Here's why the markets are ignoring the geopolitical events
We are all well aware of the recent geopolitical events in the Ukraine and the Middle East which in the past from my experience at least, would have upset global financial markets to a greater extent than we have seen in the past few months. Even yesterday’s EU and US sanctions against Russia had a very muted effect on the markets despite the fact that these political tensions can only hurt trade and investment. The headlines that I read seem to be focused on the belief that the Fed has all the answers and will just keep interest rates at or around zero for as long as is necessary to support growth.
Therefore anything else is pretty much irrelevant. However there are one or two cracks appearing as we reach August, a month which historically can be quite volatile despite the fact that or perhaps because of the fact that the senior proprietary traders are on holiday. August is a month which has usually caught me on the wrong side of a big move in several years gone by.
There does appear to be more volatility creeping into the market and I don’t need to remind you that I have quite a negative outlook on the stock markets. (See my article on 10th July: Stocks-Are we about to hit rough weather?). I think there is an increasing risk of decent correction over the summer/autumn. In fact the Dax is already establishing a short-term bear trend and the Dow has failed miserably to hold above 17,000 as I write. The S&P has stalled below the magic 2000 level with many believing valuations are overstretched, myself included.
But what about the commodity markets?
Gold and silver have experienced the odd knee-jerk reaction to a geopolitical headline but nothing to trigger any positive trend. The charts below show gold and silver in a sideways trend at best. This must be very frustrating for all the gold bugs out there who would have expected these global events to have triggered a flight to safe haven.
At least gold is managing to hold above the 200 day moving average (pink line) you see in the chart above. If that gives way Bulls will have to defend the seven-month trendline around the mid 1260 area or the 2 ½ year bear trend could resume with at least a test of the 1180 lows.
I was feeling really positive about silver at the beginning of July but the last two or three weeks have been disappointing as we hover just below the longer term trendline you see in the chart above. Unless we can see a couple of weekly closes above here in August it looks like sideways action is the best we can hope for into the end of the year.
WTI Crude managed to beat March, April and May highs in the 104.50-105.20 area at the start of June when hostilities moved up a gear in Iraq and the Ukraine, as you can see in the chart above. However a very aggressive sell-off from the end of June through to the middle of July 2 took WTI Crude down almost 9 dollars in just three weeks. We have failed to sustain the bounce in the middle of July and it appears we are now heading back towards the 200 day moving average at 99.90. We have not closed below here since the beginning of May so watch carefully in August in case we start to see daily closes below this pink line and of course a break below July lows at 99.00 would signal we are in the short-term bear trend.
Brent crude has at least managed to remain stable over the past two weeks but this really just looks like a consolidation phase after the sharp sell-off. It does look more likely that the next big move will be to the downside now that we have unwound the severely oversold conditions from mid July.
Of course these commodities are not being aided by the recent strength of the US dollar, something we anticipated in my article back on Independence Day around four weeks ago. With continued strength in the US economy and increasing focus on eventual rate rises there is a good case for continued strength in the US dollar. This of course only serves to increase energy costs for emerging markets allowing them to purchase less Oil.
I will finish up with a look at Natural Gas which has experienced six weeks of declines in a row. This commodity has in fact been in quite a strong bear trend ever since we topped out after those extremely volatile conditions at the end of January and beginning of February. The only hope for Bulls now to stage a recovery is if they can make sure the price holds above the 200 week moving average at 3.715. A break below important longer-term Fibonacci support at 3.660 however, is likely to trigger the next leg lower.
As I write I see no sign of a sudden reversal in the weakness in energy markets and no indication of a Bull trend developing in gold or silver. However an increase in volatility could certainly be on the cards and this would be most welcome by many day traders who have been struggling to stay awake at their desks. Some Forex pairs are starting to see bigger daily ranges and the stock markets have become more interesting. I do at least think that this is a trend that will continue into the autumn. For that reason, I’ve been slowly buying into a small long position in the VIX.