BMO Equal Weight Banks Index ETF (ZEB.TO) & Gold Continuous Contract (GC.F) 

It’s the last day of November and what a month it has been for equity markets. Every major equity market around the world is up at least 3.0%, and about half are up more than 10%. In North America, the S&P 500 has climbed 10.6% from a month ago, the NASDAQ has gained 13.0% over the last month, and the S&P/TSX has climbed 6.9% over the last month.

Gains have slowed over the second half of the month. In the last week, the S&P/TSX is down 0.4% (mainly due to energy and banks struggling), while the S&P 500 and NASDAQ are up 0.1%-0.3%. Major indices in North America and overseas continue to encounter resistance near their summer highs and are still having a tough time breaking through.

In sector action, technology and insurance groups have been able to push through their summer highs. Pretty much everything else, including the interest rate sensitive groups which initially benefitted from the downturn in treasury yields, have stalled out short of their summer peaks.

Meanwhile a disconnect appears to be growing between market and central bank outlooks on the future of interest rates. Treasury yields have continued to decline, with the US 10-year treasury note yield recently falling below 4.4% for the first time since September, trending downward with easing consumer price inflation pressures shown in CPI reports from around the world.

On the other hand, central bankers, who tend to look at wider and less volatile inflation measures like core CPI, service and wage inflation, have maintained their neutral to hawkish rhetoric. Earlier this week, the Reserve Bank of New Zealand announced a “hawkish hold” keeping its benchmark interest rate level while leaving the door open to future interest rate increases, and indicating it is not expecting its first rate cut until 2025. Market action and economic news for the coming week may be framed around what it all means for the Fed decision and forecasts coming on December 13th. The sharp dropoff in treasury yields reflects a change in investor thinking to anticipating a more dovish Fed. Today, the Fed’s favorite Core PCE inflation report is coming out and US wage inflation is due on Friday the 8th, along with nonfarm payrolls.

This coming week the Bank of Canada and the Reserve Bank of Australia are holding meetings. While both central banks are expected to keep rates on hold, comments in their statements may give an indication of what central bankers are generally thinking about the world economy and monetary policy trends. Ahead of this, Canadian employment and wage inflation data is coming out tomorrow.

Canadian bank earnings season continues with the rest of the Big Six reporting today and tomorrow, followed by the regional Canadian banks next week. Bank of Nova Scotia started things off with a thud, missing expectations on earnings and increasing loan loss provisions both domestically and internationally.

The energy sector, both producers and service companies, has also been struggling lately. Both energy stocks and the oil price have the potential to be active in the coming week. OPEC+ is expected to announce 2024 production quotas today and whether those are increased or decreased could have a significant impact on trader sentiment.

In this edition of Equity Leaders Weekly, we look at the Canadian banking sector moving into its earnings week, and at what recent gains in the gold price may be telling us about investor sentiment.

It has been a challenging year for Canadian bank stocks, represented here by the BMO Equal Weight Banks Index ETF (ZEB.TO). The group started the year off strong then was sideswiped in March when a crisis at US regional banks soured investors on banks in general. Canadian banks stabilized in the spring and tried to mount a summer comeback but peaked at a lower high in August.

ZEB.TO turned decisively downward in September when the ETF staged a rare bearish Sextuple Bottom breakdown, and then took out its October 2022 low earlier this month. Recently, ZEB.TO has bounced back but the rebound has been moderate, gaining enough to retest its previous breakdown point and trigger a bullish Low Pole Warning signal, but not enough to complete a full pattern. The SMAX score for ZEB.TO remains bearish at 3, indicating that the sector continues to exhibit weakness relative to the asset classes.

As we already saw following Scotiabank’s results earlier this week, the group has the potential to move depending on the how the results and commentary fare relative to expectations. More disappointments could put pressure on the sector. A close below $30.45 would roll the chart back into a column of Os with next potential downside support at the October low near $29.00. Some positive results could shore up support for the sector with upside resistance possible near $33.00, near a downtrend line, then $35.00 based on a round number, previous column high, and pending horizontal count.

Just as stocks have gotten hot again in the last month, so has the price of Gold (GC.F). The yellow metal has rallied back above $2,000/oz in recent weeks and even climbed above $2,050 to trade at its highest level since 2020 and within striking distance of new all-time highs. Gold has completed bullish Double Top, Spread Double Top and Spread Triple Top breakouts and has a bullish SMAX score of 9, indicating strength against the asset classes.

Gold is commonly seen, however as a defensive haven raising questions about why it is rallying in tandem with equity markets. Below we consider which of the factors which traditionally drive trends in Gold may be active at the moment.

1) Decline of the US Dollar – Likely. As the world’s premiere hard currency, it’s nemesis has historically been the US Dollar, the world’s premiere paper currency. The US Dollar has gone into retreat over the last month, which may be helping to boost the price of Gold, and other currency/commodity markets priced in US Dollars.

2) Increased demand for alternative currency trading vehicles – Likely. In addition to Gold (up 3.1%), Silver (up 4.5%), platinum (up 4.9%), and Bitcoin (up 9.9%) are all up significantly in the last month.

3) Gold as an inflation hedge – Doubtful. One of the factors driving down treasury yields has been a significant easing in consumer price index inflation readings this month.

4) Gold as an indicator of fear in equity markets – doubtful since the VIX volatility/fear indicator is down 39.4% in the last month and equity markets have been surging.

5) Gold as an indicator about the health of the global financial system – Maybe. US bank stocks never really recovered from the March regional bank crisis and Canadian banks have been under pressure lately with earnings falling and loan loss provisions rising.

A close above $2,080 would confirm the start of a new advance. Horizontal counts suggest next potential resistance may emerge in the $2,120 to $2.140 range. Initial support appears near $1,975 based on a horizontal count.