Hello traders and welcome to this week’s market rap up. Across the globe, from the August 28 bottoms that most stocks hit, they all pretty much made some gains back with the Hang Seng and the Nikkei leading the pack gaining 5.4 and 4.2% each. The Euro Stoxx 50 recovered 2.5% with the FTSE and the DAX each moved up 2.0 and 1.6% respectively. Down Under the S&P ASX rallied back 1.6%. The S%P and Dow were the weakest of the bunch squeaking out each just over .10%
Even though equities rallied a bit this week, the moves up look weak and lack impulsive momentum. The Dow’s move up from the August 28th bottom is a corrective-like retracement that has retraced only 27% of the move down from the 16658 top. Taking a look at the chart below, you can notice the long strong move down in the middle of the swing. It looks like a textbook Elliott wave third wave. This pattern is found both on the Dow and the S&P. The odds are that this is just a first wave down of a deeper move down which can only be the first wave of a five wave move down or the A wave of a zigzag. Regardless if this is the first wave of a corrective or impulsive move, we can expect more movement in the downward direction in the weeks to come. Additionally, the recent moves back up are choppy and very corrective like—leaving me with the conviction of a risk off week to come.
How this figures with the latest Non Farms numbers is yet to be seen. The markets did not rally on the poor Payrolls number missing the 180 consensus by 11K. And to make matters worse last month’s number was revised down to 104 from 162K. On the surface the one bright spot was that the Unemployment number came down to 7.3%, however, it was because the participation rate dropped to 63%, the lowest since 1978. According to Brad Plummer of the Washington Post, if the participation rate was the same today as it was back when Obama took office the unemployment rate would be 10.8%. On top of the fact that most of the jobs that have been created are low paying part-time service sector jobs, there can be no doubt that the recovery has been a smoke screen for the ongoing “great recession.” Like I have said in the past, the Fed is bluffing and there will be no taper. However the market fails to see this and still hangs on the hopes that a taper is in line this month or in December.
These bad Non Farms number and the crises over in Syria is the perfect scapegoat for the Fed to put off the supposed taper. Most analyst are pinning their hopes on a tape because some of the fundamental numbers that have come out recently have been ok. Both the ISM Manufacturing and Non-Manufacturing PMI number beat nicely this week, with strong components in each except for the poor employment number in Manufacturing. Even though the employment component of the Non-manufacturing PMI came in strong, one must not forget that these are the type of jobs that exasperate the US’s trade deficit and debt—two things that are extremely sensitive to higher interest rates.
Sensitive to say the least! Just think of the spot the Fed is in. If the economy gets better, then interest rates are going to go up naturally. However, if the economy gets worse, or stays bad, then QE isn’t working and more QE is needed, which will cause rates to go up because of inflation expectations. If the Fed drops QE, the party is over and interest rates will reset to market and spike, causing a major restructuring in the economy. I still really cannot see rates making new all time lows. However, a good retracement is in line.
Notice the Elliott Wave Count below on the US 10Y. It is quite obvious that we are in a third wave. The five subminuette black Roman counts could very well be the final five of fuchsia minuette bracket v of a three at minute degree. It has so far failed to produce anything near a fourth wave at minute degree. Even the second and fourth waves at smaller degree are shallow for norm
This seems like a good place for a corrective forth wave. The 161.8 wave 3 vs. wave 1 limit has been passed, along with the 161.8 extension of wave 1. Additionally, note that the wave five of the previous downswing that bottomed at the all-time July 25th low has been retraced and with price sitting right on the 61.8%.
Look for a retracement to the previous wave four at minuette degree. Fundamentally, things look good too. The weak Non Farms numbers and the Crisis over in Syria give the Fed the perfect reason for being dovish, which could take some pressure off yields for a bit; but not for long. A lot of analysts think that bonds are rising because the economy is getting better. I am more inclined to think otherwise and say it’s because of inflation expectations.
Now, it is not just the US that is having problems with higher interest rates. Over in the EU fundamentals came in mixed to bad with the EUR Zone Markit Manufacturing MPI beating by .1 at 51.4 while the German missed by .2 coming in at 51.8. GDP for the EZ came in better than expected by not contracting as much as the consensus -.7% coming in at -.5%. EZ retails sales missed along with German factory orders. Draghi came out and left interest rates at .5% with a dovish tone. Although the EZ has been recovering somewhat the fundamentals still look too weak for the EZ economy to be able to handle a rise in interest rates. The ten year hit 1.69—up 12 basis point from last week. On the charts the EUR looks weak. It has so far carved out a five wave move down of what looks like a completed expanding diagonal for a wave B of a larger zigzag. It is now heading down to complete a C of B at minute degree. We should get a pull back for a wave two subminuette black wave ii. This correction on the EUR goes nicely with the next chart which is the USDollar index. It appears like it has finished an impulsive wave up and is now correcting in a wave two. The index could hit the 81.50 area by Tuesday along with the EUR reaching back up to 1.33.
The pound was up on the week but failed to make a high above the August 21st high which as interesting to note giving the great numbers that have been coming out in the UK of late. This week, most fundamental figures that came out beat expectations; all accept trade numbers that came in missing bad. And even though Industrial production growth rose in June it slipped in July missing at 0.0 vs. .1 eyed down from last month’s 1.3%. The widening trade deficit is one of the biggest on record which caused some pound selling; however, it recovered some of those losses on the back of the poor Non Farms out of the US. Notice however that even though it has been beating the US fundamentally as of late, it could not make a high above the August 21st 1.57 high. The pound fell short of 1.57 on Friday. It will be interesting to see if the pound falls from here or does move up to break above 1.57 on the back of some good employment numbers this week. The pound has been strong against both the USD and the EUR as of late. However it looks like it just might weaken against both this week if the Elliott Wave counts are not invalidated. It is hard to tell. Moves, down and up, on this chart are choppy and very corrective. If the employment numbers come out good this week, the pound might rally and invalidate this count.
The Japanese Yen poked up above the 100 mark only to roll over quickly after Governor Kuroda appeased the markets about offsetting the new consumption tax with more easing. The yen dropped to 98.50 and then clawed its way back to 99.13 by Friday’s closing. Then on Sunday on the back of the GDP beating coming in at 3.8 vs. 3.7 the yen rallied up to 100 again but failed to make a new high above the 100.23 it hit on Thursday.
However, even though the GDP number came out good, the trade deficit widen again and missing consensus at -942.3B vs. -862.4B yen. This could prove troublesome for the JPY. It appears on the chart that the USD/JPY has just finished or is about to finish a D wave of a triangle fourth wave. The rally today looks very impulsive and the move down from the top at 100.23 looks like a three wave move. I am looking for a corrective move down today and tomorrow and then a third wave up of the final fifth to finish the D of the triangle before the pair heads back down to complete the blue circle at minute degree. If the pair rallies above the 101.53 this count is invalidated.
Even though the com dollar have been benefiting from the rallies in commodities lately the pairs seem to be about to roll over once again. The Aussie in particular has benefited from the good numbers coming out of China. However, on the charts they all appear tobe at the end of corrections and the buck might gain on the com-pack this week. However, there is some room for them to correct further.
With equities down, commodities up and bonds yields up, things look pretty shaky. But like I said, I think that these bad Non-Farms numbers that came out and the crisis over in Syria, is the perfect excuse for the Fed to talk dovish. It will be an interesting weak. Happy trading.