French Fashion

French Fashion

There are two types of economic uncertainty that can influence interest rates and investments in general; economic policy uncertainty (EPU), and immigration policy uncertainty (IPU). The French election is a proxy for, and has an effect on both of these, and as a founding member of the EU, France carries special weight in European political and economic matters.

The chart below shows the historically high levels of EPU and IPU that France is experiencing. The effect of these uncertainties shows up in lower French bond prices (higher rates), and lower German bund prices (lower rates).

The Global populist political movement which has sprouted within many Western democracies, and which is nurtured by these uncertainties, tends to be isolationist, nationalistic (racist?), and generally fearful. All of which make trade and, therefore, economic expansion more difficult. The far-right candidate, Le Pen, for example, wants to remove France from the EU and (insanely) redenominate French public debt in new French Francs. We hope there is a sufficient number of French voters, who understand what this would do to ALL investments in France, to stop such potential economic madness. The fact that the German Bund rate has been in a general uptrend since the beginning of the year (chart below), is a welcomed sign that perhaps is predicting a poor enough showing for Le Pen in this Sunday’s run-up election to remove her as a threat. If that happens, then you can expect German Bunds to sell-off in relief.

Given the solid PMI numbers and the improving growth over the past few months which a variety of officials including ECB Chief Economist Peter Praet have attested to, the elimination of the “Frexit” threat would signal the all-clear for a eurozone recovery.

Source: Tom Jensson

Equities

Despite more digital-ink being spilled this week on warnings of the stock market’s imminent demise, we continue to see the opposite. Worry continues to be elevated on both the economic and geopolitical fronts, and worries generally fuel bull markets, especially when the worries appear to be of the obvious variety; high PE ratios, and Le Pen in control of French politics are obvious worries.

The AAII investor sentiment index shows that worry increased this week with the bull sentiment dropping down to 25.7%, and the bear and neutral sentiments rising to 38.7% and 35.6% respectively. Bear markets generally start when bull sentiment is above 50% and bear sentiment is below 30%. In other words, when the majority are not fearful (chart below).

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The put:call ratio has carved-out a local top in the SPX. {This section is for paid subscribers only}

Fundamental metrics continue to point to long-term appreciation for the S&P 500 (chart below).

Even though we think that we are in a long-term bull market, the chances of weakness in the near-term remains elevated. We are not entering any long positions just yet.




Gold

The dollar and rates, continue to move within their upward channels (chart below).

The USD/JPY FOREX ratio has reached the 50% retrace level of the August to December 2016 rally. and the stochastic is in over-sold territory. A rebound in the ratio, and, therefore, weakness in the gold price is probable in the near-term.

The correlation between gold and the PRING inflation index, although variable, shows a strong positive correlation on an average basis (chart below). Lately, it has dipped into negative territory as inflation dropped while gold went up, but history shows that we can expect a reversion to the mean (which is positive). We continue to point out that inflation is unlikely to be a problem as long as the FED has a backlog of rate hikes to deliver.

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The commitment of gold futures traders increased again this past week; commercials are 76% short, and speculators are 77% long (chart below).

The commitment of silver futures traders remains at historical levels; commercials are 78% short, and speculators are 84% long. The long side of the trade remains very crowded.

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We wish our subscribers a profitable week ahead and ask that email be monitored for Trade Alerts.

Regards,

ANG Traders

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Source: Nicholas Gomez