I would have lost this bet…twice

Monday, 9 December 2019
Adelaide, Australia
By Bernd Struben

  • OPEC’s toothless bite
  • Check your stop-loss levels
  • Tread Carefully as Liquidity Falls

I would have lost this bet.

Even if you gave me two shots at it.

The bet in question is correctly answering this. What drove…and is driving…the big gains across major global stock market indices?

You can probably guess my first answer. Delivered with a confident swagger.

‘Renewed hopes on a successful mini-deal easing the US–China trade war, of course.’

Buzz! Wrong.

Then, delivered with equal bravado, ‘Surely then one of the big central banks — the Fed, BoJ, PBoC, or ECB — is flagging future rate cuts or ramping up QE.’

Buzz! Wrong again.

No, investors piled back into stocks not on hopes for an end to the trade war or rumours of more easy money from the central banks. But rather on unexpectedly good economic news from the world’s biggest economy.

It’s the kind of good news you’d expect to provide a boost for equities in markets not manipulated by central bankers. Rather than the ‘bad economic news is good news for stocks’ mantra we’ve been stuck with for years now. Where every new downturn is met with expectations of another interest rate cut.

The good news in question is the latest US employment figures. And they smashed expectations.

First, analysts at the US Bureau of Labor Statistics donned their Santa hats and upped their figures for the number of new jobs created in September and October. The real bombshell though is this: The month of November saw the creation of 266,000 new jobs.

This comes during a global slowdown, mind you. And a festering trade war with China that we were told was hurting the US as much as…if not more…than China. And surely costing jobs.

Now, to be fair, the numbers are juiced a bit with the return of 48,000 General Motors workers following a resolution to their labour strike. That accounts for most of the 54,000 new manufacturing jobs ‘created’.

This is a fact you’ll hear repeated by all the market bears. While there’s truth to that, even without the returning strikers the number of new jobs still far exceeds expectations. And let’s not forget that when the GM workers walked off the job, this was counted as job losses.

So fair’s fair…

The employment boom also sees the official US unemployment rate drop back down to 3.5%, matching its record low from September. A record that stretches back 50 years.

And it’s likely to see an uptick in fourth quarter US GDP growth.

All else being equal, that should prove good news for US markets heading into 2020. It should also help support Aussie stocks and the broader ASX 200. But with the US economy humming along, you may want to consider putting some more of your investment eggs into US baskets.

The S&P 500 is up 25.3% year-to-date.

If you think it’s got further to run in the coming months you could consider the ISHARES S&P 500 ETF [ASX:IVV]. The exchange traded fund is intended to track the performance of the S&P 500. Year-to-date it’s exceeded that goal, up 29.5%.

Now, a look at the markets…

Markets

Over the weekend, the Dow Jones Industrial Average closed up 337.27 points, or 1.22%.

The S&P 500 closed up 28.48 points, or 0.91%.

In Europe the Euro Stoxx 50 index closed up 44.21 points, or 1.21%. Meanwhile, the FTSE 100 gained 1.43%, and Germany’s DAX closed up 111.78 points, or 0.86%.

In Asian markets Japan’s Nikkei 225 is up 107.19 points, or 0.46%. China’s CSI 300, perhaps tellingly, is down 0.22%%.

The S&P/ASX 200 is up 23.38 points, or 0.35%.

West Texas Intermediate crude oil is US$58.88 per barrel. Brent crude is US$64.07 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,461.05 (AU$2,137.91) per troy ounce. Silver is US$16.60 (AU$24.29) per troy ounce.

One bitcoin is worth US$7,544.08.

The Aussie dollar is worth 68.34 US cents.

OPEC’s toothless bite

Getting back to oil…

West Texas Intermediate crude oil is still trading within the US$50–60 per barrel range I’d forecast for 2019.

The muted 0.8% rise in the price of WTI since Friday comes despite OPEC+ agreeing to deeper output cuts through March 2020.

If you’ve been following along with the Insider, you’ll know those deeper cuts come as a surprise to me. I expected the best the cartel would be able to muster was to continue with their current level of production cutbacks.

But the Saudis won the day. Sort of.

Saudi Arabia is again shouldering the bulk of the cuts, vowing to slash 400,000 barrels per day atop their existing limits.

So why the negligible uptick in crude prices?

First, the global demand outlook remains tepid.

Second, signing an agreement and actually sticking to it are two very different things. Cheating has always been an issue for OPEC. In 2019 Russia, Nigeria and Iraq all pumped more than their agreed quotas on the majority of months. I certainly wouldn’t put my money on these nations adhering to their commitments next year.

Which brings us to point three. The new agreement only runs through March. If the Saudis aren’t happy with the reductions they see from the rest of the OPEC+ members, extending this agreement will be tricky indeed.

Finally…and most importantly…the days of OPEC dictating the oil price are fast fading in the rear-view mirror. Thanks to the fracking revolution, the US is now the largest oil producer in the world. It’s pumping record levels this year. And it’s expected to set new records through at least 2022.

Barring a calamity in the Persian Gulf, I expect crude prices to gradually slide heading into March. And then potentially fall off a cliff if OPEC+ can’t agree to extend them through the rest of the year.

Atop that it’s not unreasonable to consider that Venezuela’s oil may rejoin the global markets in 2020…if and when the nation’s embattled president Maduro finally makes for the exit.

Not to mention that Iran’s leaders are feeling the heat from protesters over deteriorating economic conditions from US led sanctions. If that heat gets stifling enough, they just might decide to renegotiate the nuclear treaty Trump chucked in the bin. Which would see yet more crude hitting the markets.

All up the mid-term picture doesn’t look good for the big oil stocks, who’ve already taken a battering this past year.

Exxon Mobil Corporation, for example, is down 8.2% over the last 12 months.

Royal Dutch Shell is down 2.1%.

Chevron Corporation bucks the losing trend…barely. The share price is up 2.7% over the last year. Though 1.5% of that gain came in Friday’s trade.

That doesn’t mean you can’t find stocks returning big gains by sticking a drill bit into the ground. It’s just not oil they’re after.

We’ll get back to that tomorrow.

For now…

Check your stop-loss levels

As part of our regular Monday feature, below veteran stock trader Murray Dawes share’s this week’s trading tips and insights.

In his premium advisory service, Alpha Wave Trader, Murray uses his proprietary ‘slingshot method’ to hunt down rapid fire profits from stocks while minimising risk.

Today he explains why he’s cautious on Aussie stocks and gold during the final weeks of 2019.

Scroll down and click on the image below to watch Murray’s latest video now.

You can learn more about the edge Murray offers active traders over at Alpha Wave Trader by clicking here.

Cheers,
Bernd


Tread Carefully as Liquidity Falls

[Click on the picture to watch Murray analyse the ASX 200 and gold now that both have confirmed bearish signals.]

After a volatile week last week, I think it is prudent to tread carefully as we head into the final days of trading for the year.

Many fund managers will have their fingers on the sell button hoping to protect what has been a great year. With indices up over 20% for the year, there will be large bonuses on the way. I wouldn’t want to see those bonuses shrivel up if prices collapsed over the next three weeks, so I’d want to sell now before liquidity dries up completely.

There was a weekly sell pivot confirmed in the ASX 200 last week. That sell pivot confirms a false break of the high from July after also hitting a new all-time high price. I’m sure you have heard of the ‘double top’ formation. I’m not saying that a double top from the 2007-high is confirmed yet, but I’m sure there will be plenty of traders who are wary of such an outcome.

Who knows how the US–China trade situation is going to go? It looks like 15 December is the next key date with new tariffs due to be imposed. That is only a few days away. If a phase 1 agreement is inked then we should expect to see some strong buying, but I think the biggest risk is to the downside if tariffs are imposed and a deal isn’t forthcoming.

The market has priced in good news, so bad news will cause a sharp reversal in prices. We have already seen the first signs of weakness last week with a very sharp sell-off in a couple of days. Until the US breaks out to new all-time highs again, traders should remain wary that another leg down may be around the corner.

Gold has also given a bearish signal with the confirmation of a monthly sell pivot last month. I gave warnings about the correction in gold many weeks ago when prices confirmed a weekly sell pivot. The monthly sell pivot is obviously a stronger signal, so I am now bearish on gold until we see a monthly buy pivot confirmed.

My long-term view on gold remains firmly bullish and I think any sell-off should ultimately be used to add to long positions, but my target on gold in the short term is US$1,360, which is another $100 lower than current prices.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader