Footsie falters

Sterling continues to test primary support at 1.13 against the Euro. Twiggs Trend Index peaking below zero warns of selling pressure. Breach of support is likely and would signal a test of the 2016 low at €1.10.


The FTSE 100 breached medium-term support at 7400 and the long-term rising trendline, warning that momentum is slowing. Bearish divergence on Twiggs Trend Index warns of rising selling pressure. Test of primary support at 7100 is likely.

FTSE 100

* Target: 7400 + ( 7400 – 7100 ) = 7700

Canada: TSX 60 bear market

The TSX 60 followed-through below 890, after breaking primary support at 900, to signal a bear market. Decline of Twiggs Trend Index below zero would strengthen the signal. Immediate target for the decline is 865*.

TSX 60 Index

* Target calculation: 900 – ( 935 – 900 ) = 865

ASX 200: Banks run into strong resistance

Iron ore peaked at $60. Expect a sharp fall to test support between $50 and $52, typical of a bear market. Chinese housing price growth — a key driver of iron ore prices as illustrated last week — is slowing and likely to drag ore prices lower.

Iron Ore

The ASX 300 Metals & Mining index is still on the up but likely to respect resistance at 3000, given the reversal in iron ore. Breach of 2750 would confirm a primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index ran into strong resistance at 8500. Declining Twiggs Money Flow highlights selling pressure. Breach of 8000 is likely and would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 displays strong selling pressure, with tall shadows on the last two weekly candles. Twiggs Money Flow dipping below zero for the second time warns of a primary down-trend. Follow-through below 5700 would test primary support at 5600. Breach of 5600 would complete a broad head and shoulders reversal, confirming a primary down-trend.

ASX 200

Gold tests resolve

The Dollar Index is in a primary down-trend. Short-term support is unlikely to hold. The long-term target is the 2016 low between 92 and 93.

Dollar Index

Silver often acts as a lead indicator gold. Testing primary support at $15.50/15.60 per ounce, breach would warn of a primary down-trend.


I have been bullish on gold since the election of Donald Trump as president. My comment last week was:

“Let me put it this way: recovery of gold above $1250 would not be a surprise. And would test resistance at $1300….”

Gold is trending lower, breach of $1215 warning of a test of primary support at $1200.

From a fundamental viewpoint, I can find no strong argument to support a lower gold price:

So I remain bullish on the long-term outlook for gold. But a peak below zero on Twiggs Trend Index warns of weakness. Breach of primary support at $1200 would mean that all bets are off.

Spot Gold

Tillerson: Not many good North Korea options | Reuters

From Reuters:

U.S. Secretary of State Rex Tillerson said on Friday there would not be many good options left on North Korea if the peaceful pressure campaign the United States has been pushing to curb Pyongyang’s nuclear and missile programs failed….

The United States, Japan and South Korea agreed on Friday to push for a quick U.N. Security Council resolution to apply new sanctions on North Korea. U.N. diplomats said the United States had given China a draft sanctions resolution.

But Washington faces an uphill struggle to convince Russia and China to give quick backing to new U.N. sanctions.

Experts say North Korea’s ICBM launch on Tuesday was a major step forward in its declared intent to create nuclear-tipped missiles capable of hitting the United States. Some U.S. experts say the missile appeared to have the range to hit Alaska, Hawaii and parts of the U.S. Pacific Northwest.

Washington has warned it is ready to use force if need be to stop North Korea’s weapons programs but the consequences of that could be catastrophic and it prefers global diplomatic action.

Source: Not many good North Korea options if pressure fails: Tillerson | Reuters

Crude breaks support at $45 / New Twiggs Trend Index

Nymex Light Crude retreated below support at $45/barrel, confirming a primary down-trend. Breach of $40 would strengthen the bear signal, offering a target of the 2008/2016 lows between $25 and $30. Declining Twiggs Trend Index, with a peak below zero, warns of a primary down-trend. Follow-through below the last trough at -1.0% would strengthen the warning.

Nymex Light Crude

Twiggs Trend Index is a new proprietary indicator that will be released with the next upgrade of Incredible Charts. The indicator combines Market Sentiment (as in Twiggs Money Flow) over Volatility rather than Volume (in Twiggs Money Flow). Signals are read in a similar way to Twiggs Money Flow but it just gives readers a slightly different perspective on the market while avoiding some of the occasional distortions caused by massive volume spikes that affect Twiggs Money Flow. I will publish more detail in a separate newsletter next week.

Warsaw: Trump unequivocally commits to Article V | CNN

….As long as we know our history, we will know how to build our future. Americans know that a strong alliance of free, sovereign and independent nations is the best defense for our freedoms and for our interests. That is why my administration has demanded that all members of NATO finally meet their full and fair financial obligation.

As a result of this insistence, billions of dollars more have begun to pour into NATO. In fact, people are shocked. But billions and billions of dollars more are coming in from countries that, in my opinion, would not have been paying so quickly.To those who would criticize our tough stance, I would point out that the United States has demonstrated not merely with words but with its actions that we stand firmly behind Article 5, the mutual defense commitment. (Applause.)

Words are easy, but actions are what matters. And for its own protection — and you know this, everybody knows this, everybody has to know this — Europe must do more. Europe must demonstrate that it believes in its future by investing its money to secure that future.

That is why we applaud Poland for its decision to move forward this week on acquiring from the United States the battle-tested Patriot air and missile defense system — the best anywhere in the world. (Applause.) That is also why we salute the Polish people for being one of the NATO countries that has actually achieved the benchmark for investment in our common defense. Thank you. Thank you, Poland. I must tell you, the example you set is truly magnificent, and we applaud Poland. Thank you. (Applause.)

We have to remember that our defense is not just a commitment of money, it is a commitment of will. Because as the Polish experience reminds us, the defense of the West ultimately rests not only on means but also on the will of its people to prevail and be successful and get what you have to have. The fundamental question of our time is whether the West has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilization in the face of those who would subvert and destroy it? (Applause.)

We can have the largest economies and the most lethal weapons anywhere on Earth, but if we do not have strong families and strong values, then we will be weak and we will not survive. (Applause.) If anyone forgets the critical importance of these things, let them come to one country that never has. Let them come to Poland. (Applause.) And let them come here, to Warsaw, and learn the story of the Warsaw Uprising….

Source: Trump’s speech in Warsaw (full transcript, video)

Warren Buffett on tax reform

Part 2 of Judy Woodruff’s wide-ranging PBS interview with Warren Buffett:

  • GOP health care reform
  • tax reform
  • the root of happiness

America should stand for more than just wealth, says Warren Buffett

Judy Woodruff from PBS with Warren Buffett in a wide-ranging interview:

  • Why you should invest in America
  • Why health care in the US is sick and needs fixing
  • Why America should stand for more than just wealth

Buffett on Wells Fargo: “It was a terrible mistake. They incentivized bad behavior. Incentives work. But they work in either direction.”

Credit Suisse contrary view on Iron Ore

Where is the Chinese iron ore inventory cycle?

By Houses and Holes at 9:06 am on July 5, 2017
Republished with thanks to Macrobusiness.

From Credit Suisse:

Iron ore turns up, once again confounds bears on the Street

Iron ore once again confounded those calling it down by jumping at the end of June. However, this was predictable. In late May and early June we were hearing anecdotally (Platts) that some steel mills were on-selling contractual cargoes of iron ore to repay quarterly loans due at the end of June. That was a destocking event which inevitably put pressure on the price by adding cargoes to the daily sales list. But by the end of the month, loans were met and destocking is always followed by restocking.

Street still focused on port stocks, China mills are not Iron ore has been nothing if not volatile so it has been a tough call, but the Street keeps getting it directionally wrong, doubling down when the price is sliding. We believe one big difference between the Street’s price forecasts and what actually happens is that analysts are looking at a different side of the supply-demand equation from the actual buyers – Chinese steel mills. The street is obsessed with ever-rising port stocks. These stocks seem a clear indication that iron ore is over-supplied so for commodity analysts, that means the price should fall until some supply is destroyed to restore balance. Therefore, when the iron ore price is rising, analysts publish grim warnings that this can’t last due to too much supply. When the price falls again, the analysts feel validated that they were right, and promptly down grade price forecasts because it’s “the end”. But then the price rises again….

Why do the steel mills keep buying?

China steel mills seem unconcerned about port stocks, although it is not clear why. We do note that steel mills own two thirds of the port stocks anyway (traders the remainder) so perhaps SOEs are taking contractual cargoes, but only using the high grade portions currently while steel prices are so high? They could buy other high grade supply from the traders’ stocks. As we found on our visit to Tangshan mills at the start of May, SOEs have no concerns obtaining bank loans so may not worry about working capital. They may plan to destock later when prices are lower. And interestingly, Mysteel’s survey of around 67 small to medium steel mills which will be private, seem to have normalised inventories rather than any build up. So larger SOEs may be the culprits.

Steel mill buying follows demand, not supply

But if we leave aside the port stocks issue, then steel mills’ buying decisions are based on demand, not supply. The volatile iron ore price is actually reflecting destock-restock cycles by steel mills. One influence on the stock cycles is seasonal and predictable, another is Chinese macro factors, particularly policy decisions and is very difficult or impossible to forecast. Macro factors and seasonal demand periods guide steel mills as to whether steel demand will be strong and prices strong. If it looks promising, they want to buy ore to run flat out. And when one is buying, all start buying to beat the iron ore price peak.

How has this worked in practice?

Seasonally we reached the construction season end in June, so rebar demand should have been lower, and it has been. But equally importantly it was clear from anecdotal reports in Platts that destocking was taking place – mills were dumping contractual cargo deliveries into the spot market, liquidating to raise cash for debt repayments due at the end of June. It is clear that near the end of the month, that would cease as debts were met. Instead, the mills that had sold incoming cargoes would need to go back and buy to continue steel production – restock follows destock. And so it has played out.

As commentators searched for an explanation for the price jump, they latched onto a speech about the economy by President Xi on 27 June that was the only notable macro event. It was not a rip-roaring call by the President, but may have provided reassurance. From Reuters’ reports we see that the President said the full-year growth target could be met, said China was capable of meeting systemic risks despite challenges and noted that maintaining medium to high speed long-term growth will not be easy due to the sheer size of the economy, but the Government is committed to bolstering consumer-driven growth and curbing excess capacity in industries such as steel and coal.

No change to our 3Q price forecast of $70/t

Despite the run-up in the iron ore price it remains below our 3Q price forecast of $70/t. But our call was not based on the end of a short-term destocking cycle. Instead, we are looking towards September and October, which is seasonally a strong period for steel production and consumption – after the summer heat and rain, but before the winter freeze. If steel mills want to be producing strongly in September, they need to be booking iron ore cargoes in late July and August, and these are typically months where the price lifts. June is normally the low point for iron ore, heading into the summer steel demand lull.

Looming winter cuts may add to 3Q iron ore demand

This year there is an additional factor to consider. The Environment Ministry has its widely publicized industrial curtailments planned for 26+2 cities over winter. Smog reaches hazardous levels over Beijing-Tianjin during the winter when coal burn for heating joins the normal industrial smoke. Next winter, a change is planned by reducing industrial emissions from mid-Nov to late-Feb. The steel industry in Hebei, Henan, Shanxi and Shandong is expected to cut output by 50%, If this policy is enforced – and smog is a high priority issue – then steel output may fall by 35-45Mt over the three months. If prices remain high, steel mills will want to keep selling so it might be possible for them to over-produce and build some inventory in 2H. If this is so, then 3Q iron ore buying could be extra strong.

Ahem, not a lot of humility there. CS was telling folks that iron ore was going higher at $94. It was it that missed the destock not the other way around.

Still, there’s some reasonable arguments here. The jump in price triggered by Li’s bland comments was a surprise. Mills have been lowish on stock so may be behind some of it. But let’s face it, when Dalian open interest also soars then we can be pretty sure that China’s loony tune retail speculators (Banana Man) also played some significant role.

Those rebar stocks are also bullish and it’s true that mills follow demand. Q3 may well hold up and mills replenish their inventories though $70 as average looks a big stretch from here. $60 would probably cover it.

But the September-November period is not seasonally bullish at all. It is seasonally weak and traditionally brings in a big destock. If we combine that with what I expect to be a slowing of growth at the margin by then, then mills will indeed follow demand and shed inventories into year end. Especially so given port stocks will be even higher before then if we see some price pressure in Q3.

Surprise retail sales figures light fire under consumer stocks

From Patrick Hatch at The Age:

A surprise jump in retail sales statistics lit a fire under Australia’s beleaguered discretionary retail stocks on Tuesday, making them some of the best performing companies on the ASX’s best day of the year so far.

Gain[s] were enjoyed across the sector as JB Hi-Fi shares closed up 5.29 per cent at $24.48 and Harvey Norman rose 5 per cent to $3.99…..

Apparel and accessory sales grew 1.3 per cent, but Australian Retailers Association chief executive Russell Zimmerman said that was likely driven by heavy discounting. Department stores still took a hit in May, with turnover falling 0.7 per cent.

“We think retailers have done it very tough in clothing and footwear. So to see it rise year-on-year we think that’s retailers discounting heavily to get consumers to buy,” Mr Zimmerman said.

Source: Surprise retail sales figures light fire under consumer stocks

Ken Robinson: How to escape education’s ‘Death Valley’

Sir Ken Robinson outlines 3 principles crucial for the human mind to flourish — and how current education culture works against them. In a funny, stirring talk he tells us how to get out of the educational “death valley” we now face, and how to nurture our youngest generations with a climate of possibility.


Refreshing to hear this talk by Ken Robinson. My wife is a teacher and would endorse his views: how a “command and control” approach by the education hierarchy is crushing teachers, burying them in so much administrative work that their ability to teach suffers. And how a regimented approach does not recognize that children are individuals with different strengths and weaknesses and that education needs to be tailored to fit the individual …. not the other way round.

Gold falls despite soft Dollar

Spot Gold broke support at $1250. Follow-through below $1240 would signal another test of primary support at $1200.

Spot Gold

But the Dollar Index is also falling. Breach of 96.50 warns of a decline to the 2016 low at 92/93.

Dollar Index

Dollar weakness is even reflected by a test of long-term support at 6.80 against the Yuan. Breach of the rising trendline on the monthly chart would warn of a primary down-trend.

Dollar Index

Let me put it this way: recovery of gold above $1250 would not be a surprise. And would test resistance at $1300.

ASX selling pressure despite iron ore rally

Iron ore roared back, breaking resistance at $60. But this is a bear market. Also port inventories are climbing, while housing price growth is slowing. Expect another test of support at $50 is likely. Breach would signal another decline.

Iron Ore

The ASX 300 Metals & Mining index rallied off support at 2750 but is likely to respect resistance at 3000. Breach of 2750 would signal a primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index also rallied but is likely to respect 8500. Breach of 8000 would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 displays strong selling pressure, with Twiggs Money Flow dipping below zero for the second time. Follow-through below 5700 would test primary support at 5600. Breach of 5600, while not yet a high probability, would complete a broad head and shoulders reversal.

ASX 200

S&P 500 selling pressure

The S&P 500 is experiencing warns of medium-term selling pressure, signaled by bearish divergence on Twiggs Money Flow. The last correction was shallow, typical of stage III in a bull market, and this one is likely to be too. Respect of support at 2400 would signal another primary advance. A correction to test primary support at 2300 is unlikely, but would warn that investors are jumpy and taking profits. This would signal stage III is closer to a top.

S&P 500

Investment the key to growth

Elliot Clarke at Westpac recently highlighted the importance of investment in sustaining economic growth:

The importance of sustained investment in an economy cannot be understated. Done well, investment in real capacity begets greater production volume and employment as well as a productivity dividend. Its absence in recent years is a key factor behind sustained soft wage inflation and the US economy’s inability to consistently grow at an above-trend pace despite the economy being at full-employment and household balance sheets having more than fully recovered post GFC.

The graph below highlights declining US investment in new equipment post GFC.

S&P 500

source: Westpac

There are three factors that may influence this:

  1. Accelerated tax depreciation allowances after the GFC encouraged companies to bring forward capital spending in order to stimulate the recovery. But the 2010 to 2012 surge is followed by a later trough when the intended capital expenditure was originally planned to have taken place.
  2. Low growth in personal consumption, especially of non-durable goods and of services, would discourage further capital investment.

US Net Debt & Equity Issuance

  1. The level of stock buybacks increased as companies sought alternative measures to sustain earnings (per share) growth. The graph below shows debt issuance has soared while net equity issuance remains consistently negative.

US Net Debt & Equity Issuance

source: Westpac

Net capital formation (the increase in physical assets owned by nonfinancial corporations) declined between 2015 and 2017. While this is partly attributable to the falling oil price curtailing investment in the Energy sector, continuation of the decline would spell long-term trouble for the economy.

US Net Capital Formation

The cycle becomes self-reinforcing. Low growth in personal consumption leads to low levels of capital investment ….which in turn leads to low employment growth…..leading to further low growth in personal consumption.

Major infrastructure investment is needed to break the cycle. In effect you need to “prime the pump” in order to create a new virtuous cycle, with higher investment leading to higher growth.

It is obviously important that infrastructure investment target productive assets, that generate income, else taxpayers are left with increased debt and no income to service it. Or assets that can be sold to repay the debt. But the importance of infrastructure investment should be evident to both sides of politics and any attempt to obstruct or delay this would be putting political ahead of national interests.


Australia is in a worse position, with a dramatic fall in investment following the mining boom.

Australia: Business Investment

source: RBA

If we examine the components of business investment, it is not just Engineering that has fallen. Investment in Machinery & Equipment has been declining for the last decade. And now Building Investment is also starting to slow.

Australia: Components of Business Investment

source: RBA

You’ve got to prime the pump…. You’ve got to put something in before you can get anything out.

~ Zig Ziglar

Daily iron ore price update (headfake) | Macrobusiness

By Houses and Holes
at 12:05 am on June 28, 2017
Reproduced with permission of Macrobusiness.

Iron ore price charts for June 27, 2017:

Tianjin benchmark roared 6% to $59.10. Coal is calm. Steel too.

The trigger of course was this, via SCMP:

China would like foreign businesses to keep their profits in the country and reinvest them, Premier Li Keqiang said in his keynote speech at the World Economic Forum in Dalian on Tuesday, although he added there would be no restrictions on the movement of their money.


China’s economic growth is gaining fresh momentum and there will be no hard landing in the world’s second-biggest economy. The unemployment rate in May dropped to 4.91 per cent, he noted, the lowest level in many years.

Market access

China will continue to open its markets in the services and manufacturing sectors. It will loosen restrictions on shareholdings by foreign companies in joint ventures and will ensure China will continue to be the most attractive investment destination.

Economic policy

The Chinese government will not rely on stimulus to bolster economic growth. Instead, it will use structural adjustment and innovation to maintain economic vitality. The government will keep stable macro policies – a prudent monetary policy and a proactive fiscal policy – to ensure clarity and stability in financial markets.

Financial risks

China is fully capable of containing financial market risks and avoiding systemic ones. There are rising geopolitical risks and increasing voices opposing globalisation. China will keep its promises in combating climate change and will work to promote globalisation.

Absolutely nothing new there. In fact it is a little reassuring to those of us that think reform is on the verge of returning.

But the market has been heavily sold and so it got excited. There is a little room for it to run given lowish mill iron ore inventories:

But, in all honesty, I’m stretching to be positive. The price jump will very quickly arrive at Chinese ports as bowel-shakingly higher inventories in short order:

And the economy is still going to slow at the margin as housing comes off leading to a destock in the foreseeable future:

The great thing about markets is they always off[er] second chances. On this occasion it is to get even more short.

The disconnect between long-term and short-term rates

Bob Doll highlighted the disconnect between long-term and short-term rates in his latest review. The chart below plots the 3-month T-bill rate against 10-year Treasury yields.

Spot Gold/Light Crude

At this stage, the disconnect is not significant. But a disconnect as in 2004 – 2005 is far more serious. Large Chinese purchases of Treasuries prevented long-term rates from rising in response to Fed tightening, limiting the Fed’s ability to contain the housing bubble.