Adriatic Metals’ Days Under the Radar Will Be Over in a Few Months; Potentially Very High-Grade Maiden Resource Estimate Expected for Rupice

By The Gold Report

Source: The Critical Investor for Streetwise Reports   02/25/2019

The Critical Investor explains why this company is one of his favorite holdings.

1. Introduction

One of my favorite holdings, Adriatic Metals Plc (ADT:ASX; 3FN:FSE), is still under the radar for a lot of North American investors, being an Australia listed company. It is my strong conviction this is not really deserved, and this situation might potentially not last very long. As it is exploring Rupice, a very high-grade polymetallic project in Bosnia Herzegovina, Adriatic already produced several impressive sets of drill results during 2018. It didn’t stop there, as the company released, for example, hole BR-36-18, which intercepted a very thick zone of high-grade mineralization over 72m returning 18.3% Zn, 10.7% Pb, 211g/t Ag, 2.5/t Au, 2.5% Cu from 206m, and 46m at 25% BaSO4 from 216m on January 21, 2019.



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These numbers already sound impressive just on their own for each individual metal, but the zinc equivalent at current spot prices would be a staggering 72m @ 49.5% ZnEq, and the gold equivalent an equally ridiculous 72m @ 31g/t. The gross metal value of such a hole is no less than US$1328/t. And it isn’t just one lucky strike, Adriatic has been pulling results resembling this since 2017.

Granted, the mineralized area isn’t very large, but the extreme grades bode well for a very economic project, potentially suited for a mid-tier producer. And the company isn’t done drilling yet. It has applied for (and was granted) a much larger area, including a potential extension of Rupice to the north, containing many large IP targets to the south. The company is awaiting approval on further drill permitting, but it is expected to be granted at the end of this month. Adriatic is fully cashed up and will explore most of these targets in 2019. What the end result will be in the form of a maiden resource estimate nobody knows yet, but I’m curious enough to do a guesstimate myself this time. It really is a gem in my view.

All presented tables are my own material, unless stated otherwise.

All pictures are company material, unless stated otherwise.

All currencies are in US Dollars, unless stated otherwise.

2. Company

After the pretty extensive analysis of Kees Dekker, which I published in October 2018, I will touch just briefly on some company specifics. Adriatic Metals has its main listing on the main board of the ASX, where it is trading with ADT.AX as its ticker symbol. The company fully owns two polymetallic projects in Bosnia Herzegovina, its flagship Rupice project and the Veovaca brownfield project.

With an average volume of in excess of 228,437 shares per day, the company’s trading pattern is quite liquid. Its secondary listing is the Frankfurt listing, with 3FN.FWB for the ticker. Adriatic currently has 131 million shares outstanding (fully diluted 150.5 million), and 19.5 million options of which most are in the money, which gives it a market capitalization of A$108.36 million based on the February 22 share price of A$0.72. The company has an estimated cash position of A$14Mmillion at the moment, and has no plans to raise more cash soon. Management and the Board of Directors hold the largest position, about 30%. Director Paul Cronin is the single largest shareholder at roughly 18%.

Another meaningful shareholder (7.7%) is Sandfire Resources, a copper-gold producer from Australia. Its Degrussa mine is depleting fast without any potential of finding new ore in the vicinity, so it is looking for other assets. Apparently it has a strong focus on Adriatic now, as it tried to lift its holdings to 19.9%. Adriatic management wasn’t too pleased with this concentration of voting rights and prevented this from happening.


Share price Adriatic Metals; source company website.

As can be seen in this chart, the share price didn’t drop off after the first results in June 2018, and it took a while before it ascended further, as drill results came in slowly. But with every set of drill results confirming and expanding the very high grade mineralized envelope at Rupice, investor confidence rose further with it. The latest 10% decline didn’t have any fundamental reason, but was likely profit-taking according to Paul Cronin. Therefore, I consider this a buying opportunity.

3. Exploration

What is Adriatic exactly up to these days? The company is awaiting the extended Exploration permit for Rupice, after receiving the Urban planning permit on February 6, 2019. The Exploration permit is expected soon, within 1-2 weeks. The permitting system in Bosnia requires a scoping study or PEA for the application of an exploitation permit, which is not different from almost any other country; there has to be a mine plan. The company figured out that using its nearby Veovaca site 17km away, a currently uneconomic brownfield project hosting a former mine, would ease the application process, so eventual ore from Rupice needs to be hauled (or concentrated on site first) to an eventual mill and plant at Veovaca. A 2017 IP survey already indicated very interesting targets (red and magenta):

A deeper IP survey is planned to start in Q1 and will scan the recently expanded license to further define drilling targets on the concession for the 2019 drilling campaign. Management indicated to me that these targets will see the first drilling in May of this year. Historical data would suggest that mineralization is quite shallow but its findings from Rupice North is that shallower lower-grade mineralization is accompanied by higher grade at depth if the structural conditions indeed exist.

Of course, this is all for the future, after a deposit has been established. This is scheduled a few months from now, well into Q2. Adriatic is currently drilling at Rupice and Veovaca. According to management, heavy snowfall last month has slowed its progress temporarily but the company expects to have all four rigs operating on the northern plunge and the new zone to the South East. Adriatic will add two more rigs at JB after it has finalized the mentioned IP survey. It will penetrate deeper than the survey from 2017 and should help identify the mineralization deeper than 200m. Management expects to drill about 20,000 meters this year. The next drill results will be out in March btw.

So, Adriatic is in the middle of delineating a resource, and as a result of the drilling so far, it seems to be able to show a good impression of potential mineralization. Here is a table with the complete results, using the very low cut-off of 1% Zn+Pb, as the company wants to include economic values of silver, gold, copper and barite as well (in my view it could just use ZnEq cut-offs to simplify things, in- or excluding barite):

It is good to see it had not too many misses when delineating the potential resource, for last year these were holes 1, 4, 6, 9, 14, 18 to 21, 24, 28, 30 and 31. Most of these holes were to the far east across a probable fault, or to the west, where the mineralization thins out. I received this map with collar locations and directions from management to get a better impression:

Hole 4-18 and 20-18 probably missed the mineralized envelopes, and 19-18 and 6-18 probably just further defined the fault line. Hole 14-18 looked like a vertical one, going to a depth of 214.9m. It could be the western limit, but at that location it is possible that the mineralization is located just below that level, at least when looking at the long section to the north.

The benefits of a low cut-off can be seen in the next table, showing for example the assay intervals of hole BR-36-18, adding another 8m to the other, much higher-grade mineralization:

The mineralized envelope has been outlined in this well-known drill collar map:

The sections will show that the mineralized intercepts get higher grade and thicker the deeper the mineralized envelope goes along strike. At the same time, the envelope is tilted, and the more near surface side (west side) of it is thinner and lower grade as well compared to the deeper side (east side). After intensive drilling around the mid-section, it appeared that there are two distinct high grade zones, the Upper HG Zone and the Lower HG Zone (projected cross sections in green):

Many of the older holes of the Upper HG Zone stopped right after the drill hit basement/non-mineralized rock, so Adriatic has to drill deeper below the Upper HG Zone to potentially establish an extension to the south (left in this section) of the Lower HG Zone. All eyes are, of course, on the Lower HG Zone at depth now, potentially extending further along strike to the north. When the Exploration permit is granted with a week or so, drilling will test this prime target.

The following set of cross sections gives a good indication of the variable shapes of mineralization, and true width of many drill results:

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Cross section X-X’ is the one that I don’t exactly follow, as the long section doesn’t indicate this second, deeper located mineralized layer, but the long section probably stays west of it, close to hole BR-10-81, missing this layer in this section.

The mineralized envelopes vary a lot in size and shape, but the good news is they seem to be fairly continuous, as seems the long section. When sequencing the sections, it appears that the Upper and Lower HG Zone start out as one, then diverge into two separate zones, of which the Upper HG Zone seems to end close to cross section U-U’ and the Lower HG Zone seems to continue at the north. I am contemplating buying an affordable piece of geo software in order to assist me with estimating envelopes, but for now calculations by hand are my approach. I started with the long section, averaged grades, looked for true widths, and this is the kind of first table as a result:

This exercise was repeated for all cross sections as well, giving me something of a starting point to work with. Determining an average width and height of the envelopes in between the sections wasn’t easy as there is not enough data, and I couldn’t average too much on the grades as it should actually be a weighted average. Nevertheless, I estimated a conservative envelope for the Upper HG Zone of 0.45M m3, and 0.7M m3 for the Lower HG Zone, which, assuming a conservative average gravity of 3.6t/m3, leads us to 4.1Mt. I am not sure how much Adriatic is dealing with sedimentary host rock, which would bring down the barite (4.5t/m3) and sulphide gravity (3.6 to 4.4t/m3).

Some info on specific gravity (density) of host rock:

“Sulphide ore minerals have high densities that range generally from about 4.0 g/cm3 for sphalerite to 4.62 g/cm3 for pyrrhotite. Galena attains an exceptionally high value of 7.50 g/cm3. Associated minerals pyrite, magnetite and hematite have densities of 5.02, 5.18 and 5.26 g/cm3, respectively. A sample of densities of massive sulphides in the Bathurst camp, determined from measurements on drill core from several sites, indicates that they range from about 3.80 to 4.40 g/cm3. Those of semi-massive sulphides range from about 3.60 to 3.85 g/cm3. By comparison, a sample of density measurements made on fine-grained sedimentary and felsic volcanic host rocks indicates densities ranging generally from about 2.70 to 2.85 g/cm3.”

With the corporate tax in Bosnia Herzegovina standing at a very cheap 10%, and a potential operation dealing with small tonnage and thus low capex, there is no doubt in my mind that this could be a very profitable mine someday. If I would take a 4Mt resource for the entire mineralized envelope, conservative recoveries and payability, and using an average small-scale underground capex/tpd of US$80,000/tpd, the total capex would come in at US$90 million. Let’s use some margin of error, and take US$100 million and US$60/t opex. This would result in a hypothetical post-tax NPV8 of US$175 million and likely a very high post-tax IRR. This is all conservative, and considering the current market cap of about US$80 million and exploration ongoing there is a lot of upside.

4. Conclusion

By now it will hopefully be clear why I think Adriatic Metals is already a pretty interesting exploration story, with lots of further upside potentially in the making on its recently expanded licenses. If the maiden resource estimate, which is expected in Q2, 2019, can indeed get to 4Mt or more, hypothetical PEA economics might be spectacular. With a very low hypothetical capex this project will be easily fundable for a wide range of parties, and will probably attract more interest after the resource estimate comes out and metallurgy proves to be fine. It is one of the most exciting exploration stories around at the moment, far from nearing the end, and as a shareholder I keep tracking them at close range with extra interest. Have a look.

I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website http://www.criticalinvestor.eu to get an email notice of my new articles soon after they are published.

The Critical Investor is a newsletter and comprehensive junior mining platform, providing analysis, blog and newsfeed and all sorts of information about junior mining. The editor is an avid and critical junior mining stock investor from The Netherlands, with an MSc background in construction/project management. Number cruncher at project economics, looking for high quality companies, mostly growth/turnaround/catalyst-driven to avoid too much dependence/influence of long-term commodity pricing/market sentiments, and often looking for long-term deep value. Getting burned in the past himself at junior mining investments by following overly positive sources that more often than not avoided to mention (hidden) risks or critical flaws, The Critical Investor learned his lesson well, and goes a few steps further ever since, providing a fresh, more in-depth, and critical vision on things, hence the name.

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Disclaimer:
The author is not a registered investment advisor, and currently has a long position in Adriatic Metals. All facts are to be checked by the reader. For more information go to the websites of the mentioned companies and read the available company information and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.

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Charts and graphics provided by the author.

( Companies Mentioned: ADT:ASX; 3FN:FSE,
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Daily Markets Broadcast 2019-02-28

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You don’t bring a MIG-21 to a gunfight

 

Prepared by Jeff Halley, Senior Market Analyst

 

You don’t bring a MIG-21 to a gunfight

 Geopolitical tensions ratcheted higher yesterday with Pakistan F-16 fighters shooting down an Indian MIG-21 over Kashmir and capturing the pilot after the Pakistan aircraft had themselves crossed into Indian airspace and conducted retaliatory airstrikes. It’s likely India was caught off guard, failing to anticipate Pakistan’s response to their air raid earlier in the week. The MiG-21 is an obsolete 1950’s vintage Soviet fighter, and you most certainly do not send them up, outnumbered, to intercept modern American F-16s. As the saying goes, you don’t bring a knife to a gunfight.

With politicians on both nuclear-armed sides making soothing comments overnight, the trick will be finding a mutually face-saving path to de-escalate the situation. Of course, this will be much easier said than done, and the potential for hostilities to ratchet higher remains very high.

Almost unnoticed, Pakistan also closed their entire airspace, which is part of the primary aircraft “superhighway in the sky” for flights between Asia and Europe. The knock-on effects are already being felt with some Singapore Airlines’ European flights adding refuelling stops and Thai Airways cancelling many European-bound flights for example. Many airlines are scrambling to find alternative – albeit more expensive – routes between Asia and Europe as a result. If escalating tensions were to force a closure of Indian airspace as well, the disruption would be enormous, and European and Asian airline stocks would be the first to feel the heat.

Elsewhere, Federal Reserve Chairman Powell’s second day of testimony on the Hill passed without incident as he signalled patience and the end of Fed balance sheet reduction this year. US Trade Representative Robert Lighthizer told the markets a US-China trade deal hasn’t been agreed yet bringing some reality back to euphoric markets post-Trump’s tariff extension, despite the fact Lighthizer also announced both sides had agreed on an enforcement process.

The markets were pinned by ebbs and flows as investors elected to stay on the sidelines until the bigger picture clarified. Wall Street limped to a nondescript close, with the S&P closing down a miserly 0.1% and the US dollar broadly steady against most G7 and regional currencies.

The day will become more interesting in Asia, with the release of the official China Manufacturing PMI at 0900 Beijing time, and median forecasts suggest 49.5. A miss lower could see local stocks and currencies come under pressure. The Trump-Kim summit continues in Vietnam, but realistically we expect nothing market-moving to come from it unless the President takes to social media.

The US GDP will be the highlight of the day, with median forecasts at 2.20%. A miss either way will see increased volatility in stock and currency markets as traders reassess interest rate forecasts.

 

FX

GBP continued its march higher, rising 100 points to 1.3350 in intra-day trading before closing lower at a still-positive 1.3300. The markets are pricing in that fact that a Brexit no-deal appears doubtful, while it seems likely we’ll see an extension of Article 50 following PM May’s outline of Parliament’s voting options overnight. I won’t get into the nitty gritty but to paraphrase Robert Lighthizer, a deal isn’t done yet. Being long sterling at these lofty levels remains a potentially perilous trade.

Regional markets will follow North America’s lead and open quietly overnight awaiting the China PMI data. A big miss to the downside could see regional currencies come under pressure.

 

Equities

Regional bourses will await China’s PMI data and, much like currencies, may slip into the red on a downside miss. China stocks are also expecting an announcement this week regarding an increase in weighting from 0.7% to 2.8% in the MSCI Emerging Markets Index. China stocks could rise if the announcement is made, potentially resulting in a wave of buying from international passive index funds.

 

Oil

Official US Crude inventories fell a massive 8.65 million barrels overnight, pushing Brent up 1.90% to USD66.60 per barrel and raising WTI 1.80% to USD57.00 a barrel. Plunging shipments from Saudi Arabia are keeping the squeeze on US refineries starved of Venezuelan crude. For now, OPEC’s production cut strategy is continuing to work, and price action is positive on both contracts – a theme that should flow into Asian trading.

 

Gold

Gold fell 10 dollars to USD1,320.00 an ounce overnight as stale long positioning and a lack of clarity on the macro-economic front took its toll. Traders should beware of escalating tensions between India and Pakistan, which could cause gold to move higher, perhaps rather quickly. In the bigger picture, despite gold’s overnight set back, the longer-term technical view remains positive.

 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Lighthizer reminds markets the trade war is far from over

US Trade Representative Robert Lighthizer gave financial markets a reality check after reminding us a trade deal with China is not forgone conclusion.  The Dow declined for a second consecutive day and technology stocks saw an end to their 12-day winning streak.

Lighthizer/Cohen/Powell – China deal not done yet

GBP -Parliament supports May’s pledge on no-deal

US GDP – Spread between 10s and 2s continue to widen

Oil – Crude imports fall to lowest since 1996

Gold – Continues to drift lower

Lighthizer/Cohen/Powell

Testimonies from US Trade Representative Lighthizer, Fed Chair Powell, and former lawyer to the President, Michael Cohen provided many headlines that basically saw US stocks trade little changed and the dollar slightly firmer.  The financial markets focused more on Lighthizer’s cautious comments that increased Chinese purchase of American goods is not enough to make a trade deal.  While both sides are motivated to finalize a trade deal, it is unknown how they can enforce a deal on currency manipulation, intellectual property and forced technology transfers.

Trump’s former lawyer attacked the President and his testimony went as expected between Democrats and Republicans.  Cohen did not give any direct evidence on collusion.

Fed Chair Powell reiterated the patience stance the Fed will have in the coming months and also signaled we can expect to hear from them soon on how they will end the balance sheet unwind.

GBP

The British pound rose for a fourth consecutive day after Parliament voted on several amendments that ultimately suggest Brexit would be delayed.  Labour lost their amendment to remain in the customs union with the EU, thus prompting their policy to support a second referendum.   The Scottish National Party’s amendment to rule out leaving the EU without a deal in any circumstance was rejected, so technically we could still have a no-deal Brexit but that is highly unexpected.  The Cooper Amendment did pass and formalized PM May’s pledge on a no-deal Brexit, which would likely see Article 50 extended.

Brexit will go down to the wire and the next key date is the March 12th vote on May’s Brexit deal.  If she loses that vote, we will see a vote on a no-deal Brexit on March 13thand if that is rejected, we will see a vote on the March 14th to extend Article 50.

US GDP

The fourth quarter release of US GDP could be a critical turning point for rate cut expectations.  The US economy was definitely softer at the end of the year and expectations are for the quarterly GDP to fall from 3.4% to 2.2%.  The current range of estimates are 1.4% to 3.0%.  Heading into the data, expectations have grown for the Fed’s next move to be a cut, with the interest rate implied probabilities seeing a 33% chance of a rate cut at the January meeting in 2020.  Treasury yields have been rising and the spread between 10-year and 2-year Treasury yields have widened to 18.6 basis points, easing concerns of seeing yield curve inverted.  Fears of the inversion peaked in December with the spread narrowing to 10.9 basis points.

OIL

The EIA reported that commercial crude imports to the US fell to a two-decade low.  The battle between OPEC and President Trump will likely intensify as oil regained its firm footing.  US production will continue to rise but in the short-term Saudi Arabia’s signal that production cuts from OPEC will continue for the rest of the year and could keep a bid with oil prices in the short-run.

Gold

The precious metal’s recent consolidation is supported by the indecision the financial markets have in pricing in what will be the Fed’s next move.  The data dependent Fed will clearly be patient in signalling their next move and gold may struggle climbing higher until we see further deterioration with US data that would seal the markets expectation for the next move to be a rate cut.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geo-political events and monetary policies in the US, Europe, the Middle East and North Africa. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC, Fox Business, and Bloomberg. He is often quoted in leading print and online publications such as the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University. Follow Ed on Twitter @edjmoya ‏

Ed Moya

Ed Moya

USD/MYR, USD/IDR and USD/PHP May Reverse. SGD Sits Within Support

ASEAN Technical Outlook – USD/PHP, USD/SGD, USD/IDR, USD/MYR

  • Malaysian Ringgit and Indonesian Rupiah face reversal candlestick patterns
  • USD/PHP kept falling but is overshadowed by fading downside momentum
  • The Singapore Dollar overturned a reversal pattern as it sits within support

We released our Q1 forecasts for currencies like the US Dollar in the DailyFX Trading Guides page

USD/MYR Technical Analysis – Bullish Reversal Pattern Brewing

The Malaysian Ringgit struggled to breach support against the US Dollar at 4.0650 as expected. Positive RSI divergence overshadowed USD/MYR’s attempt to resume the dominant downtrend. This showed fading downside momentum and it could precede a turn higher. Furthermore, a falling wedge candlestick pattern is brewing. This is typically a bullish reversal pattern. A turn higher would place near-term resistance at 4.0925. For updates on the ASEAN pairs that I am closely watching, you may follow me on Twitter @ddubrovskyFX for updates in the interim.

USD/MYR Daily Chart

USD/MYR, USD/IDR and USD/PHP May Reverse. SGD Sits Within Support

USD/IDR Technical Analysis – Inverse Head and Shoulders

Another bullish reversal pattern seems to be brewing in an ASEAN currency, the Indonesian Rupiah. USD/IDR’s downtrend is overshadowed by an inverse head and shoulders candlestick formation. Prices have just rebounded on the right shoulder, aiming towards the neckline which is sloping downward from January highs. Pushing above this would open the door to testing resistance at 14396. Meanwhile, clearing support exposes the head of the formation which is a range between 13848 – 13923. With that said, IDR weakness could be fundamentally countered by intervention from the Bank of Indonesia.

USD/IDR Daily Chart

USD/MYR, USD/IDR and USD/PHP May Reverse. SGD Sits Within Support

USD/PHP Technical Analysis – Fading Downside Momentum

USD/PHP cleared a support range between 51.93 and 52.00 pointed out last week, opening the door to resuming the dominant downtrend. However, positive RSI divergence is showing here too which ought to be a sign of caution for Philippine Peso bulls. The pair is sitting right on 51.78 which was a support area from February to April 2018. If it holds, the pair may climb to test the near-term falling resistance line from the middle of February 2019. Otherwise, descending exposes support at 51.62 next.

USD/PHP Daily Chart

USD/MYR, USD/IDR and USD/PHP May Reverse. SGD Sits Within Support

USD/SGD Technical Analysis – Bullish Reversal Pattern Fell Apart

Last week, I noted an inverse head and shoulder in USD/SGD. Since then, the Singapore Dollar gained against its US counterpart as it overturned the candlestick formation. It remains within a support range between 1.3443 and 1.3489. Clearing it would expose the rising trend line from January 2018. On the other hand, if USD/SGD turns higher, then it must contend with multiple descending resistance lines pointed out on the chart below.

USD/SGD Daily Chart

USD/MYR, USD/IDR and USD/PHP May Reverse. SGD Sits Within Support

**All Charts Created in TradingView

Read this week’s ASEAN fundamental outlook to learn about the underlying drivers for these currencies!

FX Trading Resources

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

S&P 500 Tips Breakdown as Trade Wars Lift and Market Prepares for US GDP

GDP Talking Points:

  • Simultaneous testimony by Lighthizer, Powell and Cohen covered trade wars, monetary policy and political instability themes
  • UK’s Parliament voted overwhelmingly for an amendment that significantly reduces the risk of a ‘no deal’ Brexit
  • Top event risk ahead is US 4Q GDP, the high profile growth report amid multiple GDP reports and a more generally appreciated theme

See how retail traders are positioning in the FX majors, indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

Trade Wars and Monetary Policy Concerns Ebb Further as the S&P 500 Threatens Reversal

Has the move to defuse one of the world’s most amorphous and volatile threats saved the markets from an imminent technical reversal? The S&P 500 and Dow Jones Industrial Average took a technical stumble Wednesday that could readily qualify as the first step into a reversal when both dropped through support for aggressive, rising wedge patterns. The pace and consistency behind these indices’ rise these past two months not only defies the very prominent uncertainty found in the fundamental backdrop, but it was a direct contrast to the far more restrained pace in other risk-guided asset classes (global equities, emerging markets, junk assets, carry trade, etc).

There is a considerable list that can be drawn upon to justify a reversal, but complacency has a way of rising at the most convenient of times. The tentative spark for the tempting reversal pattern offered no follow through and had fairly weak ‘breadth’ across other speculative benchmarks. The headlines this past session probably had a lot to do with muddling intent. During the US session, there were three simultaneous testimonies taking place. Former Trump Lawyer Michael Cohen’s answers were high drama, but political stability fears is not presently an active market concern. Fed Chairman Jerome Powell had his second day before Congress for his semi-annual update. His insights didn’t change much from day one, though he suggested a decision on the balance sheet could be coming soon.

US Trade Representative Lighthizer touched the more exposed nerve when he suggested the US-China negotiations were not complete, but that his department would soon officially take down the March 1st deadline for the tariff hike on the trade partners’ $200 billion in goods. The question now on traders’ minds – or it should be – is how much ‘relief’ rally is left in this theme? If there were an unambiguous deal struck with China and President Trump dropped all pretense of a possible auto tariff, we could perhaps squeeze further advance out of the market. Yet, we are unlikely to see anything that clear. Watch the US indices’ charts closely.

Chart of 12-Month Relative Change in Volatility Measures (Daily)

Chart of Volatility for Stocks, Currencies, Yields Emerging Markets and Oil

Brexit Risks Drop Sharply After Parliamentary Vote Curbs Threat of ‘No Deal’

Another advance that has earned clear technical progress and has its rooting in fundamentals was the charge from the Pound. The currency advanced across the board Wednesday, but the tempo was notably more restrained than what we had seen the day before. Nonetheless, the extension earned a loaded GBPUSD advance through 1.3300, an extension of the EURGBP’s larger bearish reversal and tentative technical clearance for crosses like GBPJPY and GBPCAD. For the market participant starved for volatility and moves with greater reliability for follow through, this is a very tempting picture. However, I personally defer to general market conditions when seeming ‘exceptions to the rule’ seem to pop up and tempt my speculative appetites.

The reason this bullish push looks more reliable is the headline fundamental support it draws as a natural ‘justification’ for those simply pining for more productive markets. The session in Parliament Wednesday was significantly downgraded in terms of importance when Prime Minister Theresa May announced she was moving the ‘meaningful vote’ on a possible Brexit proposal out to March 12th. With this push, UK politics would not find their definitive call on forcing next steps. However, the day was not completely spent for potential. In fact, the amendments that would be addressed in the Commons carried a particularly important update that would significantly reduce the spectrum of risks surrounding the UK’s divorce from the EU.

The Cooper amendment passed 502 to 20, essentially forcing what was suggested by the Government that in the event that the proposal was rejected on March 12th that May would in turn start the process to delay the March 29th Brexit date. There are still risks and unknowns factored into this situation, but it materially reduces the risk of an economically-painful ‘no deal’. Whether or not the Pound continues to advance in the interim though is a question of how much of a discount there is still built into the Sterling with this ‘confirmation’ of a softening on the UK’s position in the negotiations. Again, I would defer to general market conditions with skepticism of follow through and favor for evidence that a fade effort was finding traction.

Chart of GBPUSD

Chart of GBPUSD

Top Event Risk Ahead Goes to the US GDP Release, But There Is More on Tap

With themes like the trade wars and Brexit actively crowding out the headlines, it is easy to overlook one of the more mundane (but ultimately crucial) fundamental themes simultaneously unfolding: growth. That will likely change today however with the United States due to report its delayed 4Q GDP update. Economic activity has been covered extensively these past weeks and months whether through rest-of-world official readings, timely proxies like PMIs, troubling forecasts from officials (IMF, central banks, governments) and sentiment surveys. The view is not an encouraging one.

With the world’s largest economy reporting its official growth update, we will have a definitive sign post for the world’s economy. So, where this has implications for the relative appeal of the Dollar (via Fed potential) and US assets; it will also serve as the baseline for a very prominent divergence between tangible economic activity and indulgent speculative positioning. The US isn’t the only country updating on growth. Hong Kong – a proxy for China – reported its economy slowed from a 2.9 percent annual pace in the third quarter to 1.3 percent in the most recent reading.

Alongside the US figures, we are due Swiss, Indian, Brazilian and the French final report. Though less potent, traders have a few other currencies/regions to track for volatility. The Euro is heading for regional employment and inflation figures after in-line sentiment surveys. The Australian, Canadian and New Zealand Dollars are facing less extreme data but the technical positioning of the crosses and the concentrated potential of the updates could trigger range swings or even limited breakouts. We discuss all of this and more in today’s Trading Video.

Chart S&P 500 and Aggregate 10-Year Yield (US, UK, Germany, Japan) and Correlation (Daily)

Chart of S&P 500 and Global Yields with Correlation

If you want to download my Manic-Crisis calendar, you can find the updated file here.

Australian Dollar Wilts As China Manufacturing PMI Contracts Again

Australian Dollar, China Purchasing Managers Index, Talking Points:

  • A key gauge of China’s manufacturing health was weak for yet another month
  • AUD/USD reversed sharply in the aftermath
  • Hopes of a trade settlement between China and the US may have limited damage

First-quarter technical and fundamental forecasts from the DailyFX analysts are out now.

The Australian Dollar slipped sharply Thursday on the news that China’s manufacturing sector contracted for a third straight month in February.

The country’s official Purchasing Managers Index came in at 49.2, below both the 49.5 which had been both January’s print and the expected February result. This series has now been below the 50 mark which separates expansion from contraction since December.

The non-manufacturing PMI was in the green, however. It came in at 54.3, for a composite of 52.4, but the weakness in manufacturing weighed heavily nonetheless.

The Australian Dollar can act as the markets’ favorite liquid China proxy given Australia’s close export links to the world’s second largest economy. It seems to have done so Thursday, with the China data more than erasing gains made earlier when Australia’s fourth-quarter private capital expenditure data smashed forecasts by rising 2% when a 0.5% gain had been tipped.

China’s numbers may need a grain of salt. The Lunar New Year break may well have weakened activity. However, they come after a raft of similarly weak numbers from around the world, and notably out of Europe, and are likely to be seen as further evidence that the global economy is slowing.

Australian Dollar Vs US Dollar, 5-Minute Chart

This is likely to be especially bad news for the Australian currency which is typically quite sensitive to world growth prospects.

That said the Aussie remains in a broad range against its US big brother. The currency was hit earlier this month by the Reserve Bank of Australia’s admission that record-low domestic interest rates could yet fall further. Futures markets had been pricing in just such a possibility since late 2018, but the RBA had previously stuck to its view that the next move was likely to be a rise, albeit not any time soon.

The central bank also slashed the growth and inflation forecasts on which its policy rests. For all that AUD/USD remains above the downtrend which dominated last year’s trade. Growing optimism for a trade settlement between China and the US has helped; Australia probably has as much skin in that game as any third country. A deal is probably the biggest single near-term risk currently run by Australian Dollar bears.

Australian Dolalr Vs US Dollar, Daily Chart

Increased caution around the path of US intertest rates has weakened the USD side of the pair, while strong Australian employment numbers also helped Aussie bulls’ cause.

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

— Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

British Pound Rally Resumed. AUD/USD Eyes Capex, China PMI Data

Asia Pacific Market Open Talking Points

  • British Pound kept rising, EUR/GBP dominant downtrend resumed
  • Sentiment was fragile, beginning with geopolitical tensions in Asia
  • AUD/JPY remains within bullish reversal pattern ahead of key data

See our study on the history of trade wars to learn how it might influence financial markets!

The British Pound continued to receive the most attention as it achieved major technical breaks across its major counterparts. Brexit-related news continues kept upholding this trading dynamic, with markets becoming increasingly confident that the UK could avoid a ‘no-deal’ divorce before the March 29 deadline. Today, Parliament voted to accept Amendment F as EUR/GBP’s dominant downtrend resumed.

Yet, sentiment was fragile over the past 24 hours as European equities closed mostly lower and US ones just missed a neutral day. It began with geopolitical tensions in Asia after Pakistan downed two Indian jets, increasing tensions between two nuclear powers. Then, US Trade Representative Robert Lighthizer seemed to have poured cold water on recent progress in US-China trade negotiations.

The pro-risk Australian and New Zealand Dollars were some of the worst performing majors on Wednesday. Meanwhile, the anti-risk Japanese Yen was rather mixed as the S&P 500 attempted to trim its losses towards the end of the trading session. Crude oil prices received a major boost when weekly US stockpiles unexpectedly contracted by the most since July 2018.

Thursday’s Asia Pacific session is loaded with economic event risk. The Australian Dollar looks to private capital expenditure data as markets are becoming increasingly confident about an RBA rate cut by the end of this year. Afterwards, the Aussie could be vulnerable if Chinese Manufacturing PMI data continues to underpin the reality that the world’s second largest economy is slowing.

S&P 500 futures are pointing narrowly lower, suggesting that APAC equities could be at risk. A deterioration in risk trends would leave AUD vulnerable while potentially boding well for JPY. AUD/JPY remains within the realm of a bullish reversal formation after near-term resistance was reinforced at 79.84. Keep an eye on the rising trend line from the beginning of this year.

US Trading Session Economic Events

British Pound Rally Resumed. AUD/USD Eyes Capex, China PMI Data

Asia Pacific Trading Session Economic Events

British Pound Rally Resumed. AUD/USD Eyes Capex, China PMI Data

** All times listed in GMT. See the full economic calendar here

FX Trading Resources

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

GBPUSD: Currency Volatility Curbed by Possible Brexit Delay

GBPUSD Implied Volatility – Talking Points:

  • GBP implied volatility suggests forex traders are betting that most of the Brexit-induced price action will occur prior to March 14
  • 1-month implied volatility for the currency has dropped from 11.4 percent to 10.2 percent since Monday
  • Looking to the shorter term, there has been a modest uptick in implied volatility on the 2-week contract which is set to expire on March 13

There are officially 30 days until March 29 – the Brexit deadline for when the United Kingdom is scheduled to separate from the European Union. That’s exactly the number of days set on the standard 1-month (1M) options contract.

Consequently, one would presume that implied volatility – the implicit variable in the Black Scholes pricing model that represents hedging costs – on the 1M Sterling option contracts should begin to tick higher. According to GBPUSD option data pulled from Bloomberg, however, that is not the case.

GBPUSD IMPLIED VOLATILITY PRICE CHART: DAILY TIME FRAME (DECEMBER 03, 2018 TO FEBRUARY 27, 2019)

GBPUSD Currency Implied Volatility

In fact, 1M implied volatility for the currency pair has dropped from 11.4 percent to 10.2 percent since Monday. This is likely due to forex market participants repositioning to account for increased odds that the official March 29 Brexit date will get pushed back.

GBPUSD IMPLIED VOLATILITY AND TRADING RANGE TABLE

GBPUSD: Currency Volatility Curbed by Possible Brexit Delay

New to trading Forex? Check out the Free DailyFX Education Center for more information on Currency Forecasts and Trading Guides.

The likelihood that the UK departs from the EU on March 29 decreased after MP’s approved Amendment F earlier today 502-20. The amendment effectively states that British Parliament rejects no-deal Brexit and requires the House of Commons to put forward a motion to extend Article 50 on March 14 if the PM’s renegotiated deal is not approved by March 12.

FOREX MARKET IMPLIED VOLATILITY AND TRADING RANGES

Forex Market Implied Volatility Table

Looking to the shorter term, there has been a modest uptick in implied volatility on the 2-week (2W) contract which is set to expire on March 13. However, 3-week (3W) implied volatility has decreased and is now lower than 2W implied volatility.

The pattern is the same for 1-week (1W) implied volatility. This indicates that forex markets are betting that most GBP price action in response to Brexit developments will occur before March 14.

GBPUSD CURRENCY PRICE CHART: DAILY TIME FRAME (OCTOBER 02, 2018 TO FEBRUARY 27, 2019)

GBPUSD Currency Price Chart

As for technicals, the Pound has jumped to its highest level since July of last year in response to dwindling odds of a hard, no-deal Brexit. This has caused the RSI to skyrocket well into overbought territory with the GBPUSD breaking out to the upside above medium-term downtrend resistance and Fibonacci retracement levels.

In the short term, however, the currency pair’s recent ascent could stabilize and send prices back towards the 1.32-1.31 handles near support at the 0.382 Fibs as March 12 approaches.

Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

Dow Jones, S&P 500 Await US Q4 GDP and Trade War Clarity

Stock Market Talking Points:

  • US Q4 GDP data will include influence of partial US Government shutdown
  • The data will have a significant impact on equity sentiment as US Trade Representative Lighthizer dinged trade war optimism on Wednesday
  • Oft cited as an economic growth bellwether, Caterpillar will be a bellwether stock to watch in Thursday’s session

View our Economic Calendar for the release of US Q4 GDP tomorrow and other important data for the majors.

The Dow Jones and S&P 500 are in precarious states after Wednesday saw a slew of comments from US Trade Representative Lighthizer, Fed Chairman Powell and to a lesser – more political – extent, Gary Cohen pressure the indices.

S&P 500 Price Chart: 1 – Hour Time Frame (December 2018 – February 2019) (Chart 1)

S&P 500 price chart

Learn the differences between the S&P 500, Dow Jones and Nasdaq

In what proved to be the most market-moving comments, Mr. Lighthizer’s testimony to the Senate dealt a sobering blow to the trade war optimism that has been circulating since early last week. Thus, the indices forfeited gains they achieved last week and traded precariously lower in their respective wedges. As the session progressed the two equity markets were able to claw their way back to positive territory but an undeniable blow to sentiment was dealt.

A Brief History of Major Financial Bubbles, Crises and Flash-Crashes

Tomorrow will deliver a pivotal piece of information for the US equity market as US Q4 GDP is released. The data includes the impact of the partial US Government shutdown that totaled 35 days and sapped an estimated 0.13% from GDP per week. That said, Caterpillar will be an important stock to watch as it is oft cited as a global growth bellwether. Unsurprisingly, the heavy-machinery maker has lagged the broader Dow Jones as global growth concerns weigh but Thursday’s data could spark a return to parity.

Caterpillar Price Chart: Daily Time Frame (September 2016 – February 2019) (Chart 2)

dow jones price compared to s&p 500

Ratio of Dow Jones to S&P 500 in red overlaid on Caterpillar (CAT)

Similarly, a solid GDP print could improve the performance of the S&P 500 relative to the Dow Jones. Since October’s rout, the Dow Jones has outpaced the S&P 500. Traditionally, the opposite is true as the S&P 500 reflects more acute speculative interests – and therefore greater return – while the Dow provides exposure to growth-dependent, blue-chip companies. Follow @PeterHanksFX on Twitter for updates and analysis on the US equity space.

Sentiment data from IG also puts forth an interesting picture, highlighting the difference in sentiment between the two equity indices. While short interest in the S&P 500 has risen sharply amongst IG’s retail traders, the same cannot be said for the Dow Jones where a larger number of traders have entered long positions.

dow jones sentiment

See how IG clients are positioned on the Dow, Gold and the S&P 500 with our free IG Client Sentiment Data.

S&P 500 sentiment

Apart from hard data, trade wars will remain at the forefront of investor concern. With President Trump’s return from Hanoi, markets may gain further clarity on his proposed meeting with Chinese President Xi Jinping as the negotiations progress.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: New Zealand Dollar Trades Lower on Disappointing Trade Data

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.