The first three months of this year have seen choppy, fairly large moves, leading to investor jitters. Add to the mix the fact many markets are priced at extremes, one can understand the very cautious approach. However, be careful of automatically dismissing something just because you think it's dear; others may see it differently.
US Dollar Index
Themes remain the same as in Q3 and Q4 2014. US dollar strength and commodity prices falling in dollar terms - coupled with waning Chinese demand. The chart of the Dollar Index (a basket of world currencies) shows a 25 per cent surge over the last three quarters with futures volumes this year double what they were this time five years ago, taking open interest also to a record high. Stalling at the psychological 100.00 level, just ahead of 61 per cent Fibonacci retracement resistance and an area that capped in the 1990s. We believe that we can now look forward to three to six months' worth of correction and consolidation under 101.80, possibly dipping briefly as low as 90.00, around a central rate at 94.00.
Gold trap
Looking at spot gold one can see it has spent another quarter trapped inside a right-angled triangle with a base around the Fibonacci 61 per cent retracement support (from 2008's low). This continuation pattern has been building since Q3 2013 and should eventually lead to a break lower with a measured target at $875. This might happen within the next three months because of Q1's large doji candle showing a market looking to break out of its consolidation phase.
US Treasury yield
Zero interest rate policy, maintained by G7 countries since the financial crisis, is spreading as deflation prowls. Recent CPI data for the top 33 countries show an annualised increase of just 1.00 per cent, almost as low as it was in 2009. This and quantative easing have pushed developed country sovereign bond yields to lows not seen in generations; it is merely a continuation of a trend that started in 1980, as per the chart of US benchmark 10-year Treasury Notes. We are also having to come to terms with the fact that zero is no longer rock bottom. We expect this to continue, moving into bargain basement territory for borrowers but not savers, and would not be surprised if the US Federal Reserve does not raise rates this year.
FTSE 100 capped
Stock markets rallied, many to all-time highs, as money is parked for lack of other opportunities - and helped by buy-backs financed at next to nothing. The FTSE 100 is one of several indices that has not managed to hold at new record highs. In fact we are trading where we were 15 years ago; very galling for UK fund managers. Be thankful one is not invested in the Italian MIB index which is currently worth less than half its peak (50,108) at the turn of the millennium and just less than 2009's high (24,558).
Property not so clear at all, and not only because of the opacity of pricing. Difficult.
MORE FROM NICOLE ELLIOTT...
Nicole Elliott is a long standing Member of the Society of Technical Analysts and has just taken over the IC's trading coverage. She is regularly interviewed and quoted by the financial media, is a conference speaker, and author of several books on charting.
