ENERGY AND METALS LEAD COMMODITIES TO NEW 2014 HIGH -- FOREX FUNDS FLOW INTO BRITAIN AND CANADA -- WISDOMTREE JAPAN HEDGED EQUITY FUND NEARS UPSIDE BREAKOUT ON WEAKER YEN -- NISSAN AND TOYOTA HELP LEAD STRONG AUTO GROUP
ENERGY AND METALS LEAD COMMODITY RALLY... The weekly bars in Chart 2 show the Reuters/Jefferies CRB Index closing at the highest level since the third quarter of 2012. [The CRB Index includes 19 commodities that are traded on exchanges in the U.S. and U.K.]. Commodity prices turned up during the first quarter of 2014 for the first time in two years. After consolidating during the second quarter, they appear to be regaining upward momentum. Energy prices spiked higher the previous week on increased tensions in Iraq. Precious metals jumped sharply this week. That might also be the result of increased global tensions. This week's jump in precious metals may also be the result of a jump in U.S. consumer prices to the fastest pace in a year combined with the Fed decision to keep rates low for an extended period of time. The daily bars in Chart 2 show the DB Commodities Tracking Fund (DBC) surging to the highest level since last August. That helped make commodities the week's strongest asset class. A weaker dollar also helped.
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Chart 1
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Chart 2
WEAKER DOLLAR BOOSTS COMMODITIES ... A weaker dollar is usually good for commodity markets. And this week was no exception. The daily bars in Chart 3 show the PowerShares Dollar Index Bullish Fund (UUP) losing ground during the week after failing a test of its 200-day moving average the previous week. Normally, the main reason for a drop in the dollar would come from a rising Euro (which accounts for 57% of the UUP). That wasn't the case this week. Chart 3 shows the Euro experiencing a minor bounce, but remaining below its 200-day moving average. With the eurozone embarking on aggressive monetary easing, upward progress for the Euro appears limited. Most of the week's currency pressure came from two other sources -- Britain and Canada.
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Chart 3
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Chart 4
BRITISH POUND REACHES FIVE-YEAR HIGH ... Chart 5 shows the British Pound ($XBP) jumping over the past week to a new 2014 high. Its longer range picture is even more bullish. The weekly bars in Chart 6 show sterling trading over $1.70 for the first time in five years. Sterling strength is based on a stronger British economy and expectations for higher interest rates -- both long and short-term. The yield on the British 10-Year Gilt is 2.77% which is higher than the U.S. (2.62%). [By contrast, 10-year yields in France and Germany are lower than the U.S. at 1.8% and 1.3% respectively]. Recent hawkish comments from the British central bank that short-term rates may rise sooner than expected also give a boost to its currency. That makes sterling a much stronger bet than the Euro. Chart 7 shows sterling climbing to the highest level against the Euro in two years. No doubt, some money leaving the dollar and Euro is moving into Britain. And Canada.
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Chart 5
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Chart 6
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Chart 7
CANADIAN DOLLAR ALSO RALLIES... Last weekend's message showed Canadian stocks nearing a test of their 2008 high (owing largely to rising gold and oil prices). Money is also flowing into the Canadian currency. The daily bars in Chart 8 show the Canadian Dollar (CDW) climbing to the highest level in nearly six months. In addition, the CDW is trying to clear its 200-day moving average (red line). When global investors buy a country's bonds and stocks, they have to also buy the currency. And they appear to be doing that. The green weekly bars in Chart 9 show the Canadian Dollar still in a longer-range downtrend extending back to 2012. The good news is that the 14-week RSI line (top of chart) and weekly MACD lines (below chart) have turned up. The solid area shows that the "loonie" has a strong correlation to gold as well. This week's jump in gold no doubt contributed to buying in the Canadian currency. Rising gold prices are also helping Canadian stocks. Three of the top five weekly percentage gainers in Toronto Composite Index ($TSX) were gold stocks.
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Chart 8
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Chart 9
JAPANESE STOCKS CONTINUE TO RISE ON WEAK YEN... My June 4 message showed the WisdomTree Japan Hedge Equity ETF (DXJ) consolidating in a "bullish symmetrical triangle". I suggested at the time that a weaker yen was part of the reason why. [The DXJ hedges out the negative impact of a weaker yen. Foreign stock holders lose money when the local currency is falling]. Chart 10 shows the DXJ testing the upper resistance line drawn over 2013 highs, which puts it very close to a significant bullish breakout. Meanwhile, the Japanese yen (green area) has remained weak. A weaker yen is good for Japanese stocks because so many of them are driven by exports to foreign markets. That's especially true of Japanese automakers.
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Chart 10
JAPANESE AUTOS RALLY ... Tesla Motors was the biggest gainer (11%) in a strong auto group. The second and third biggest auto gainers were Japanese. Chart 11 shows Nissan Motors (NSANY) surging to the highest level in eight months. It cleared its 200-day line in the process. Chart 12 shows Toyota Motor (TM) reaching a five-month high. It is now challenging its 200-day line.
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Chart 11
