August 6, 2014
I was away for two weeks (three weekends) mostly without internet and cell phone. And I never left Ontario. So it was always a bit of a surprise whenever I was in a position to check markets and the latest in the geopolitical wars. Gold as of today has barely budged. It was at $1,309 when I left on July 18 and it is trading at $1,308 today although we did get down near $1,280 before rebounding again. The S&P 500 on the other hand broke important support at 1,950 and is today hovering somewhat above 1,900 for a loss of roughly 3% or so.
The biggest impact on the stock market appears to be geopolitical with the conflicts in Ukraine and Israel/Gaza. Both are equally dangerous and could trigger a broader conflict. But the most dangerous is Ukraine and it is not necessarily the military conflict. The real conflict or the most dangerous one to the global economy is the economic sanctions. Quite simply sanctions against Russia, which has been the main response from the West, simply do not nor will they work. Sanctions threaten the global economy. The West (US, Canada, EU primarily) are leading the way on sanctions but the reality is most of the world is ignoring them. The sanctions are a form of a trade war. The sanctions for example have grounded a subsidiary of Aeroflot the Russian airline. In retaliation Russia is threatening to ban all EU flights over Siberia and the Russian government has been directed to prepare retaliatory measures against the West. Russia has also in the process of cutting a massive $20 billion deal with Iran that will allow Russia to help develop Iranian oil fields and even have Russia buy oil from Iran. The deal includes 500 thousand barrels of Iranian oil per day in return for Russian goods, equipment and services. Considering US sanctions against Iran, Russia is basically snubbing the US with regards to those sanctions. Sanctions don’t work especially with the world’s 8th largest economy even though it may work on a smaller country that has little economic clout like North Korea. China also appears prepared to bust or ignore any western sanctions against Russia bringing the two Eastern powers closer together. While China has not been targeted they are gravely concerned about the West`s reaction to Russia. In a global trade war no one wins and everyone loses. The Great Depression hammered that concept home but then history is being largely ignored. The response it seems is that “this time it is different“. No it is not different it is just the players that are different.
On the military side there has been renewed buildup of Russian troops on the Ukraine border and there have been constant stories of NATO buildups as well although that news is not printed widely (or at all) in the western press. For every action there is a reaction. What comes first – the chicken or the egg.
With the S&P 500 breaking support at 1,950 one has to focus on more important support now. That line in the sand is currently at 1,875. If that level breaks it will end an uptrend that has been in place since October 2011. Given current oversold levels expect some sharp volatility over the next week. The market is still buying the dip but the background is negative and as I have noted continually over the past few months the negative divergences have been becoming more pronounced. On a monthly basis the key breakdown point is under 1,737. The market is still quite a ways from that level. There has been no substantial correction in the markets since 2011 so one is considerably overdue. The good news is that this is probably only the first wave down so there could be a sharp up move that follows this correction. However, that top should be even more important as the market is indicating that the move up from the lows of 2009 is most likely complete. The ensuing bear could return the market to the 2009 lows.
As for gold its now three year correction (and counting) is getting long in the tooth as well. The danger short term for gold is that the final low is still not in and I have consistently pointed out that there remains downside risk including serious downside risk even to $1,000 until gold takes out in order $1,380, $1,430 and $1,550. While I might not believe that the Goldman Sachs (and others) gold target of $1,000 is going to happen the admission is that it does remain a possibility. The good news is that the gold stocks (HUI, TGD etc.) appear poised to break out before gold. This is the kind of positive divergence one needs at the lows.
The geopolitical front is becoming potentially more dangerous from a military standpoint and especially from an economic standpoint. Russia has numerous economic weapons to use against the West depending on how far the West is prepared to go with sanctions. An ace in the hole for Russia remains the roughly $500 billion of external Russian debt that is owed primarily to EU and US banks. Russia could default as a final action against sanctions. An event such as that could cause a panic in EU and US stock markets.
A full report will return over this weekend including some catch up commentary on the recent US GDP numbers and the recent US employment numbers. The GDP number on the surface looked good but underneath it is rot.
BA, FCSI, CIM
Investment Advisor, Technical Strategist
Industrial Alliance Securities Inc.
26 Wellington Street E, Suite 900
Toronto, ON M5E 1S2