Second Half of 2018 for Markets: Trade Wars, Pre-Brexit Uncertainty, Interest Rates Hike and Returning Volatility.
Dan Gramza talks to Picking Alpha about his view on the markets for the second half of 2018. How traders can navigate the rest of the year.
Q.: 2nd half of 2018 for markets: trade wars, pre-Brexit uncertainty, interest rates hike and returning volatility, how to navigate in such conditions. Historically, what are the most popular instruments and strategies in such situations?
D.G.: I think it’s important to remember that capital is always flowing from one sector to another. For example, we see this with Risk on and Risk off trades. Risk on trades means that capital is flowing towards the stock market to take on the risk of equity market movement. Risk off trades means capital is moving away from the stock market and towards interest-rate bearing markets which are considered safer and having less risk and volatility.
Stock indexes, currencies, interest-rate, metals and energy sectors will benefit from traders that focus on market direction up or down and will find increasing profit opportunity with increasing volatility.
Strategies that can help us identify an increase in volatility could be what I call Behavioral Japanese Candle charts which I use to identify a change in buying and selling behavior, moving averages can be used as a filter such as when the market trades above a 20 period moving average it is considered in an uptrend or oscillator studies such as stochastics can provide an indication of when the market is becoming stretched in a particular direction which is identified as an oversold or overbought condition.
Q.: After G7 most unpleasant ending what traders can expect from the markets for the next six months? Which markets are the most prone to aftereffects of G7 meetings?
D.G.: Over the next six months, I am bullish on the US stock market, bullish on the US dollar, bearish on interest rates futures prices, neutral to bullish on the gold market, bullish on the copper market, bearish on crude oil, neutral to bullish on natural gas, currently bearish on soybeans, corn and wheat for the next three months and bullish on these markets after September.
An area that President Trump focused on in the G7 meeting was dairy trade with Canada. Canada charges 7.5% on milk within a quota level. Milk above-quota faces a 241% tariff. Over-quota rates can be 270% and rise to 314% for other products per the World Trade Organization. US North American Free Trade Agreement (NAFTA) negotiators wanted this system of supply management tariffs eliminated entirely over 10 years. Canada has refused. The original NAFTA agreement did not cover milk, but President Trump wants to have it included. Depending on how the milk issue is settled with Canada this could create volatility in the dairy market.
The United States buys more crude oil from Canada than any other country. As the US purchases Canadian crude oil it could put additional demand for Canadian dollars and therefore increasing Canadian dollar prices.
All of the above markets including dairy are traded on the CME Group exchange.
Q.: If Feds are going to tighten the interest rates, what can we expect from currency markets? What currencies are in the strongest and in the weakest position? Why?
D.G.: As interest rates increase, it can make investments in the United States more attractive therefore increasing demand for US dollars and weakness for other currencies such as the euro, Swiss francs, British pound and Japanese yen.
Q.: What is your market outlook for the energy markets for the 2nd half of 2018?
D.G.: I am bearish on the energy markets going into the second half of 2018. There is a tremendous amount of supply available and demand is just not soaking it up and I do not expect this situation to change much over the next six months. We are seeing Russia and members of OPEC already increasing production before there was an agreement to do so which is increasing global supply. However, if the US dollar decreases tremendously in value, a geopolitical event or large supply interruption, these issues could create an increase in crude oil prices.
Q.: After Canada and Mexico stand off with USA on tariffs, on which markets do you foresee any turbulence? Why?
D.G.: The US trades a variety of products with both countries. A finalized NAFTA agreement and settlement on tariffs would not necessarily have a dramatic impact on any one particular market because demand will not necessarily change more than it has in the past before the NAFTA agreement was renegotiated. It could create volatility if the NAFTA agreement and tariffs include markets that have not been included before such as dairy.
Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains at dangramza.com.