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In last Thursday’s newsletter we promised to explain why the US government benefits from high inflation. The main reason is the inability to do anything about the huge rising national debt.

S&P 500

The fight against the coronavirus pandemic has cost the US economy huge amounts of unbudgeted money. Fortunately for the authorities, these sums can easily be borrowed on the open market. Today, the US national debt is close to $28.5 trillion. This is more than the annual GDP. Yet spending continues to rise. And US President Joe Biden is about to raise the national debt ceiling once again. Republicans in Congress continue to haggle, demanding lower spending. But it is clear to everyone that the debt ceiling will once again be raised.
What are the risks to the US economy? In a low-interest-rate environment, almost nothing. But rates will rise at some point in time. And that would be a real disaster for the government. Suppose the interest rate rises to the current rate of inflation of 5.5% per year. This would lead to the fact that there would simply be nothing left to repay the interest. Of course, more money could be printed, but it would be a vicious circle. The new money would accelerate inflation even more. The interest rate will go even higher. And we will have to pay even more on our debts.
Fortunately for the American government, interest rates have not risen yet. Inflation, on the other hand, is continuing to accelerate. The only solution to the national debt problem (although no one is saying it openly) is to raise inflation even higher.
Why? It’s simple. If prices go up, then so do companies’ profits, their expenses and the income of citizens. And that means that taxes on those amounts go into the budget. At the same time, the American government is paying for its old debts with actually old, already severely devalued money. And the longer this situation lasts (low interest rate on trades + high inflation), the easier it will be to pay off the national debt.
Since the Fed and the US government are interested in accelerating inflation, they will watch closely to ensure that stock markets rise further. What to do about it? It is up to everyone to decide.

01.50 Japan’s Q2 GDP
04.00 China Retail Sales in July
14.30 New York Fed manufacturing activity index for August

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

Back to our favourite pound/dollar chart. And see what has changed since the last newsletter. And once again we try to understand if technical analysis is working or not in the forex market.

GBP/USD

We have purposely zoomed in on the D1 chart to capture the movements of the pound sterling over the last year. The chart shows an uptrend which has been forming for half a year. Then there was a successful breach of its lower boundary. Further this border of the channel turned from a support line into a resistance line. After its unsuccessful retests, the price moved down, finally burying the uptrend.
On July 21, there was a breakaway from the 200-day moving average. The up-corrective move, allowed an inclined level to form, which becomes the upper boundary of a new downtrending channel. Today we drew it for the first time on the chart.
• Notice how amazing the picture is. It looks as if the new channel is a mirror image of the old one. Even its widening is at approximately the same angle. The only difference is that the descending channel is slightly wider than the ascending one. This is quite natural, taking into consideration the rising volatility of the pound/dollar pair.
• Right now the price is near the upper sloping resistance line. If it holds, then a move to the lower boundary will begin. It is not yet on the chart and the downward movement, at some point in time, will form the lower shadow of the candle. Through this shadow we will extend the lower boundary of the falling channel.
So does the analysis work or not? In this case it is not crucial. The main thing is that many traders and investors believe that TA works. Which means that our subscribers can understand:
• Where a large number of stops are located
• Where downward and upward price movements are most likely to end (within this channel)
• And the signal that will give the opportunity to enter the trade with an excellent risk/profit ratio

16.00 University of Michigan Consumer Confidence Index for August in the USA

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

The US stock market continues to post new all-time highs. The bears are constantly trying to short them. And they keep closing positions at a loss. When will it all finally end?

S&P 500

That is, when will the market start to react to fundamental and technical factors? For example, will it start paying attention to the extremely inflated P/E? The correct answer would be this. Irrationality can last much longer than you have enough money by shorting the trend. You may think you are right, but the market is not interested in your opinion at all. The S&P 500 has not fallen by 5% for more than half a year. And all smaller declines are quickly redeemed, leading to new highs. Yes, we can see that a very large bubble is being inflated. Its scale is approaching what we saw in 2000, before the dot-com crash.
But there is a significant difference. The 2008-2009 crisis taught the US government and the Fed how to “solve all problems”. All it takes is printing and handing out a bunch of unsecured money. If that is not enough, no problem. You can also print money and buy assets off the market, which in a normal market economy shouldn’t be worth anything at all. We are talking about companies that only avoided bankruptcy thanks to the US Federal Reserve.
There was no such help in 2000. And the massive drop in stock indices, especially the Nasdaq, was the logical result of the bubble bursting.
Now at every sneeze, the White House announces new programs to help people and businesses. And the Fed is talking about easing monetary policy.
And what is the problem? Americans love it. People get cheques from the government. And companies don’t have to stress too much, they will still get help, even if they perform worse than their competitors.
Of course, it’s bad enough that inflation is accelerating. But there is a huge plus for the American government. What is the upside? We will talk about that in one of our next newsletters.

08.00 UK Q2 GDP
11.00 EU industrial production in June
14.30 Initial weekly jobless claims in USA

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

The market opening on Monday night was a cold shower for the yellow metal bulls. In a low liquidity environment, gold collapsed sharply by $80 at once. Yes, the price rebounded slightly after stops were removed. However, the trend is worrisome.

XAUUSD

We are all well aware of the fundamental reasons that should lead to the rise of the gold metal. First of all, inflation is accelerating around the world. However, gold stubbornly refuses to rise towards the $2,000 per troy ounce level.
Let’s consider what other fundamental reasons there are for this. So far there are two.
In one case (not the most important, but important), we are talking about the fact that after the highest historical prices last year, the gold mining companies have increased the production volume. This means that the supply of yellow metal to the market has also increased. Everything is logical. On expectations of growth of cost up to 3 or even 4 thousand dollars (as trumpeted by analysts), gold mining at mines with higher production costs began.
According to statistics, in the first half of 2021, gold production amounted to 1,784 tonnes. This is almost 10% more than what was produced last year. Moreover. This is the highest level in the last 20 years.
The second was affected by the coronavirus epidemic in India. It has sharply reduced the production in the local jewellery industry. Consequently, the demand for gold has fallen sharply. And this is huge by the standards of the market, 500 tons of physical gold.
So we have two factors. One increased the supply of gold metal in the first half of 2021. And the other has reduced it. We think this is one of the main reasons why gold is not rising following other commodity groups.
The following development seems logical. As the situation with coronavirus improves in Asian countries, and above all in India, demand for physical gold in the jewelry industry will rise again. This will lead to an increase in the value of the yellow metal.

08.00 German consumer price index for July
14.30 US Consumer Price Index for July

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

Investors and traders waited last Friday for US labour market data. Needed an answer to fears of a global and US economic slowdown. The trigger was a new rise in coronavirus infections.

EUR/USD

The data published at the end of the week was very strong. The number of new jobs in the US economy in July was the highest in over a year. At the same time the unemployment rate also fell in July from 5.9% to 5.4%. Both figures substantially exceeded analysts’ forecasts. In addition, the number of new jobs created last month was revised upwards.
This reinforced investors’ expectations of a normalisation of the US labour market. The yield on 10-year Treasuries rose to 1.3%, reaching the highest level since mid-July.
More important to forex traders, however, was the reaction of the Dollar Index. It rose sharply, almost to 93 points. And the EUR/USD dropped to 1.1760.
If we abstract from the rather strange policy of the Fed, which refuses to tighten monetary policy, we see the following. U.S. government bond yields should sooner or later reach 2% and then 3% per annum. In contrast, European bonds are unlikely to move upwards from zero yields.
These expectations, as well as a more rapid vaccination of the U.S. population, should push the EUR/USD pair lower. The first target of 1.15 is fairly quick. The second target is the 1.10 level.

Why do fewer traders believe in this scenario?

The stock, money and currency markets are in their second year of absurdity. All the obvious fundamental factors that worked before are now irrelevant. Traders have already bet several times during this time on a sharp rise in the US dollar. And each time they were disappointed in their expectations.
It is quite possible, that the situation will not change this time. And in a month we will see a new report on the labor market in the USA. It will be much worse than expected. Another reversal of the EUR/USD pair, already towards the level of 1.20.

03.30 China consumer price index for July

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

At the end of Thursday’s meeting, the Bank of England kept its benchmark interest rate at 0.1%. And also left unchanged the amount of asset purchases from the market at £895 billion. This is what analysts and markets were expecting. However, there are also nuances.

GBP/USD

What nuances are we talking about? It is the rapid recovery of the UK economy. And a rapid rise in inflation.
The Bank of England has raised its economic growth forecast for 2022 to 6% from May’s 5.75%. It also noted that UK GDP will grow by 5% in the second quarter of 2021, slightly higher than expected in May.
The regulator notes that inflation in the country has accelerated markedly, exceeding the 2% target. Price growth is predicted to accelerate temporarily in the near future, reaching 4% in the fourth quarter of 2021.
In particular, the Bank of England has stated that some modest monetary policy tightening is likely to be required over the forecast period if the economy develops in line with its forecasts. The Bank of England also indicated that the threshold for winding down its purchases under the quantitative easing programme was lower than previously.

What can this lead to?

The UK could be the first among the world’s leading economies to start tightening monetary policy. It does not have strong unemployment problems like the US. And all the covenants that are constantly being imposed across the EU have been lifted.
A reduction of asset purchases could start to take effect by the end of 2021. And the first interest rate hike will take place in the 2nd quarter of 2022.
It seems that both events are still a long way off. However, the markets are living with expectations. And amid expectations of an ultra-soft monetary policy in Japan, the EU and the USA, the British pound could start to rise at a rapid pace. Only a hint from the Bank of England at the next meeting in September this year will be enough for this to happen.

14.30 New jobs created outside of agriculture in the US in July
14.30 Canada Employment Change for July

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

On Wednesday, the latest US oil and petroleum product inventory change data was released. And the data came as a shock to traders who were trading long in black gold.

OIL.WTI

According to the published statistics oil inventories increased by 3.627 million barrels at once, while analysts had expected a fall of 3.102 million barrels. The news immediately put pressure on oil prices. The oil price is losing a few percent in the moment. And it’s dropping well below the critical $70 level.
Traditionally, at the end of July, stocks of petroleum products in storage are lower. This is caused by the holiday season. Millions of Americans get behind the wheel of their cars and travel across the country. The disruption of the seasonal factor tells us that oil producers in the US (and above all shale producers) continue to increase production levels of black gold.
Fundamental factors are also adding to the rising sentiment of the bears. The threat of new lockdowns in many parts of the world due to the delta strain of coronavirus is on the rise.
Also a separate and very serious risk is the possible entry of Iranian oil into the market. In a dynamic equilibrium situation, even an additional 0.5 million barrels per day could shake the supply-demand balance considerably.
The outlook for the oil price could also be affected by economic data from the ADP in the USA. It shows that the labour market and economy in general is improving. Markets are concerned that this may prompt the US Federal Reserve to start cutting stimulus earlier than planned. The S&P 500 index has been losing about half a per cent since the open. At the same time the dollar index rises to its highest level in a week.
Thus, all of the above factors could contribute to a further drop in oil prices.

13.00 Bank of England interest rate decision
13.00 Bank of England meeting minutes
14.30 US initial jobless claims for the week

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

The following is written in all investment books. A conservative portfolio should be formed in the proportion of about 60% stocks + 40% safe bonds. American 10-year Treasuries are great for “safe”. Or 10-year German bonds. One gets the impression that all these books can be deposited in the library. The reality is completely different.

S&P 500

Yields on 10-year US and German government bonds are almost back to the levels they were at the start of the year. U.S. bonds can offer investors a yield of 1.2% p.a. And German bonds show a negative yield of -0.4%. That is, the market is betting that we will soon see a sharp slowdown in inflation and even some deflationary episode from these levels.
But will we see this slowdown in inflation? No one knows that yet. On the other hand, with annual price growth in the USA of 5.4%, American 10-year Treasuries are now showing negative yields of 4% p.a. I guess there is no precedent for this in the history of the last 200 years.
What does this tell us?
1. There is a lot of free money in the markets. And there is simply nowhere to put it. And if anyone thinks there is a bubble in the stock market, we have no idea how much bigger that bubble could get.

2. Some investors are very much afraid. So they are willing to keep buying bonds with huge negative yields. What is the reason for this behaviour?

Let’s imagine that there is an investor or pension fund waiting for the stock market to crash. And he has a spare $10 million on hand. Where would you physically hold the money?
You can’t put it in stocks, because these investors are expecting a fall. But keeping the money in an account with a broker or a bank is even scarier. If a crisis hits, the bank or broker can simply go bankrupt. And the money of these investors will evaporate. On the other hand, if investors have bought government bonds in a brokerage account or through a given bank, there is no risk of bankruptcy for them. The bank or broker can go bankrupt. But the investor’s bonds will stay with him in any case.
How long will this absurd situation continue? We think it looks a lot like a trend that could end at any time. However, it goes on and on.

03.30 Australian retail sales for June
14.30 ADP US private sector employment report for July
16.00 US ISM Services Business Activity Index for July

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

The first cryptocurrency pushed back from the support line at $29,000 and began a new rally. What has happened in the market since our last review? Just the facts from a fundamental and technical point of view.

BTCUSD

Fundamental analysis

The sharp drop in bitcoin over the last 3 months began with the introduction of restrictions on mining in China. In fact, the authorities have put the industry under a ban. A huge number of miners went offline, dropping their hash rate. This resulted in the remaining miners increasing their profits despite the drop in BTC quotations.
Great news for holders of the first cryptocurrency. Last week, for the first time in 3 months, the network’s hash rate started rising again. This indicates that the mining devices are being transported out of China and connected in new locations. This process will increase every week. The complexity of mining will increase. This means that the cost of mining new coins will also increase.
We can state that any negativity from China no longer hangs over the market. In the Middle Kingdom, all cryptocurrency companies are banned. And they have all been permanently squeezed out of the country.
According to researchers, whales with wallets of 100-10,000 BTC have accumulated an additional 170,000 BTC during the market crash. What does that tell you? While the public was selling off coins in a panic, the most knowledgeable people in the industry were conversely buying them up. Why were they doing this? And what were their expectations? We think you can do the answer for yourself.

Technical analysis

The daily chart above shows that the bitcoin not only broke through the 200-day moving average again from bottom to top. But it has also consolidated above it. Moreover, the sharp rise of the first cryptocurrency led to a large number of algorithmic buyers entering the market. For example, on signals such as the new 20-day high.
Again, if you look at this chart, you can see that the bears, especially those standing in a position with shoulders, are very afraid. There are no resistance lines to be seen at the top. If the rise continues, there is nothing to stop the first cryptocurrency from heading towards the $50,000 level. The move could further accelerate on the closing of the shorts on margin calls.

08.00 German retail sales for June
16.00 ISM Manufacturing Activity Index for July

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

We continue to publish notes that are definitely useful for beginners as well as being of practical interest to experienced traders. Today we will look at an example where a very powerful signal, according to technical analysis, turns out to be false.

BTCUSD

3 days ago we saw a “golden cross” pattern on the bitcoin chart. It represents the intersection of the short-term and long-term moving averages. Typically, the 50-day MA is used as the short-term average and the 200-day MA is used as the long-term average. If the short-term MA crosses the long-term MA from below to above, it is a buy signal. And if it crosses downwards from above, it is a sell signal.
Why do we call this pattern a very powerful one? The fact is that it appears on the chart very rarely. Sometimes not more than once a year. Naturally, a lot of attention is focused on this pattern, including the large funds. For many of them such a MA crossing may be a signal to enter or leave a long-term position.
But this time something has gone wrong. If someone went short at the close of the day, when the “golden cross” was formed, he sold BTC at the lowest price. The next night, BTC reversed and began to rise quickly.

Why did this happen?

Yes, we are describing what happened “retrospectively”. But even 3 days ago it could have been assumed that the price would bounce back rather than continue to fall.
– As always, when we talk about the analysis, it is worth seeing the whole picture. And it shows that the price was close to the strongest support, which it has already jumped-up 3 times.

– Moreover, this support line is at the level of last year’s closing. That means that all the assets rose in price this year, and bitcoin returned to the level from which it started the year. And this in a situation where inflation is increasingly worrying investors. And bitcoin is virtually the only asset that cannot be mined, produced or printed additionally

– And most importantly. Many traders who sold BTC on the “golden cross” signal did not think of the logical fallacy. Bitcoin trades 7 days a week. This means that the “golden cross” pattern for the 7-day chart will be different from the 5-day chart. Therefore, we can not speak about the strength of the pattern in this case.
Interesting? Yes! That is why we deal with trading, since it always gives us an opportunity to use our mind to its full capacity. And to find those logical connections.

08.00 UK retail sales for June
09.30 Markit Manufacturing Activity Index for Germany in July
10.00 Markit Manufacturing Index for EU in July
14.30 Canadian Retail Sales in May
14.30 ECB press conference and monetary policy commentary

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.