All eyes are on Deutsche Bank and Turkey this morning.  It’s been a while since I calculated wipeout ratios [see: Banks’ Wipeout Ratios], but DB is in worse shape than any of the other banks I looked at last year, with the possible exception of Goldman Sachs.

Deutsche reported OTC (not total) derivatives in its 2015 annual report of €41.9 trillion, about $47.3 trillion in USD.  With Tier 1 capital of  €48.7 billion, this works out to a multiple of derivatives to Tier 1 capital of 861, or a wipeout ratio of approximately 0.11%.  In other words, a minuscule 0.11% decline in the value of DB’s OTC derivatives portfolio would wipe out all of its Tier 1 capital.

Like every other bank, they’ll tell you the exposure isn’t that great, that almost all of their positions are offset by other positions — what they call “netting.”  Of course, we learned from Lehman, AIG and Bear Stearns that netting out the exposure for balance sheet purposes isn’t the same as eliminating the exposure.

Turkey’s downgrade…what can you say?  Turkey’s a perfectly nice country with lovely people…and, an evil crackpot at the helm.  As we discussed in July [see: Turkey Sinks to New Lows], this was only a matter of time.

This latest action, however, will turn the markets on Erdogan.  With no one to bully, hold accountable or throw into jail until he gets his way, this will cost him dearly.  Unfortunately, it will be the citizens of Turkey who ultimately pay the price.

With the futures off 10 points and USDJPY and CL testing support again, one gets the impression that the rally is hanging by a thread.  That might be a slight exaggeration – but, only slight.

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On Aug 30, with USDJPY at 102.47, we put a target of 104.24 on it, noting that it represented the top of a well-established channel and a key Fib level.

USDJPY obliged by tagging our target three days later, then reversing as expected.  At the time, there seemed to be considerable downside potential.  A client who actively trades the USDJPY asked for downside targets, and I posted this chart on the 6th.

We were almost immediately rewarded with a drop to 101.19, “d” on the chart below.  The subsequent backtest came very close to tagging “c.”  Everything was going really well.

Then, all of a sudden, it didn’t.  Nothing was happening.  USDJPY headed in the general direction of target “e”, but reversed on the 12th at a point that created a new, rising channel.  For another week, USDJPY angled higher, buoyed by suggestions that the BoJ would increase its easing.

I didn’t’ believe the suggestions, as the BoJ has painted itself into a corner with respect to NIRP and currency devaluation.  As the latest policy meeting approached, I added some downside targets that equated those original targets “e” and “f.”

The announcement was as obtuse and delusory as anything Draghi might have dreamt up.  But, cutting through the BS, there would be no additional easing — only an attempt to steepen the yield curve.  As it loves to do, the BoJ forced USDJPY higher in a self-congratulatory spasm, breaking out of the extension of its original falling channel.

Holding short during that 30-minute, 1.77 spike would have required nerves of steel.  And, that was the point, right?  Stopping out those of us who saw the downside case as being obvious?

By the time the dust settled, those price levels were as accurate as could be — even if it took a little longer than expected.  Total move, from 102.47 up to 104.24 and down to 100.09: 5.92.  A very nice 3-week return.  And, though it took more than a little patience, it was worth every sleepless night.

With the ECB, BoJ and FOMC all having trotted out their brilliant plans for a recovery (what’s the hurry…it’s only been 9 years?) we’ll take a look at what to expect next.

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With our latest forecast well on its way to proving its worth, I’m going to take the day to catch up on some of the secondary charts that have been woefully neglected.  Today, the focus is on oil.  Will there or will there not be an agreement to cap production?

Reuters suggested overnight that it was practically in the bag as long as Iran played ball.  This morning, we’re hearing that Iran has no interest whatsoever until their production has reached pre-sanction levels — if then.

After tagging our downside target twice in the past several weeks, oil is making a bid to break out of its latest falling channel.  Since it’s integral to our equity forecast, I’d keep a close eye on it today.

Here’s a quick roundup of the other charts I’m watching.

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Critics are roundly denouncing the Fed’s latest failure to launch as gutless, feeble-minded insanity.  And, they’re right.  There will come a time when the folly of not doing more to stave off the inflation part of stagflation is obvious.

But, for now, the only data they’re dependent upon is the “market.”  And, all the major futures and currency pairs we watch are responding exactly as expected.  The weakness in equities over the past several weeks was all about holding the Fed’s feet to the fire.  With SPX perched on the precipice of critical support, a rate increase was most unlikely.

As I wrote several days ago in What to Expect:

By keeping stocks at or near support, they’ve made the Fed think.  And, if they’ve played their cards right, they’ll make the Fed flinch.  At a few points above last year’s highs, there is no room for a decline.  Any decline.  They sacrificed a few months of rising stock prices for a few more months of ZIRP.

Looking at targets this morning…    USDJPY didn’t waste any time in tagging our next downside target, leaving it in another make it or break out position.

Congrats to those of you who hung in there for the payoff.  To those who didn’t, repeat after me: “USDJPY is only a tool.  USDJPY is only a tool…”

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As we expected, the BoJ left QQE largely unchanged.  Rates are unchanged, except for a yield curve twist that could marginally steepen the curve.  The amount of money being thrown at stocks/bonds remains unchanged except that the TOPIX will be emphasized over the Nikkei 225 (at least until they own most of the TOPIX too.)

From our base case in yesterday’s post What to Expect:

The BoJ and FOMC both stand pat, with the BoJ possibly increasing equity purchases (but shifting to TOPIX from NKD) and the FOMC pounding the table on a December rate hike to help prop up the USD.  EURUSD will drop through its SMA200 and CL will rally strongly enough to keep stocks on the rise… USDJPY will sell off initially, reaching 100.50 or 100.08…

Things went pretty much as planned.  Oil and NKD spasmed higher.  The EURUSD plunged below its SMA200.  And, after the initial self-congratulatory spike, USDJPY nailed our next downside target — though it really took some patience (and, nerves!) to see it through.

Next, we’ll find out if the FOMC can be as accommodating (pun intended.)

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Less than 24 hours to go for the BoJ decision, and about 30 for the FOMC’s.  And, equities are ramping again in eager anticipation of a non-event.  QE, QQE, ZIRP, NIRP, ETF purchasing, VIX, CL, TNX and currency manipulation got us here.  Without them…well, the “market” would rather not think about that.

Kuroda and Yellen are stewing in that knowledge this morning — keenly aware that the whole house of cards could collapse if they do the “wrong” thing — whether or not the economic circumstances dictate.  VIX’s manufactured sleeper of a decline belies the fireworks just ahead.

So, we’ll take a look at the upside and the downside cases this morning — laying out specific targets representing good, bad and ugly scenarios.

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I chart DX every day and post an update more often than not.  But, with the FOMC and the BoJ both meeting this week, it seems like a good time to look at the big picture for the greenback.

Last May [see: Update on DX: May 6, 2016] we noted that DX was at a crossroads.  Its future depended on whether CL or USDJPY would step up and fuel stocks’ next leg up.

If you believe CL will break out again and deliver SPX to new highs, then DX breaking down here would make perfect sense. If, on the other hand, the BoJ has seen the folly of its ways and is about to breathe new life into the yen carry trade, then DX will surely break out.

As it turned out, USDJPY stepped up to the plate and rallied through the remainder of the month.  And, after a few days of waffling, CL rallied through June 8.  So, DX broke out, but only rallied through the end of May when USDJPY topped out..  At that point, it bumped up against the top of the falling white channel and spent the next several weeks backtesting the gray channel from which it had broken out.

As the chart above shows, DX took the 2nd backtest on June 23 and used it to form the bottom of a rising channel (white) that has since guided prices higher.

The following day saw DX rally 3.95% after the Brexit results came in, lifting it up and out of the falling white channel as well.  By the time it got done rallying, that rising white channel was looking pretty solid.  But, is it?  Can it maintain its momentum if the FOMC doesn’t raise rates?

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With both the Fed and the BoJ meeting Tuesday and Wednesday, huge currency moves are almost certain.  With them, the potential for huge equity moves is quite elevated.

It has been 10 days since I released an alert [see: Psyops and the FOMC] that stocks were at a critical support level.  The S&P 500 has tested that support three times since then, while central bankers have repeatedly shoe-horned the dollar higher and VIX lower.

Were they forcing DX higher in anticipation of a disappointing FOMC decision?  The next several days will be a crap shoot, with lots of opinions but little certainty about what to expect.

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We’re entering the crap shoot phase of the “market” now, with bets being placed on next week’s central bank actions driving most of the action.  The big development this morning is the EURUSD, which was finally allowed to break down.  It should have occurred last week after the ECB stood pat on additional easing.

But, of course, central banks have an aversion to prices tumbling as they’re pontificating.  Kinda makes them look bad.  Draghi is no exception – hence the after effect fireworks.  And, to be more precise, you’d have to say the propping up really dates back to late June, when EURUSD inexplicably rallied after its Brexit tumble.

The big beneficiary, of course, is the USD, which moments ago broke through its SMA50.  But, futures are still negative, for obvious reasons.  This morning’s inflation figures suggest a rate hike is needed.  In this case, what’s good for the USD isn’t going to help stocks.  At all. (more…)

CL finally reached our downside target range yesterday [see: Oil Makes Its Move.]  The drop had been postponed for over two weeks, but is just as meaningful.  How it responds from here will drive equity prices through at least next week’s FOMC meeting.

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