Risk appetite and Trade tension.

Updated: Jan 7

There’s been a lot of talk about recessions, trade tensions between the EU and US are escalating and there’s still no final resolution to US-China trade talks, or Brexit. And yet investors are optimistic because bank earnings are strong and they believe that Central Bank policies seeks to stimulate economic growth by loosening money supply.

USD/JPY broke 112 on Friday, hitting a 1-month high in the process while the euro also rose to its best level against the US dollar since March 26. The only times that we see simultaneous strength in pairs like USD/JPY and EUR/USD is when risk appetite is strong.

Leuthold Group’s Jim Paulsen is tempering his bull case for stocks.

Even though he believes the S&P 500 could rally at least another 10%, there’s a catch.

Paulsen won’t rule out a recession.

“Between now and the summer, we’re going to decide whether the economy is going to hold together or whether we’re falling off a cliff,” the firm’s chief investment strategist said Wednesday on CNBC. But he’s not willing to bet all his chips on it.

“Recession and bear market fears would return very, very quickly and very harshly,” he said. “We have a good deal of fear. Fear of bear markets. Fear of recessions. Fear of negative yields. Fear of reverting curves. ... We’re climbing a wall of worry.”

Yet, the S&P 500 is up almost 23% from its December low and more than 15% this year. The index is just 2% from its all-time high.

SP500 Daily chart getting closer to all-time high

Stocks pulled back at the start of the week but rebounded strongly on Friday to end the week not far from 6-month and all-time highs.

USD/JPY Daily Chart

Fed-fund futures are pricing in a 48% chance of a rate cut in January so easing is certainty on their minds. Fundamentally, USD/JPY should see 110 before 114 but technically, USD/JPY hit a 7-week high and the positive momentum is strong. Our yellow support and resistance line is at 112 so if the pair breaks this year’s high of 112.14, the next stop should be 113.

Trade tensions between the European Union and the US are at a boiling point with President Trump threatening $11B in tariffs over Airbus (AIR) subsidies. In response, the EU is preparing its own list of retaliatory tariffs worth over $22B.

The World Trade Organization hasn’t officially recommended a penalty for the EU but if they do or the US pushes ahead with the tariffs, it will be very damaging to the region’s economy – and the euro.

EUR/USD Weekly chart

Meanwhile, EUR/USD rose above 1.13 for the first time since March 26 but the rally should be faded. Data was better than expected with the German trade surplus growing and industrial production falling less.

The currency cross continues trading in a narrow range after the ECB dovish stance faded away. We see a strong bullish candle within our weekly zone. However, the economic outlook remains weak, with Draghi saying that “slower growth momentum is expected to extend into the current year”. At the same time, Draghi said that the likelihood of a recession remains low. On the inflation front, Draghi stated that interest rates will remain at current levels at least until the end of 2019 and possibly later.

GOLD PRICES fell with other precious metals on Thursday in London, sliding back below $1300 as Western stock markets rose and new US data came in stronger than analysts expected.

Gold Daily chart

Gold is printing lower highs and has also formed the good old head & shoulder formation. Gold is now looking much more bearish than it did earlier this week, and all of the sudden we have the support underneath that is being threatened. If you are bullish on gold longer-term you probably need to be buying physical gold as anything levered will be very dangerous. To the downside, the $1250 level will be supportive but we could go as low as $1200 if that move happens.

Happy Trading!