Financial Markets Update

Financial Markets Update

Many of the financial markets around the globe have enjoyed strong moves since Donald Trump's election as President of the US back in November. The perception that he would cut taxes and increase spending triggered a rapid re-adjustment in a number of markets including the precious metals, the US dollar and stock markets. Initially we saw all these markets show strong gains, as cash that had been sitting on the sidelines during the election process was finally put to work. However, as the weeks have gone by and Trump has become increasingly bogged down by the political maneuverings of both the Democrats, his own Republican party and a hostile media, this enthusiasm has started to wane. The failure last week to get Congress to endorse his attempt to repeal the 'Obamacare' healthcare program is symptomatic of the struggles Trump will face during his presidency. This ending of the honeymoon period for both the Trump presidency and the economic euphoria that accompanied it, makes for a good time to review the financial markets.

The US Dollar

During the early stages of the Trump presidency the dollar enjoyed a strong rally fueled by the belief that a more lenient fiscal policy would lead to a huge repatriation of overseas earnings by US companies. This allied to a generally improving US economy would all be dollar positive. I have spoken at length about why I believe the US dollar is going much higher in the medium and longer term ( for a recap see  http://kiwiblackers.blogspot.co.nz/2013/11/the-coming-us-dollar-rally.html ) but lets now take a look at the chart.

We can see the rally that occurred from early November through to the start of 2017, followed by a correction since. More recently this correction has gathered pace, as the defeat of the populist Geert Wilders and re-election of Prime Minister Rutte in the Netherlands has breathed some hope back into the euro project and led to some investors selling dollars to move back into euros. This reaction will likely run a little longer, but as we can see from the technical indicators at the bottom of the chart, price is starting to get oversold. I have highlighted an area of potential support on the chart, and this zone is further reinforced when we look at a point and figure chart for the dollar.

With this chart we can see the potential target price of 95.45. As always, there are no guarantees that it will be reached but it does give us a little more confidence.

 In conclusion, the US dollar will ultimately resume its climb to new highs, and this correction provides a great opportunity to go 'long'. I would rather be long a little early than try to finesse it and miss out!

The Dow Jones Index

The Dow reacted very strongly to the Trump election victory rising over 18% to its high of 21169 on 1st March. As is often the case with financial markets, the more the price goes up, the more bullish investors get until we reach a point where all the potential good news is priced in and prices only have one way to go. The Dow held out for a long time but finally it is easing off as the promise of tax cuts and increased spending becomes less certain. If we look at the current chart of the Dow Jones we can see that it reached very overbought levels and as a consequence is at great risk of a more concerted reaction. 

I have marked the more likely areas that support will be found on the chart, and we can once again look at the point and figure chart for any clues. 

Here it gives us a downside count of 19772, a correction that would finish at the first support level. Here as with the US dollar investors might be wise to invest too early rather than hope for a large correction. I have explained in prior posts why the US stock market will be the only game in town once funds start pouring back into US dollars, so trying to pick the bottom and time your investment to perfection could prove very frustrating.

Gold

Gold also fared well in the aftermath of Trumps election. It was also given a second wind by the subsequent dollar weakness. However, unlike the the dollar and the stock market, Gold (and its compatriot Silver) are still in their long term corrections from the highs of 2011, and whilst the rally has been impressive, it still has a long way to go before we can be convinced that the low is truly in.

We can see that Gold is still in the downtrend that started in July last year, and that whilst a near-term weaker dollar might give it a bit of a fillip, it is getting into overbought territory. Once the dollar starts to rally, I would expect to see gold fall hard, with the critical point being the 1124 support level. If that is broken, it opens up the 1045 level as the next target.

The point and figure chart for Gold is giving us an objective of 1119, which seems to reinforce how important that 1124 support level is. We shall just have to wait and see.

Conclusion

What I believe we are currently seeing are counter-trend moves in all these markets. With the Dollar and US stock markets, once the corrections are over they should resume their track to new highs, fueled by the increasing turmoil in Europe and the rush to find safety in the US dollar. Ultimately Gold will also find favour, but first it must finish its multi year correction. This is something we must keep a very close eye on, as when that bottom is finally reached, the upside potential will be huge.

I shall endeavour to keep you up to speed as the moves unfold and do my best to pick those entry points as they manifest.