WhiteLove
9th July 2016, 18:50
The current market situation is bit by bit starting to look more and more uncertain. On one hand the US stock market appears to have some strength, yet at the same time Oil is clearly weak and on Friday the Shanghai stock exchange closed down by -0.95%, while Gold appears to be in the middle of a strong uptrend and Silver is indicating that in the mid term it is going to be strong. This combination overall suggests that it is defensive investments that rule the markets right now. That works OK for the markets when Shanghai has been performing like it has.
But if what we saw on Friday is the beginning of a downturn, then what we have is a pretty bearish situation. Then all of a sudden the eyes will be on Shanghai.
Interestingly, the US stock Baidu (a Chinese competitor to Google) has lately performed poorly against both Nasdaq and the Shanghai stock exchange (3m perf - Shanghai: +0,11%, Baidu: -13,14%, Nasdaq: +2,18%), this even when its competitor Google is getting into new lawsuites almost on a weekly basis now.
Interestingly when Shanghai stock exchange has been strong, Baidu has been weak and when Shanghai stock exchange has been weak, Baidu has been even weeker. This combination suggests that there is a bunch of heavy investors out there that are aware that there is trouble around the corner when it comes to tech companies having exposure in China. That's one issue.
Another issue is the situation with bank stocks. Deutsche Bank is looking weak, it has declined by -73% since early 2014 and is currently near its 52-week low. If Oil is going to remain weak, which I think it is, then I also think DB is going to remain weak. That in combination with a weak Shanghai and a US stock market that starts to decline with the rest of the market, can become the next gear in the downtrend for banks. At some point a bank will collapse if that trend continues and likely in that case accelerates in downward momentum.
Due to these risks, I would say it's more likely that FED will not raise the interest rates on the next meeting. That can in the short term stop a possible decline going on at that point, but it might only set the markets at that point in temporary decline suspend mode. If this happens, while the bank sector is becoming more and more in trouble, while oil becomes weaker and as Shanghai keeps weakening and all of this boosts Gold and Silver into rally, then at some point will come this moment when panic selling starts to occur in Gold and Silver. That will be a moment when all investments are turned into cash at the same time. If at the same time the situation in China keeps accelerating in decline, I think there is the chance for a major bank collapsing either in the US, in the Euro zone or both, which might put one of the major currencies into a crash situation. If it's a bank in the Euro zone like in Germany or Italy, then probably it is the EUR currency that is going to take the hit first, likewise if its a bank in the UK, it's probably the GDP that is taking the hit first. But when this happens, this can set off a very complex chain reaction, that might spread to the US as well. And once a major financial institution in the US collapses, say Bank of America, then the situation will be much worse than 2008, because now FED is due to its rate policy totally out of ammunition to try to contain the situation.
There are a few what-if scenarios that the above is depending on, so let's see how things are developing from here. But the current setup is not beautiful. There are some worrying currency unbalances already present, for instance 1-year perf. JPYGDP is ~+50%. (Japanese yen vs. British Pound) So what we can already conclude is that we are witnessing a major change/shift within the financial system.
Optimal strategy:
2/3: Gold
1/3: Silver
But if what we saw on Friday is the beginning of a downturn, then what we have is a pretty bearish situation. Then all of a sudden the eyes will be on Shanghai.
Interestingly, the US stock Baidu (a Chinese competitor to Google) has lately performed poorly against both Nasdaq and the Shanghai stock exchange (3m perf - Shanghai: +0,11%, Baidu: -13,14%, Nasdaq: +2,18%), this even when its competitor Google is getting into new lawsuites almost on a weekly basis now.
Interestingly when Shanghai stock exchange has been strong, Baidu has been weak and when Shanghai stock exchange has been weak, Baidu has been even weeker. This combination suggests that there is a bunch of heavy investors out there that are aware that there is trouble around the corner when it comes to tech companies having exposure in China. That's one issue.
Another issue is the situation with bank stocks. Deutsche Bank is looking weak, it has declined by -73% since early 2014 and is currently near its 52-week low. If Oil is going to remain weak, which I think it is, then I also think DB is going to remain weak. That in combination with a weak Shanghai and a US stock market that starts to decline with the rest of the market, can become the next gear in the downtrend for banks. At some point a bank will collapse if that trend continues and likely in that case accelerates in downward momentum.
Due to these risks, I would say it's more likely that FED will not raise the interest rates on the next meeting. That can in the short term stop a possible decline going on at that point, but it might only set the markets at that point in temporary decline suspend mode. If this happens, while the bank sector is becoming more and more in trouble, while oil becomes weaker and as Shanghai keeps weakening and all of this boosts Gold and Silver into rally, then at some point will come this moment when panic selling starts to occur in Gold and Silver. That will be a moment when all investments are turned into cash at the same time. If at the same time the situation in China keeps accelerating in decline, I think there is the chance for a major bank collapsing either in the US, in the Euro zone or both, which might put one of the major currencies into a crash situation. If it's a bank in the Euro zone like in Germany or Italy, then probably it is the EUR currency that is going to take the hit first, likewise if its a bank in the UK, it's probably the GDP that is taking the hit first. But when this happens, this can set off a very complex chain reaction, that might spread to the US as well. And once a major financial institution in the US collapses, say Bank of America, then the situation will be much worse than 2008, because now FED is due to its rate policy totally out of ammunition to try to contain the situation.
There are a few what-if scenarios that the above is depending on, so let's see how things are developing from here. But the current setup is not beautiful. There are some worrying currency unbalances already present, for instance 1-year perf. JPYGDP is ~+50%. (Japanese yen vs. British Pound) So what we can already conclude is that we are witnessing a major change/shift within the financial system.
Optimal strategy:
2/3: Gold
1/3: Silver