Fear And Uncertainty Take A Vacation

The end of the summer season tends to be one of the quietest times in markets as participants take their vacations and prepare for the months that lead up to the end of the year. While many in the United States take time off at the end of August leading to the Labor Day weekend holiday, Europe virtually shuts down for the final month of summer.

As we head into the final week of August, the major issue facing markets appears to be Hurricane Harvey, the storm that has set its sights on the Texas Coast which is a critical region of the United States when it comes to oil production and refining. Additionally, the Federal Reserve’s annual gathering in Jackson Hole, Wyoming is always an event where comments and opinions about the state of the U.S. economy can impact markets. This year, the major topic of interest is not so much the economy, but who the President will appoint to run the central bank this fall. The two leading candidates are Gary Cohn, the former Goldman Sachs President who is now the chief economic counsel to the administration. The other candidate is the sitting Chairperson, Janet Yellen who gave a market-moving speech on Friday causing the dollar to move towards recent lows and bonds to rally. Yellen told markets that she supports the “benefits” of the current regulatory environment which could wind up cementing Gary Cohn’s chances of becoming the nation’s top central banker in the weeks ahead.

Over recent weeks and months, we have seen a series of events that have caused markets to move, and there is no reason to believe that this will not continue, or even pick up steam into September and beyond.

A crisis or two each week

The Brexit referendum and U.S. presidential election dominated the news cycle in 2016. At the end of the year, markets nervously awaited the results of the two election events. A combination of the U.K.’s divorce from Europe and a new U.S. President who ran on a platform of rejecting the status quo with no political experience created an environment of fear and uncertainty. At the same time, optimism embraced many markets as the prospects for tax reform, infrastructure rebuilding in the United States resulting in fiscal stimulus, and a departure from politics as usual caused market participants to view the coming year as a glass half-full. Stocks rallied, commodities prices moved to the upside, and bonds fell as the Fed increased short-term interest rates and began to signal that the legacy of quantitative easing would start to slowly disappear from their balance sheet over the months and years ahead.

Now that we are eight months into 2017, things have not changed much and this year is shaping up to be a reversion to the norm. France elected a pro-EU candidate, and Germany is likely to do the same in September when Angela Merkel glides to her fourth consecutive term as German Chancellor. The House of Representatives and Senate in the United States have both slammed the brakes on any, and all legislative initiatives from the new administration and gridlock in Washington could be worse than ever even though the majority of both houses of Congress are from the same political party as the President. In fact, looking back over recent months markets have faced increasing pressure as they have faced crisis after crisis.

The Congress failed to repeal and replace healthcare legislation, which was the first sign that the administration was not going to have an easy time with any of its legislative agenda. The President has continued to use twitter as a political tool, much to the dismay of many in Congress. A special prosecutor is looking into many aspects of the campaign, from Russian involvement to financial transactions of the President and his family. The relationship between the U.S. and Russia has deteriorated to a new low. North Korea has become a nuclear power and has been exchanging dangerous rhetoric with the United States. These exchanges have weighed on U.S.-Chinese relations. At the same time, the 2016 Presidential election was one of the most divisive in history, and the division within the country has continued to cause protest, violence, and uncertainty over recent months. Violent exchanges in Charlottesville and other locations around the nation are a continuous reminder of the current tenuous nature of the political and economic state of the world’s leading democracy. At the same time, the terrorist attack in Spain last week was a sign that the world still faces a dangerous and constant threat.

Market volatility increasing

Markets are a reflection of political and economic events around the world, and the current state of affairs means that we should expect volatility in the weeks and months ahead in markets across all asset classes. When it comes to the equities markets, the rally since the beginning of 2016 has been nothing short of amazing. Source: CQG

As the weekly chart of the S&P 500 E-Mini futures contract highlights, the index declined by 11.5% during the first six weeks of 2016. However, since finding a bottom in February 2016, it has been off to the races for the prices of equities, and all of the major indices have made a series of record highs over recent months. In August we have witnessed two significant selloffs on August 10 and 17, and stock prices have yet to return to the pre-August 10 highs since the correction in the market. The pair of selloffs on two consecutive Thursday’s in August could be a harbinger of things to come once the summer season comes to an end given the issues facing the world and United States on the political and economic landscapes.

It could be a very frenetic fall season

The optimism that followed the U.S. Presidential election at the end of 2016 and start of 2017 caused the dollar index to climb to the highest level since 2002. Source: CQG

As the weekly chart of the dollar index illustrates, the rally that began in May 2014 that took the greenback from 78.93 to highs of 103.815 during the first week of January 2017 appears to be in trouble as the index has declined to under 93 as of the close of business on August 25. Critical support for the bull market in the dollar index stands at the May 2016 lows of 91.88. At the end of last week, the dollar index was trading less than 1.0 above the line in the sand for the multi-year bull market for the dollar against other world currencies. As the European economy recovers and the ECB moves towards normalization from accommodation, the chances are that the dollar could move below technical support. While a lower dollar will foster business for U.S. multinational companies as it makes U.S. exports more attractive on global markets, it will likely support raw material prices which could cause inflation to rise in the months ahead. Therefore, economics, as well as political factors, are likely to increase volatility in markets over the weeks and months ahead. The stock market could be particularly susceptible to some big moves during the fall season as it is traditionally a time of the year when stocks can run into downside pressures.

Gold and silver are likely to be beneficiaries

As we move into the beginning of September next week and the post-summer trading the week after, the price of gold is currently sitting at just below the highs of 2017. Source: CQG

As the weekly chart shows, the range in gold so far in 2017 has been from lows of $1146.50 at the start of the year to highs of $1300.70 during the middle of August on the continuous COMEX futures contract. On August 25, December gold futures were trading at around the $1298 per ounce level. Resistance on the December contract stands at $1307, the April 17 highs, so gold is less than $10 below a technical breakout level to the upside. Gold is both a commodity and a financial asset at the same time, and it tends to move to the upside during periods of fear, uncertainty, and turmoil on the political and economic landscapes. Source: CQG

As the weekly chart of COMEX silver futures highlights, the volatile precious metal has traded in a range from lows of $15.15 on July 10 to $18.655 per ounce on April 17 and was trading at around $17.05 on Friday, August 25. While gold is close to its peak price for the year, silver was trading at just over the midpoint of its 2017 trading range on Friday. However, anyone who has experience trading in the wild silver market knows that when gold’s little brother begins to move, it can explode or implode over a very short period. A continuation of events on the political and economic landscapes could provide support for these two precious metals in the weeks ahead. Gold has been sitting quietly just below technical resistance and is now ready to challenge the top end of its trading range. Above the $1300 level, $1377.50 the 2016 highs will stand as technical resistance for the yellow metal. If gold breaks higher, silver will likely follow in explosive fashion. Gold and silver suffered from a pair of flash crashes on June 26 and July 6 that took the prices of the metals to lows of $1211.10 on December gold futures and $15.145 on September silver futures on July 10, but both metals have staged impressive comebacks and are now on the verge of moving a lot higher.

Big price variance could be the norm

Enjoy the final week of the summer season of 2017 and the Labor Day weekend holiday. We could be in for a wild ride in September and the rest of the year in markets. There are so many issues facing the world as the summer comes to an end and prices across all asset classes and sectors tend to reflect the political and economic landscape. Fear and uncertainty appear to be on vacation at the end of August, but they are likely to cause lots of price variance over coming weeks as volatility could become the norm rather than the exception. Keep a close eye on the price of gold as it tends to serve as one of the most efficient barometers for fear and uncertainty and it is currently sitting at a level that is very close to a breakout to the upside. Avoid complacency in markets over the coming week as it could be a case of all quiet before a volatile storm.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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