Trouble in Canada - "So a busy week and so far in Asia the main story is the G7 summit. The summit ended in a war of words as Trump refused to allow US officials to endorse a planned joint communique after Canadian leader Trudeau comments in a press conference at the close of the event basically suggesting US tariffs were insulting. Mr Trump tweeted that the Canadian PM was “very dishonest & weak” and White House advisor Larry Kudlow backed him up by saying on TV yesterday that Trudeau “really kind of stabbed us in the back”. Late last night German Press also reported Chancellor Merkel as saying that the EU wont be “taken for a ride” by the US." - R. Zurrer for Money Talks

Bulletin Headline Summary From RanSquawk

• European bourses higher ahead of Trump/Kim summit and as Italy reiterates plans to stay in the Eurozone
• Sterling slides as industrial production has biggest monthly fall since October 2012 and trade deficit widens
• Looking ahead, highlights include 3- and 10-year note auctions from the US

The "most important week of the year" started off with a session that has been a study in contrasts, with risk-off trades emerging early on in Asian trading, as Asian markets and US futures slipped pressured by the higher Yen in the aftermath of this weekend's G-7 debacle which resulted in a communique that for the first time ever, was not signed by the US; concerns about a potential trade war, however, quickly morphed into optimism as investors shifted their attention to the historic summit between U.S. and North Korea as well as the meetings by three of the world’s three most important central banks, with the EUR spiking ahead of what may be the ECB's announcement that it will end QE in early 2019, while Sterling returns to center stage with tomorrow's critical Brexit vote.

The net result has been an offset of extremes, with US equity futures flat, but don't expect this to last: as Deutsche Bank's Jim reid writes, "today is actually the calm before the storm" and we’ll at least be able to monitor the fall out from the tense and quite remarkable G7 meeting over the weekend or G6 vs US meeting as it could be called. 

Helping boost sentiment, Italy's new finance minister, Tria, gave a strong endorsement of the euro in comments over the weekend, prompting UBS to suggest that Italy's disagreements with the EU seem more likely to focus on immigration than on economics. Italian bonds and stocks surged while helping the Euro rise to session higher highs, after Tria told the Corriere della Sera newspaper over the weekend that there was “no discussion” of any proposal to leave the common currency and that the government would also block any market conditions that would “push toward an exit" (he would naturally say that having seen the recent rout in Italian bonds).

“This is the one of the first references on not letting the fiscal plan getting out of hand, and that the government will not let the BTP-bund spread get to the same wide level as back in 2011-2012,” Danske Bank's Arne Lohmann Rasmussen told clients. “We expect to see some stabilization in the BTP-bund spread.” And sure enough, Italian 2Y yields tumbled following renewed hope that the status quo will return to Italy.

Of course, it's only a matter of time before the Italian sentiment changes: after all for the ruling populist coalition to reach its goals, it will have no choice but to bust Italy's budget, but until then hope has returned. Among his other points  in the Corriere interview, Tria said that the government will seek an EU accord that would allow the exclusion of infrastructure investment costs from the budget deficit; that a review of legislation on co-operative and small banks isn’t a priority; and that he can’t provide targets for growth and deficit before September.

As Bloomberg notes, not all are convinced that Tria’s comments warranted such a large push higher, given the challenges the new government’s fiscal program will pose to the country’s finances as debt stands at around 130% of GDP as Morgan Stanley noted recently.

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The fundamental drivers for Gold and the US Dollar are similar and that is why they typically trend together. Negative and/or falling real rates drive Gold and the same drives the greenback though with respect to differentials between the other competing currencies. When real rates are rising or strong in the US that is bearish for Gold and bullish for the US Dollar. The opposite is also true. And with the US Dollar being the global reserve currency, it naturally competes with Gold, which is an alternative. All being said, history as well as recent action suggests that weakness in the stock market is more crucial to Gold’s future than weakness in the US Dollar.  

We do not want to diminish the impact of the US Dollar (with respect to Gold) but its weakness from early 2017 into Q1 2018 failed to impact the precious metals sector in a meaningful way. Since precious metals peaked in the summer of 2016, the US Dollar index made two new lows (one in September 2017 and one in early February 2018) yet precious metals (aside from Gold) didn’t even come close to their 2016 highs. Moreover, during the recent decline in the US Dollar index from nearly 104 to 88, the stock market outperformed Gold, gold stocks and Silver. Clearly, Gold needs something else to happen to trigger its bull market.

As we’ve often discussed, Gold has continued to underperform the stock market and from an intermarket perspective, this has prevented it from starting a real bull market.

History argues that Gold cannot be in a real and significant bull market unless it is outperforming the stock market. In the chart below we plot Gold (blue) along with the Gold to S&P 500 ratio (black). 

In the 1970s and 2000s the two plots are trending in the same direction. 

However, note what happened during the 1993 to 1996 period, the 1985-1987 period as well as during the past few years. These were Gold “bull markets” but they were quite weak as Gold did not consistently outperform the stock market during these periods. (As an aside, Gold only outperformed the stock market in late 1987 after the stock market crashed and the precious metals bull ended. Despite a massive dollar decline in the mid 1980s, Gold only enjoyed a merely decent run). 

The reality is, real interest rates tend to follow the stock market. 

At present, If the stock market continues to rise, then the economy is performing well and that means the Fed will continue to hike rates. That means real rates (at least on the short end and that is what impacts Gold) will remain stable or even rise.

Last week we noted the similarities between today and the 1999-2001 cycle. Interestingly, the stock market peaked in March 2000, which was 16 months before the US Dollar peaked. If the current rebound in the US Dollar is the start of a much bigger move, then I would expect the stock market to peak before the US Dollar. 

The other bullish catalyst for Gold (an acceleration in inflation) is also bearish for the stock market as rising inflation leads to falling margins (for corporations) and falling multiples for stocks.

In any case it’s quite clear that a big bull market in Gold will not begin or take place without first a bear market in stocks. A bear market in stocks would trigger or coincide with positive fundamental developments for Gold. Sure, a decline in the US Dollar can certainly stabilize Gold or support rallies in the interim. However, Gold’s outperformance of the stock market is more important (than a falling dollar) for it to begin a big bull market. Until that begins we have narrowed our focus to a smaller group of companies, capable of rising 300% to 500% without the help of metals prices. 

Canada has blocked a proposed C$1.51 billion takeover of construction company Aecon (ARE.TO) by a Chinese state builder on national security grounds, underscoring rising wariness of Chinese firms buying up assets in Western countries.

Aecon's takeover by overseas investment and financing arm of China Communications Construction Co Ltd <601800.SS> was scheduled to close in February. But this was delayed after Canada extended a national security review.

The Canadian government has now ordered... CLICK for the complete article

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