of this post: having been bearish (and correct) on oil for the past few weeks Dennis Gartman (who not that long ago predicted that oil would not rise

above $44 again in his lifetime), has just turned bullish on oil.

From his note:

CRUDE OIL PRICES CONTINUE TO PLUNGE, but we begin this morning noting that Tropical Storm Cindy is making landfall along the Texas/Louisiana border, and although she is only a tropical storm and is not a hurricane she’s forced some of the oil and nat-gas operations in the Gulf of Mexico to be shuttered in. She will pass northward and eastward today, leaving a great deal of rain behind, but likely causing no damage of any sort to these operations.However, Cindy does raise everyone’s awareness that the “Hurricane Season” has begun in earnest with another “disturbance” shaping up to the west of the Caribbean  Islands that bears watching.

That said, we move on by making the following rather definitive statement for we’ve ended our comments on the energy markets for the past two or three weeks with the statement that “Strength is to be sold; weakness is not to be bought” and have added even later in our commentaries that “We trust we are clear.” This morning, given the myriad downgrades that the energy stock analysts have put forth in the course of the past several days and given the decided one-sidedness of the psychology, and given the severity of the recent weakness we think it is wise to say that for at least a while strength is not to be sold and that for a while weakness is indeed to be bought.

That does not mean that we have suddenly turned bullish of crude oil and nat-gas prices for clearly we have not; but aggressive selling is to be avoided for a while and we can make the case that nearby WTI, now having fallen for five weeks in a row and having falling precipitously, could easily bounce back toward $46-$47/barrel. That may seem optimistic, but we must remember that nearby WTI was trading $47/barrel only two weeks ago!

For oil bulls, this may be good news...  or not so good news.

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