Outlook: Markets are skipping back and forth between fear of inflation and fear of recession. This results in some peculiar price actions. For what it’s worth, the Bloomberg Economics’ “probability of a recession in the next 12 months at 38%, up from zero just months ago. Morgan Stanley predicts the euro-area will slide into a recession at the end of 2022, and Citigroup analysts reckon the odds of a worldwide pullback in the next two years are about even.” We can’t resolve the issue and even if we had a perfect crystal ball, it might not tell us how to trade because the process of getting there bends and kinks some other things. Twilight Zone music. We saw it is spades yesterday--commodity prices mostly lower while the 2/10 ran to -0.04. These two things are not necessarily at odds, but certainly not “normal.”  The 2/10 spread ran up, it ran down, it ran up again. It’s slippery as a greased pole. Meanwhile, the European bond market (aka the Bund) is far steadier and on a rising trajectory, with a bump or two. This implies two things—the market in US Treasuries is wobbly and somewhat indecisive between the idea the Fed will back down and the Fed will not back down. In any event, we will know fairly soon—Powell’s fancy inflation forecast comes on July 15 (the index of common inflation expectations) and the policy meeting itself is July 27. We have to wait a lot longer for the ECB to decide whether to fight inflation or fight recession, and so far it looks like it would rather fight recession, with wimpy rate hikes (if any). This means the yield gap is widening. A widening yield gap favors the hiker. The correlation of the two-year differential with the euro/dollar is strong. See the chart from kshitij.com. Deduction: that Shock that takes the euro to parity might be on the schedule as soon as the market comes to accept this is the picture. If so, expect an overshoot. So, which asset is right—bonds, equities commodities and what about those oil prices? A drop in most commodities, ex-European oil and natgas, implies recession might not be on the schedule, after all. Besides, a drop in input prices is nice for European manufacturers, especially in Germany, the engine of growth. Granted, yesterday’s industrial production was a sad -2.15% y/y and the chart is not encouraging, but those outcomes came before commodity prices started falling. Is it possible German manufacturing picks up on demand from Asia and falling input prices? Yes. The PMI’s are still over the boom/bust line of 50. Q3 could bring a trade deficit, but a resilient economy can overcome it. The Trading Economics forecast for Q2 is 1.1% (due end-July), a drop from 3.8% for Q1 but not a negative. Bottom line—Europe could have been saved by excessive pessimism. Note this is decidedly the minority point pf view and only a suggestion, not a forecast. Now if only Russia could be wished away. And the meaning of Russia today is a single thing—oil. The oil market is nuts. Everyone knows that. Back in the last crisis, there was a point when there was more oil traded in futures than existed, not to mention wild swings driven by …. nothing at all. What about going under $100 this week? Fear of recession? What happened to those supply constraints even from the mighty Saudis? Bloomberg reports the oil market is in good form as shown by backwardation. “Nearby oil contracts continue to trade at a big premium to contracts for later delivery. The downward curve slope, known as backwardation, is a hallmark of a very tight physical oil market. At about $4 a barrel, the front-to-second front month backwardation is near its strongest ever. “ If not basic supply and demand, which really should NOT seesaw every day, then it’s trader positioning. “Liquidity in oil market futures is very poor, leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Both happened this week. Over the summer, several big producer-hedging deals are likely, including the annual deal used by the Mexican government to lock in prices for the following year. On Tuesday, oil traders reported Wall Street banks buying put options for 2023 in large size — likely a sign that a big client was in the market hedging oil prices. Don’t misinterpret one day’s price decline as presaging a relaxation of the pressure that’s pushed Brent up by more than 50% in the past year.” Whew, we needed that dose of reality-checking. What we learn from it is that deduction in economics/finance is riskier than you think. We do get perverse outcomes, quite often, in fact, and much of the time the cause is trader positioning and/or market conditions, especially liquidity, and...

Outlook: Markets are skipping back and forth between fear of inflation and fear of recession. This results in some peculiar price actions. For what it’s worth, the Bloomberg Economics’ “probability of a recession in the next 12 months at 38%, up from zero just months ago. Morgan Stanley predicts the euro-area will slide into a recession at the end of 2022, and Citigroup analysts reckon the odds of a worldwide pullback in the next two years are about even.” We can’t resolve the issue and even if we had a perfect crystal ball, it might not tell us how to trade because the process of getting there bends and kinks some other things. Twilight Zone music. We saw it is spades yesterday--commodity prices mostly lower while the 2/10 ran to -0.04. These two things are not necessarily at odds, but certainly not “normal.”  The 2/10 spread ran up, it ran down, it ran up again. It’s slippery as a greased pole. Meanwhile, the European bond market (aka the Bund) is far steadier and on a rising trajectory, with a bump or two. This implies two things—the market in US Treasuries is wobbly and somewhat indecisive between the idea the Fed will back down and the Fed will not back down. In any event, we will know fairly soon—Powell’s fancy inflation forecast comes on July 15 (the index of common inflation expectations) and the policy meeting itself is July 27. We have to wait a lot longer for the ECB to decide whether to fight inflation or fight recession, and so far it looks like it would rather fight recession, with wimpy rate hikes (if any). This means the yield gap is widening. A widening yield gap favors the hiker. The correlation of the two-year differential with the euro/dollar is strong. See the chart from kshitij.com. Deduction: that Shock that takes the euro to parity might be on the schedule as soon as the market comes to accept this is the picture. If so, expect an overshoot. So, which asset is right—bonds, equities commodities and what about those oil prices? A drop in most commodities, ex-European oil and natgas, implies recession might not be on the schedule, after all. Besides, a drop in input prices is nice for European manufacturers, especially in Germany, the engine of growth. Granted, yesterday’s industrial production was a sad -2.15% y/y and the chart is not encouraging, but those outcomes came before commodity prices started falling. Is it possible German manufacturing picks up on demand from Asia and falling input prices? Yes. The PMI’s are still over the boom/bust line of 50. Q3 could bring a trade deficit, but a resilient economy can overcome it. The Trading Economics forecast for Q2 is 1.1% (due end-July), a drop from 3.8% for Q1 but not a negative. Bottom line—Europe could have been saved by excessive pessimism. Note this is decidedly the minority point pf view and only a suggestion, not a forecast. Now if only Russia could be wished away. And the meaning of Russia today is a single thing—oil. The oil market is nuts. Everyone knows that. Back in the last crisis, there was a point when there was more oil traded in futures than existed, not to mention wild swings driven by …. nothing at all. What about going under $100 this week? Fear of recession? What happened to those supply constraints even from the mighty Saudis? Bloomberg reports the oil market is in good form as shown by backwardation. “Nearby oil contracts continue to trade at a big premium to contracts for later delivery. The downward curve slope, known as backwardation, is a hallmark of a very tight physical oil market. At about $4 a barrel, the front-to-second front month backwardation is near its strongest ever. “ If not basic supply and demand, which really should NOT seesaw every day, then it’s trader positioning. “Liquidity in oil market futures is very poor, leaving them vulnerable to anyone unwinding a large position or selling forward contracts. Both happened this week. Over the summer, several big producer-hedging deals are likely, including the annual deal used by the Mexican government to lock in prices for the following year. On Tuesday, oil traders reported Wall Street banks buying put options for 2023 in large size — likely a sign that a big client was in the market hedging oil prices. Don’t misinterpret one day’s price decline as presaging a relaxation of the pressure that’s pushed Brent up by more than 50% in the past year.” Whew, we needed that dose of reality-checking. What we learn from it is that deduction in economics/finance is riskier than you think. We do get perverse outcomes, quite often, in fact, and much of the time the cause is trader positioning and/or market conditions, especially liquidity, and...

Euro nearing parity with dollar It continues to be a miserable July for EUR/USD, which has declined 3.12%. The euro continues to deliver fresh 20-year lows, dropping to 1.0071 late in the Asian session. The euro has since recovered most of today’s losses, but the psychologically-important parity line is getting closer by the day, as the euro continues to stumble. On the economic front, US nonfarm payrolls outperformed, with a reading of 381 thousand, well above the consensus of 240 thousand. The ECB released the minutes of its June meeting on Thursday, with investors hunting for clues about the lift-off hike at the July meeting. The minutes didn’t provide any new insights, which could be a disappointment but shouldn’t really be all that surprising. The July 21st meeting will be live, with a modest 25bp increase being the most likely scenario, with another rate hike to follow in September. Still, the ECB has not shut the door on a larger hike at the upcoming meeting, and we have recently seen higher-than-expected moves by the Federal Reserve and other central banks. Lagarde & Co. will be keeping a close eye on next week’s inflation reports out of Germany and France, the two largest economies in the eurozone. If inflation remains unchanged or dips lower, it will provide ammunition for the doves who are content with a 25bp move. Conversely, a rise in inflation will put pressure on the ECB to respond with a 50bp increase. Another factor in the rate decision could be the exchange rate. A weak euro is attractive for exports but also contributes to inflation.  The euro hasn’t been at parity with the US dollar since 2002, and some ECB members may feel that the central bank’s credibility is on the line if the euro continues to slide and falls below parity. EUR/USD Technical EUR/USD tested support at 1.0124 and 1.0075 in the Asian session. There is resistance at 1.0221 and 1.0324.

Euro nearing parity with dollar It continues to be a miserable July for EUR/USD, which has declined 3.12%. The euro continues to deliver fresh 20-year lows, dropping to 1.0071 late in the Asian session. The euro has since recovered most of today’s losses, but the psychologically-important parity line is getting closer by the day, as the euro continues to stumble. On the economic front, US nonfarm payrolls outperformed, with a reading of 381 thousand, well above the consensus of 240 thousand. The ECB released the minutes of its June meeting on Thursday, with investors hunting for clues about the lift-off hike at the July meeting. The minutes didn’t provide any new insights, which could be a disappointment but shouldn’t really be all that surprising. The July 21st meeting will be live, with a modest 25bp increase being the most likely scenario, with another rate hike to follow in September. Still, the ECB has not shut the door on a larger hike at the upcoming meeting, and we have recently seen higher-than-expected moves by the Federal Reserve and other central banks. Lagarde & Co. will be keeping a close eye on next week’s inflation reports out of Germany and France, the two largest economies in the eurozone. If inflation remains unchanged or dips lower, it will provide ammunition for the doves who are content with a 25bp move. Conversely, a rise in inflation will put pressure on the ECB to respond with a 50bp increase. Another factor in the rate decision could be the exchange rate. A weak euro is attractive for exports but also contributes to inflation.  The euro hasn’t been at parity with the US dollar since 2002, and some ECB members may feel that the central bank’s credibility is on the line if the euro continues to slide and falls below parity. EUR/USD Technical EUR/USD tested support at 1.0124 and 1.0075 in the Asian session. There is resistance at 1.0221 and 1.0324.

The bears awoke from their winter sleep and took control of Wall Street. However, they haven’t conquered the gold market yet! The Bear Market It’s official: there is a bear market in equities! As the chart below shows, last month, the S&P 500 Index plunged more than 20% from its historic peak of 4797 points in early January 2022. A decline of greater than 20% is considered to mark a bear market as opposed to a normal correction within the bull market. The Dow Jones hasn’t yet crossed that threshold, but the S&P better reflects the condition of the US stock market, so we can firmly state that bears took control of Wall Street for the first time since the pandemic crash. How long will the bear market last? According to Reuters, after World War II, on average, stocks declined slightly over a year from the peak to the bottom. So, the current bear market could continue for a few months. Similarly, on average, the S&P 500 index fell by 32.7% during modern bear markets. Hence, there is room for further declines in the stock market. What does the bear market in equities mean for the US economy? Well, the bear market in stocks doesn’t have to be something disturbing for the whole economy. As the old joke goes, “the stock market has predicted nine of the past five recessions.” Indeed, 25 bear markets have happened since 1928, of which only fourteen have also seen recessions. However, in modern times, the relationship between the stock market and overall economic activity has strengthened. There have been eleven bear markets since 1956, of which eight have been accompanied by recessions. Since 1968, all bear markets but one (the infamous 1987 crash) have coincided with overall economic crises. Finally, all four recent cases of bear markets (1990, 2000-2003, 2007-2009, and 2020) were accompanied by recessions (see the chart below). Hence, we should take the bearish stock market seriously. Although a bear market doesn’t necessarily cause a recession, it sometimes portends one. For example, the dot-com bubble in the stock market reached its peak and burst in August 2000, seven months before the US economy fell into recession. When this occurred in March 2001, the S&P500 just entered bear market territory. Later, the stock market peaked again in October 2007, just two months before the official beginning of the Great Recession. It entered bearish territory in September 2008, when Lehman Brothers collapsed, triggering the most acute phase of the global financial crisis. Given that we are already five months since the S&P 500’s most recent peak and one month since the index entered a bear market, a recession may be on the horizon (theoretically, we could be already in one, as the NBER declares official beginnings many months after they have already started). Of course, each case is unique, and this time may be different. However, there are important reasons to worry. After all, the stock market dived due to the Fed’s tightening cycle, initiated to curb high inflation. Although necessary to tame upward price pressure, it could trigger a recession. The last three economic downturns – and bear markets in equities – were preceded by hikes in the federal funds rate, as the chart below shows. Implications for Gold What does it all mean for the gold market? Well, bear markets that accompany recessions are generally positive for the yellow metal. However, the relationship is more nuanced than one could intuitively expect. In 2000-2001, gold declined initially in tandem with the stock market and bottomed out in April 2001, one month after the S&P 500 entered a bear market, as the chart below shows. Then, it started a multi-year rally that ended in March 2008, in the middle of the Great Recession. Gold remained in a downward trend by November 2008, plunging in tandem with the stock market, although to a lesser extent. Only then did it start its fabulous surge. A similar pattern occurred in 2020: during the pandemic March, gold declined alongside the S&P 500, albeit to a lesser extent, and began to rally shortly after the initial sell-off. This suggests that we could be close to the bottom in the gold market. If there is an asset sell-off when investors scramble for cash needed to fulfill their obligations and cover their margin calls, the yellow metal could decline further. However, when this phase of a crisis is over, gold should shine. Rising interest rates could continue to exert a downward pressure on the yellow metal for a while, but when they peak, gold will have a clear field to run.

In this article we’re going to take a quick look at the Elliott Wave charts of USDNOK, published in members area of the website. We have favoring the long side due to impulsive bullish sequences the pair is showing in the cycle from the 9.33 low. Consequently, we recommended members to avoid selling the pair, while keep favoring the long side.  Recently the pair made a short term pull back that has given us buying opportunities.  In the further text we are going to explain the Elliott Wave Forecast and trading strategy. USD/NOK Elliott Wave 1hour chart 07.07.2022 Currently the pair is giving us intraday (ii) blue pull back that is unfolding as Elliott Wave Zig Zag Pattern.  Wave (ii) Pull back looks incomplete at the moment. We expect to see more downside toward 10.041-9.976 ( Blue Box – buying zone) . We don’t recommend selling the pair against the main bullish trend. Strategy is waiting for the price to reach blue box zone, before entering the long trades. We expect buyers to appear at the blue box for the further rally toward new high ideally or for a 3 waves bounce at least . Once bounce reaches 50 Fibs against the  b red  high, we will make long position risk free ( put SL at BE). Invalidation for the trade would be break of marked invalidation level 9.976 USD/NOK Elliott Wave 1 hour chart 07.08.2022 USDNOK has given us more downside toward blue box as expected. The pair found buyers at the Blue Box area: 10.041-9.976  and we are getting good reaction from there. Raly from the buying zone made break of previous peak confirming wave (ii) is done and we can be ideally trading within (iii) blue.  As a result , all long trades are risk free (put SL at BE) + partial profits have been taken.