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Jeremy Frommer, CEO of Hedge Fund LIVE Jeremy Frommer has 20 years of industry experience and is currently responsible for general management and leadership of the General Partner. Previously, Mr. Frommer was a Managing Director and Head of the Global Prime Services Group (“GPS”) at RBC... More
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  • Market Commentary: Currencies and Commodity Driven Global Markets  0 comments
    May 12, 2011 10:05 AM | about stocks: USD, SPY, VIXM, GLD

    HedgeFundLIVE.com — It has become obvious that equity markets are being driven by the commodity and currency markets. We have watched breaks in Silver, Gold, Oil, the EUR/USD and the AUD/USD create strong enough effects to whip around strong/weak stocks. Gold which has shown more resilience than Silver lately, should no longer be thought of as the force driving taking the market higher. The divergence in the price action of Gold against Silver, Oil, and equities should be noted. It is now a  separate asset class being used to hedge against inflation, for personal savings, and by countries as a stable store of value and wealth (reserve currency). Markets can no longer be exclusively traded based on specific asset analysis, particularly in the long-term.

    Some basics on the following: Oil/commodity prices are crucial in consumer/business spending; consumer spending effects businesses; businesses make up economies; economies are traded through currencies; currencies are susceptible to all global effects (economic, political, natural disasters, etc.). However, there is no ONE top market that dictates to the rest, they are an interconnected web. When one strand is disturbed, the entire web will shake. Obviously the list of relationships above is incomplete and meant to be so for the sake of this article.

    In the graphs below, please notice the same broken trend line throughout the different markets which lasted from mid March to the beginning of April. Very simple technical analysis, but it shows systemic weakness.

    Oil recently pulled back, falling from highs near $112 per barrel. At the same time, the AUD/USD fell. The AUD/USD is a commodity currency, with a lot of value based on Australia’s coal, oil, and mining exports. The AUD/USD also took a hit from the decline in Gold, Silver, and other mined commodities. The currency fell from 1.10 and the next major support will be at 1.02. If the AUD continues to 1.02, it will decline roughly another 6%, the decline in Oil will correlate to this area with a 7.3% decline.

    technical analysis, markets, stocks, bonds, currencies, commodities, oil, gold, silver, derivatives, webs, globalization, VIX, Euro, USD, EURUSD, AUDUSD, aussie, loonie, decline, barrel, hedgefundlive, stock market, fxa, spy, data, fundamental, political

    AUD/USD daily chart 5-11-11

    The red line on the AUD chart and the Oil chart marks this support area. The red line on Oil is at $91.50, but it may get sucked below to $90 as markets tend to favor round numbers. These two are highly correlated, but it should also be noted that the FXA (AUD/USD ETF) correlates with the SPY 75.76% of the time (remember the web). The green horizontal lines indicate key levels: AUD/USD at parity and Oil at $100 per barrel. On a fundamental note, Australia released trade deficit data earlier this week and beat estimates by over 300% (1.74 billion vs. 0.49 billion). The AUD/USD barely moved higher after the data, which shows weakness.

    technical analysis, markets, stocks, bonds, currencies, commodities, oil, gold, silver, derivatives, webs, globalization, VIX, Euro, USD, EURUSD, AUDUSD, aussie, loonie, decline, barrel, hedgefundlive, stock market, fxa, spy, data, fundamental, political

    Oil daily chart as of 5-11-11

     

     

     

     

     

     

     

     

     

     

     

    The EUR/USD which has broken the medium trend line along with the rest also has some interesting factors to mention. The equities markets have shown a high intra-day correlation recently to the price action in this currency pair. Mainly, the USD is the driving force of this pair. The Fibonacci levels on the chart are based on the lows from 6-7-10 and highs from 5-4-11. Notice the price stopped on the 23.6 retracement level today (5-11-11). Also notice the red line, it is the 50.0% retracement at $1.34, and on a % base correlates to a 6-7% decline with the AUD and Oil; there is some price support data here.

    technical analysis, markets, stocks, bonds, currencies, commodities, oil, gold, silver, derivatives, webs, globalization, VIX, Euro, USD, EURUSD, AUDUSD, aussie, loonie, decline, barrel, hedgefundlive, stock market, fxa, spy, data, fundamental, political

    EUR/USD daily chart 5-11-11

    The equities markets, depending on which one you look at, have not broken the medium-term trend line. But I believe them to be weak and that it is only a matter of time until they are drawn down by commodities and currencies. It would be no stretch to see the global markets decline another 6% in the near -term. Among other factors, the VIX is historically undervalued. Data suggests the VIX tends to average 18.5, so there may be a rise coming (from the decline in equities). The USD/CAD also fits with the above analysis, though it hasn’t broken the same trend line. A 6-7% increase in the pair would lift it to parity (I wrote a blog a few ago stating that I believe the USD/CAD to be parity reverting). Another reason I believe the break in the currencies is real, both the AUD and EUR pairs retested the trend line from the downside and failed; this typically signals weakness. Overall I am bearish for the next month. I do not see any reason the markets will drive higher before finding solid support (6-7% decline).

    In conclusion, I believe if markets continue to decline the support levels for AUD/USD at 1.02, Oil at 91.50, and EUR/USD at 1.34 are crucial.

    Remember it is a web, anything can happen. 
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