2017

STATE of the
GLOBAL MARKETS
The State of the Global Markets – 2017 Edition

TABLE OF CONTENTS

WELCOME . . . . . . . . . . . . . . . . . . . 3

UNITED STATES EUROPE

OVERVIEW . . . . . . . . . . . . . . . . . . .4 OVERVIEW . . . . . . . . . . . . . . . . . . 17

HIGHLIGHTS OF 2016 . . . . . . . . . . . .4 ECONOMY & DEFLATION . . . . . . . . . 17

THE STOCK MARKET . . . . . . . . . . . . .5 CURRENCIES . . . . . . . . . . . . . . . . . 19

THE BOND MARKET . . . . . . . . . . . . .7 THE CREDIT MARKETS . . . . . . . . . . 20

GOLD AND SILVER . . . . . . . . . . . . . .8

U.S. DOLLAR . . . . . . . . . . . . . . . . . .9

ASIA-PACIFIC
OVERVIEW . . . . . . . . . . . . . . . . . . 10

SPECIAL SECTION
GLOBALIZATION’S NEW CHAMPION:
EMERGING ASIA . . . . . . . . . . . . . . . . 12

AUSTRALIA . . . . . . . . . . . . . . . . . . 14

JAPAN . . . . . . . . . . . . . . . . . . . . . 15

ARABIAN MARKETS . . . . . . . . . . . . 16

2
The State of the Global Markets – 2017 Edition

WELCOME

Dear Reader,

Thank you for downloading Elliott Wave International’s annual report, The State of the Global Markets — 2017 Edition.

We put together this report to get you up to speed with EWI’s big-picture outlook for 2017 and give you a sneak peek
inside our regional monthly publications, The Elliott Wave Financial Forecast, The European Financial Forecast and
The Asian-Pacific Financial Forecast.

As you read, you may notice that some of the essays here are from earlier in 2016 and they are still relevant today. You
may also notice our analysis doesn’t mention news of geopolitical importance. That’s because we take the radical view
that external events are in fact driven by the same hidden engine that also drives the market’s internal price patterns.
Therefore, such events do not significantly impact share prices as most people believe; they are rather parallel results
of a shared cause: changing social mood.

Social mood is the common thread connecting everything we do at EWI. We observe that investors’ moods and their
resulting decisions to buy and sell are regulated by waves of optimism and pessimism that fluctuate according to the
Wave Principle.

Once you identify the current stage of social mood and put it into the context with the Wave Principle of human and
social behavior, you can begin to formulate forecasts not only for financial markets; but also for the economy, political
voting preferences, war and peace, and even social trends in music, filmmaking, fashion and beyond.

Our sincere hope is that this report challenges your thinking about investing and encourages you to dig deeper into
the Wave Principle in 2017.

Thank you for reading,

The EWI Team

3
 2017 Edition

United States
OVERVIEW
From the January 2017 Elliott Wave Financial Forecast (published Dec. 30)

The Dow Jones Industrial Average is in an Intermediate-degree rally from the 15,503 low on February 11, 2016. A
short term setback is approaching, but the structure of the advance from February does not label complete, so the
index should carry to new highs after a correction is complete. Sentiment extremes deepened in recent weeks in U.S.
bonds, gold, silver and the U.S. Dollar Index. Each of these assets is reversing their respective trends near term. U.S.
Treasury bond prices could bounce several points before the bear trend resumes. The rally potential in gold and silver
will be part of a bear market advance that started in December 2015, but both metals may carry past their July highs
before the bear market resumes. A short term decline in the U.S. Dollar Index has the potential to morph into a more
pronounced selloff.

HIGHLIGHTS OF 2016
From the January 2017 Elliott Wave Financial Forecast
(published Dec. 30)

In 2016, the Wave Principle helped The Elliott Wave
Financial Forecast anticipate several key trend reversals.
In January, EWFF placed the U.S. Dollar Index in a
fifth-wave advance and called for a rally above 100.510.
After an intervening pullback to a low in May, the dollar
fulfilled the forecast in November, when it pushed to a
new 13½-year high. The January EWFF also showed a
simple schematic of an idealized Elliott wave in gold that
included an arrow showing “You Are Here.” The forecast
indicated a gold rally in a Primary wave B. Prices carried
30% higher until July 6, when gold reached $1375.53.
Through the balance of the year, gold and its higher-beta
companion metal silver have retraced a good portion of
the January-to-July rise, and now they appear set to rally
in early 2017. On June 30, EWFF anticipated a historic
trend change in the U.S. bond market with this comment:
“The wave labels shown on our chart indicate that a fifth
wave is terminating: a trend reversal is nigh.” Three
trading days later, on July 6, the 10-year U.S. Treasury
note bottomed at a yield of 1.318%. By December 15, the
yield had doubled to 2.649%. Likewise, the 30-year U.S.
T-bond yield rose strongly, up 54% from 2.088% on July
11 to 3.21% on December 12.

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The State of the Global Markets – 2017 Edition United States

THE STOCK MARKET

The trend in the Dow Jones Industrial Average proved
more elusive during the initial months of 2016, but by
May, EWFF identified the 18,167 high on April 20 as
Minor wave 1 of Intermediate wave (5), implying a
continued advance to new all-time highs in Minor waves
3, 4 and 5. The Dow reached a new high on July 12 and
continued to higher highs through December. The wave
structure of the rally does not appear complete.

Passive Investing Conquers the World

Here’s a passage from Robert Prechter’s brand new book,
The Socionomic Theory of Finance:

Central banks and governments are subject to waves

of social mood and prone to herding. No amount of
central planning or policy actions can neuter this fact
or change it. On the contrary, such machinations tend to
play right into the imperative of the waves. We say the
waves of social mood do what they do, and behaviors
of authorities informed by various schools of economic
thought fit right into them.

We discussed various late-cycle, government machinations
on behalf of the bull market in five of the last seven issues
of The Elliott Wave Financial Forecast. These range from
the recent effort to repeal the Dodd-Frank Wall Street
Reform Act to historic global government initiatives such
as quantitative easing, negative interest rates and whatever
other financial price-pumping schemes central bankers
can dream up. It makes perfect sense socionomically:
Impelled by the final upward thrusts of a 200-year
positive trend in social mood, central bankers and other
government authorities are engaged in activities that they
think will keep financial asset prices rising even as the
DJIA continues to notch new all-time highs. Their actions
will appear to work only as long as social mood lets them.
When the trend turns down, their actions will be outed as
impotent, just as they were in 2007-8.
The current “stampede” into passive stock funds is another
area where the imperative of the waves is playing out in
a climactic final flourish. In October, The Wall Street
Journal announced “Passive Investing’s Triumph” with
a series of articles exploring its rapid growth that is now
“pushing aside stock pickers and changing the investment
world.” One headline touted “The Rise of the ‘Do Nothing’
Investor,” while another asked, “Are Fund Managers
Doomed?” The bottom graph on the chart above shows
index funds’ share of the mutual fund universe. Its near
exponential rise — effectively from 0% in 1985 to 37%
in 2016 — bears out the Journal’s contention. Historically
speaking, investors’ willingness to simply buy the broad
stock market is a relatively recent development. Index
investing didn’t even register a 1% mutual fund market
share until 1986, which was relatively late in the Grand
Supercycle bull market, the end of Primary wave 3 of
Cycle wave V of Supercycle (V).
The chart also shows that the economic theory underlying
index investing was formulated earlier, at the end of Cycle
wave III, a 24-year bull market. The Capital Asset Pricing
Model (CAPM) led directly to indexation; it purports to
calculate the increase in value an investor should expect
based on the inherent risk level of an asset. Through
the end of Cycle wave III in February 1966 and the
revisitations of Dow 1000 in December 1968 and January
1973, five different versions of the Capital Asset Pricing
Model were proposed. Some built on preceding versions,
but the idea was clearly in the air as other forms of the
theory emerged completely independently. The most
famous came from William Sharpe, whose “reliance on
efficient markets led him to be called the godfather of
index funds.” In The Myth of the Rational Market, Justin
Fox stated that in 1969 (a few months after the speculative
peak of Cycle wave III of Supercycle wave (V)), CAPM
and the efficient market theory were “joined at the hip” by
Eugene Fama. In 1973, shortly after the Dow completed
a third test of the 1000 level, the academic breakthroughs
yielded a market breakthrough: the first index fund.

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The State of the Global Markets – 2017 Edition United States
Still, in the 1960s and early 1970s, the “assumption that
a simple index would dominate a professionally managed
portfolio was considered heretical.” According to John
Bogle, founder of Vanguard’s pioneering S&P 500 index
fund, investors did not exactly embrace the concept of an
index fund in 1975 (at the start of Cycle wave V). With
some difficulty, Vanguard managed to unveil the first retail
index fund on August 31, 1976, near the top of Primary
wave 1 of Cycle wave V. Bogle says initial subscriptions
totaled just $11.5 million, “a far cry from our objective of
$150 million.” Over the course of wave V, however, the
industry grew as the credibility of the theory that supported
it became widely accepted. The bestowal of Nobel Prizes
shows the theory’s assent; Sharpe received his in 1990, the
year of another key market top within in Cycle wave V,
while Fama won his in 2013. In a 70-word description of
Fama’s accomplishments, the Nobel committee stated that
“his results influenced the development of index funds.”
Today, Vanguard manages more than $3 trillion, primarily
in S&P 500 index funds and ETFs. The company’s Total
Stock Market Index Fund led all mutual funds with
inflows of $38.1 billion in 2016 (through November 30).
The second-through-fifth biggest inflows also belonged
to Vanguard. For passive and exchange-traded funds as a
whole this year, $428.6 billion flowed in while $286 billion
flowed out of actively managed funds. As the chart shows,
it was a record year in opposite directions for both groups.
Heresy has become gospel.
Notice that most of the rise in index funds’ market share
has come since the mid-1990s. This rise also fits the
wave structure, as The Elliott Wave Theorist observed
in 1997 that the final advance of the Grand Supercycle
bull market would not be an ordinary bull market. It is
a mania, and “a very human aspect of manias is that no
prudent professional is perceived to add value to a client’s
investment experience. Indeed, the professional with a
knowledge of history and value is eventually judged an
impediment to success. In a mania, no one can add value.”
In many ways the strength of the old bull market is fading,
but the historically unprecedented demand for index
funds shows that some mania traits remain in place. The
popular appeal of index funds will likely grow as stocks
trace out the final waves of Primary wave 5. Look for the
“Do Nothing” mindset to intensify even after the market
tops out, as the portfolio theories behind indexation call
for investors to buy more when stocks fall. Ultimately,
however, the bear market will debunk the ideas of market
efficiency and diversification to which indexing panders.
According to the prevailing financial theory, financial
actors are fully rational, unbiased maximizers, which
makes risk-taking knowable and quantifiable. Cracks
Follow this link for the most up-to-date analysis of U.S. markets: http://www.elliottwave.com/wave/MIFF
in the idea of efficient markets guided by perfectly or
close-to-perfectly rational investors started to appear in
1987, after the crash, then in 2009, after the DJIA had
declined 54%. The next phase of decline will shred the
belief in market efficiency. As the Theorist also noted
in back in 1997, “Post-mania declines are typically as
persistent as the mania was on the way up.” Books like
Fox’s Myth, which came out in 2009, and advances in
behavioral finance only skim the surface. As Prechter has
noted, “The only effective challenge to a theory is a better
theory.” For a full discussion of the flaws in the efficient
market hypothesis, see pages 274-275 of STF.
Here’s another relevant excerpt, from page 260:
The efficient market hypothesis and the socionomic
theory of finance are principled, extreme theories of
aggregate financial pricing. The former proposes purely
conscious, rational, reactive pricing, whereas the latter
proposes purely unconscious, impulsive, proactive
pricing. EMH is on one end of the rational/non-rational
spectrum, and STF is on the other. Chapter 19 explores
hypotheses that attempt to take a middle ground.
One critically important achievement of The Socionomic
Theory of Finance is its timing. As the chart on page 3
shows, EMH depended upon the upward thrust of waves
for its full articulation, as well as its popular acceptance
in the form of indexation. Due to a full knowledge of the
waves of social mood, STF manages to provide the most
comprehensive articulation of socionomic theory, even
though the waves are still tilting fully against the theory’s
broad acceptance. While its inherent contrarianism will
tend to limit its appeal, the bear market will be kinder
to the idea of “purely unconscious, impulsive, proactive
pricing.” As STF gains wider acceptance in a period of
negatively trending social mood, passive investing will fall
out of favor and eventually be regarded with contempt.
6

The State of the Global Markets – 2017 Edition United States

THE BOND MARKET

From the December 2016 Elliott Wave Financial
Forecast (published Dec. 2)

The strong decline in U.S. Treasury bond prices

since the July peak accelerated in November, as
yields on Treasury notes and bonds surged. The
week of November 11, the weekly percentage
change of the yield on the U.S. 10-year Treasury
note shot to 21%, the strongest move in 50 years.
Since EWT/EWFF’s forecast for a bond market
peak on June 30/July 1, the price decline has
been nearly unrelenting, with T-bonds down
over 27 points (15%) since the July 11 peak. The
Bloomberg Barclays Global Bond Index lost 4%
in November alone, the largest monthly decline in
26 years, since the index’s inception in 1990. The
steep sell-off is consistent with market behavior
following the completion of an ending diagonal
pattern (see text, p.36), as a rising diagonal “is
usually followed by a sharp decline retracing at
least back to the level where it began and typically
much further.” In this case, the diagonal pattern’s
start was at 111-121 in June 2009. The bottom
graph of the chart at right shows that investor
sentiment has gone from peak optimism near the
top to deep pessimism now. The 30-day bond DSI
(trade-futures.com) is at its lowest level since
September 2013, when a month-and-a-half long
countertrend bounce started. The bear market in
bonds should be historic. If pessimism is high
enough to coincide with a short term bounce
in prices, we will alert you when the bounce is
complete and the next wave down is set to begin.

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The State of the Global Markets – 2017 Edition United States

GOLD AND SILVER

From the December 2016 Elliott Wave Financial Forecast
(published Dec. 2)

Within hours of the Primary wave A low in

gold at $1046.20 on December 3, 2015, EWFF
published a chart with the title “Sharp Rally
Ahead.” Since it would be a Primary-degree
advance, EWFF stated that it should be the
biggest increase since the September 2011
peak. In July, gold rose to $1375.53, a 31%
gain, and EWFF stated, “Primary wave B has
now satisfied its minimum expectations.” Since
then, gold’s price has declined to near $1160,
a 15% decline.

Similar to equities, the market action in gold has

coincided with an important shift in sentiment,
but in the opposite direction. “Investors are
abandoning the ship,” says one analyst. This
includes two billionaire hedge fund managers
who said they were bailing out of their gold
positions with separate, high-profile statements.
Retail investors are doing the same, as they
“pulled $576 million from SPDR Gold Shares
in November, more than double the outflows
last month and the largest dollar amount since
August.” Last week, the Daily Sentiment Index
(trade-futures.com) recorded back-to-back days
of less than 10% gold bulls, and the ten-day
average dropped to 9.1% for only the third
time in the nearly 30-year history of the data.
As the chart shows, the other two times were at or just in the $1434-$1500 range. If an impending rally falters at
preceding near-term lows. With respect to this sentiment lower levels, we will discuss the implications in upcoming
measure, traders are now more bearish than they were issues.
at the December 2015 low, when gold was $115 lower.
We recognize a sentiment extreme and its implications, Silver sentiment is nearly as bearish as gold’s, as last
and this one says that gold should rally near term. Last week’s silver DSI declined to just 6%. The dearth of
month, EWFF showed a simple schematic of an Elliott bulls coincided with an intraday low at $16.15 basis spot
wave and pointed out where gold prices were within the on November 23. Over the past week, gold continued its
development of the wave . While it’s possible that Primary decline, but silver has so far remained above its November
wave C down has started, the degree of pessimism toward low. An intermarket divergence often occurs between the
the yellow metal suggests otherwise. Wave B will likely two precious metals at trend reversal points. The deep
get another phase of advance before it is complete. As sentiment extreme in both metals indicates an impending
discussed in prior issues, gold would meet several targets rally. Silver’s advance should mimic gold’s, more or less.

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The State of the Global Markets – 2017 Edition United States

U.S. DOLLAR
From the January 2017 Elliott Wave Financial Forecast
(published Dec. 30)

On December 20, the U.S. Dollar Index hit its

highest level in 14 years. The push to 103.650
carries the dollar to a level that was last traded
on December 23, 2002. Measures of investor
optimism have risen accordingly. The 5-day
Daily Sentiment Index (trade-futures.com) hit
90.4% on December 21, its most extreme level
since the Intermediate wave (3) top in March
2015. Also, as shown on the chart, the December
3 cover of The Economist features a bulked-up
image of George Washington alongside the
title, “The Mighty Dollar.” Our late friend Paul
Macrae Montgomery posited the Magazine
Cover Indicator, which holds that financial
assets grace the cover of weekly magazines
usually when the trend is near exhaustion and
reversal. According to Montgomery’s insight, a
trend reversal in the associated market tends to
occur one to three months after its appearance on
a cover. The presence of both of these sentiment
extremes is compatible with a fifth wave, which
the dollar is currently tracing out, as shown by
the wave labels on our chart. The bull market
that EWI forecast eight years ago is in its late
stages. The emergence of sentiment extremes
confirms our conclusion. Dollar bulls take note.

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Asia-Pacific
OVERVIEW
From the January 2017 Asian-Pacific Financial Forecast,
(published Dec. 30)
Risk rises on EM-DM divergence
When markets rise in unison, it usually signals a strong
uptrend. In contrast, when markets diverge from one
another, it often signals a larger correction. Divergent
markets in the Asian-Pacific region present such a risk
now.
The MSCI Emerging Markets Index — of which Asian
companies make up more than 60% — continues to test
the neckline of the head-and-shoulders bottoming pattern
we have been watching for the past half-year. (See the
weekly chart.) The test of the line in early November
coincided with the fifth-largest weekly outflow in the
iShares ETF that tracks the index, which launched in
Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF
2017 Edition
2003. The four larger outflows, which all occurred during
the corrective period from 2011-2014, either marked the
week of a low or, at most, preceded a final correction
low by several weeks.
We believe that pattern is repeating now, but, if the
index were to fall significantly below the neckline (for
example, by registering two consecutive weekly closes
below it), it would challenge our bullish forecast for
emerging Asia. Such price behavior would also raise the
possibility that wave C of IV down in the index may
continue, perhaps to the index’s long-term channel line
(see quarterly chart).
10

The State of the Global Markets – 2017 Edition Asia-Pacific

Recent weak price action in several key individual
emerging markets means that the risk of a deeper decline
is high at the current juncture. For example:
•• China’s smaller-cap ChiNext Index and the
Shenzhen Composite Index have continued to
fall below uptrend support.
•• Taiwanese and South Korean stocks have rallied
weakly out of the contracting triangle patterns
they completed in mid-2016 — hardly the kind
of swift advances that Elliotticians expect of
thrust patterns.
•• Hong Kong and Singapore stocks have also yet
to show the kind of bullish price action we would
expect, following their wave IV contracting
triangles.
Meanwhile, the surging rallies in developed markets in
December triggered extremes in breadth in Japan and
volatility in Australia that have tended to coincide with
tops in the past. Although we see no reason to change our
long-term bullish forecasts for these developed markets,
even relatively small corrections in Japan and Australia
could coincide with larger sell-offs in the region’s less-
developed markets.

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF 11

The State of the Global Markets – 2017 Edition Asia-Pacific

SPECIAL SECTION
GLOBALIZATION’S NEW CHAMPION: EMERGING ASIA
From the December 2016 Asian-Pacific Financial Forecast
(published Dec. 2)

In the wake of Donald Trump’s victory in the U.S. presidential elections, China has wasted little time trying to pick up
the free trade mantle soon to be left by U.S. president Barack Obama. As Obama prepared to meet other leaders at the
2016 Asia-Pacific Economic Summit in Peru for the last time, the Financial Times observed on November 17: “Trump
win gives China keys to Asian economic integration.” China’s eagerness to take the lead on free trade is a perfect
manifestation of the long-term wave patterns in emerging
Asian markets.

Two economic trade blocs proposed by China have taken

center stage now that Trump has promised to kill Obama’s
proposed Trans-Pacific Partnership (TPP) and its U.S.-E.U.
peer, the Transatlantic Trade and Investment Partnership
(TTIP).

The top chart at right, from a Finland-based international

media group called GBTIMES, shows how the two blocs
[the Free Trade Area of the Asia-Pacific (FTAAP) and the
Regional Comprehensive Economic Partnership (RCEP)]
compare to the TPP in terms of membership. FTAAP is
mainly at the conceptual stage, but RCEP is actively being
negotiated, with members of the Association of Southeast
Asian Nations showing particular interest. Both plans are
less ambitious than TPP, because they have lower standards
for environmental, labor, and food safety. But, for now,
they are the only games in town for nations looking to
increase trade by lowering tariffs. “You can’t beat something From GBTIMES, November 24, 2016
with nothing, and the Chinese are offering
something,” said the head of a Washington-
based economic research firm interviewed
for the FT article.

The bottom chart at right, from The Economist,

sheds some light on why emerging Asian
nations in particular are still interested in
opening their markets: Compared to more
developed nations, they are growing faster
and immigrants make up a smaller percentage
of their populations.

The stock charts on this page show the big

picture from the perspective of the Wave
Principle: Emerging Asia’s multi-decade
bull markets still have a long way to go,
even though they have struggled through
corrections in recent years. And bull markets
are inclusionary, which means that emerging
From The Economist, November 19, 2016

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The State of the Global Markets – 2017 Edition Asia-Pacific

Asia at present is naturally more open to economic

liberalization.

The CEO of Baidu—which is sometimes called the

Chinese Google—probably spoke for many of his
peers when he said this to an audience at China’s
World Internet Conference on November 17: “I read
that an advisor to President-elect Donald Trump
complained that three-quarters of engineers in Silicon
Valley aren’t Americans. So I myself hope that many
of these engineers will come to China to work for us.”
(Bloomberg) Whether or not that percentage is correct,
Trump has promised to “end forever” the use of cheaper
labor through the H-1B program that grants U.S. visas
to foreign tech workers.

Many years from now, when Asia’s emerging markets

enter into long-term bear markets and their growth
slows, they too may turn inward as the developed
world has in recent years. For now, though, their
willingness to consider opening their markets to
foreign trade and labor stands in contrast to the
increasing demands for protectionism in many
developed markets.

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF 13

The State of the Global Markets – 2017 Edition Asia-Pacific

AUSTRALIA

Resources rally with emerging markets

From the December 2016 Asian-Pacific Financial Forecast,
(published Dec. 2)

The resource sector continues to rebound in line with

our forecast this year. Our January 2016 issue alerted
subscribers to the bullish potential for commodities, citing
a scenario outlined by EWI’s chief commodities analyst,
Jeffrey Kennedy. According to that scenario, commodities
would likely bottom in January or February 2016 and then
rally for between one and three years.

Our October 2016 issue then pointed out that the value
of trade in commodities would likely continue to rise
with the MSCI Emerging Markets Index for a while. The
prices of industrial commodities such as copper, iron ore
and coal, in particular, have surged in recent months,
which supports our forecast. We believe commodities
in general should continue to rally along with wave D
up in the MSCI Emerging Markets Index. For detailed
analysis of commodities, check out Jeff’s Commodity
Junctures services.

Anecdotal statements about the recent price surges

suggest that industry is still in denial of the uptrend,
which is typical in the early stages of bull markets. The
CEO of Minerals Council of Australia told Bloomberg on
November 28 that “anyone who says they are not surprised
by this is kidding themselves. We shouldn’t assume that
these high prices will persist and I know the industry is not
going to take its eye off the productivity focus in getting
costs down.” An analyst at one of Australia’s big four
banks added: “Producers have been focused on cutting
costs and improving efficiencies within the system over
the past few years. There hasn’t been any significant new
investment going into capacity.”

It’s business as usual for the resources industry: Just

as they overinvested on the way down, they are now
underinvested on the way up.

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF 14

The State of the Global Markets – 2017 Edition Asia-Pacific
JAPAN
From the January 2017 Asian-Pacific Financial Forecast,
(published Dec. 30)
The evidence that Japanese stocks have begun a much
larger advance continues to roll in. Even though the Nikkei
and TOPIX continued to rally strongly in December,
sentiment considerations remained little changed from
last month. Consider these factors:
•• Noncommercial traders—the so-called dumb
money—have actually gone net short for the past
five weeks, according to Bloomberg’s CFTC CME
records. The last time they went net short was
October 2012, as the Nikkei was just beginning its
2013 rally.
•• Short-sellers on the Tokyo Stock Exchange have
lost little of their extreme bearish conviction,
accounting for on average 35% of all daily value
traded throughout December, compared with 37%
at the end of November.
•• Bearish analysts are digging in their heels: Forecasts
for the broad-market TOPIX index at year-end were
actually lower than they were at the beginning of
November—and even lower than at the index’s 2016
lows—­according to Bloomberg data.
Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF
The monthly chart shows a more speculative piece of
evidence based on the Toraku 25 Index, which is an
indicator of breadth, or the number of stocks participating
in a trend. During the secular bear market from the early
1990s to 2012, extremes above 135 in the indicator
consistently appeared ahead of major peaks. The two
signals that have occurred during the bull market since
2012, though, occurred in the early stages of larger
advances. Our wave count indicates that the December
2016 signal has probably also signaled a kickoff to a larger
advance. But the second confirmed bullish signal shows
that the advance may not necessarily provide a smooth
ride in the near term: In the four months after June 2014,
the Nikkei experienced significant volatility over the next
four months before beginning a steady uptrend.
Overall, the price action and sentiment picture supports
our view that Japanese stocks have begun a significant
intermediate-term rally, even if they may experience
turbulence in the near term.
15

The State of the Global Markets – 2017 Edition Asia-Pacific

ARABIAN MARKETS
From the January 2017 Asian-Pacific Financial
Forecast, (published Dec. 30)

After several months of sideways consolidation,

Arabia’s stock markets appear to be ready to
move higher in a third wave in line with other
emerging markets. The 40-week cycle turn
that we identified one year ago seems to have
marked the end of the wave (2) correction in
Abu Dhabi and Dubai.

Sentiment appears to be ripe for a strong rally.

On December 26, 2016, Abu Dhabi’s stock
exchange announced that it is planning to
allow short-selling by early 2017. “This tool
will be welcomed by institutional investors,”
a fund manager told Bloomberg on December
27. Those who actually use the tool may later
regret their decision, though, if stocks rally in
a third wave as we expect them to.

Follow this link for the most up-to-date analysis of Asian-Pacific markets: http://www.elliottwave.com/wave/MIAFF 16
 2016 Edition

Europe
OVERVIEW
From the January 2017 European Financial Forecast,
(published Dec. 30)

The DAX has recovered about 75% of its decline from April 2015 to February 2016 — a deep retracement but still well
within the norms for a second wave. The CAC 40’s 70% retracement has also been deep; however, the Euro Stoxx 50
has recovered just 50% of its equivalent sell-off. Stocks could make a final push to new highs, but it’s not guaranteed.
Regardless of the stocks’ next near-term move, the overall market remains chronically overvalued and confidence in
the economy has reached levels commensurate with a high-degree market top. As we’ve long said, the bear market is a
Continent-wide story, one that will ultimately ensnare Europe’s biggest markets and seemingly most stable economies.

ECONOMY & DEFLATION

From the November 2016 European Financial Forecast,
(published Nov. 4)

Europe fought its last major battle with

deflation in the 1920s and ’30s, so most people
have no direct experience with this rare and
dangerous economic phenomenon. Inflation,
by contrast, generates disproportionate levels
of fear, because it’s a much more recent
economic bugaboo. These dire headlines,
which we pulled over a short two-week
window last month, vividly illustrate the
point:

You may be wondering what kind of earth-

shattering news sparked the late-breaking
inflation panic. It was nothing more than a
routine report from the UK Office of National
Statistics, which reported in October that
consumer prices rose 1% year-over-year
(up from 0.6% the previous month). Yes,
the percentage is down from 5% just a few
short years ago. Yes, inflation is running at
half the Bank of England’s 2% target. And,
yes, critically low levels of inflation persist,
despite the Bank of England’s cheapest

Follow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFF 17

The State of the Global Markets – 2016 Edition Europe

interest rates in history and nearly half-a-

trillion pounds’ worth of quantitative easing.
None of these crucial details matter, because
the public remains wholly preoccupied with
inflation. In fact, the consensus view among
UK consumers and bond investors matches
the panic shown by the press. Notice that
consumer inflation expectations (top graph)
recently pushed to their highest level since
2011, while 5-year breakeven rates — the
difference in yield between standard gilts and
inflation-linked gilts — just hit a two-year
high.

In other words, credit investors show a

powerful impulse to protect their investments
from an inflationary pick-up. Their lopsided
attention to inflation in the face of contrary
evidence is a powerful contrary signal, one
that says the scariest chapters of todays’
deflationary collapse have yet to be written.

Follow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFF 18

The State of the Global Markets – 2016 Edition Europe

CURRENCIES
From the December 2016 European Financial Forecast,
(published Dec. 2)

The latest euro sell-off has decisively shifted the forex

conversation from if to when the euro will reach parity
with the dollar. Bloomberg reported on November 22 that
one of Goldman Sachs’ “top trade ideas for 2017” calls
for euro-dollar parity sometime in the next 12 months.
It’s “now or never,” adds the currency team at Societe
Generale, which forecasts a 1-to-1 exchange rate in the
first quarter of 2017. Because European elections are on
investors’ minds, analysts are naturally pinning all of the
euro’s twists and turns on politics. The “threat of political
tail risk,” says one currency strategist, “could push the
euro to reach parity against the dollar for the first time
since 2002.” (Bloomberg, 11/22/16) Another Bloomberg
analyst adds that the potential for a “populist surprise will
keep the euro under pressure.” Business Insider, a popular
financial news website, argues that central bank actions
can only add fuel to the euro’s bearish inferno. The “two
big catalysts” for euro-dollar parity will be “European
politics, and a strengthening dollar following the expected
rate hike by the US Federal Reserve in December.”
(11/22/16) Whatever the reason for the euro’s weakness,
you can be sure that it’s not the upcoming elections or
the potential actions by the U.S. Fed. In fact, the currency
began the current downleg of its wave structure more than
two years ago — before Brexit, before Trump and long
before any hint of a rate hike.

For our part, EFF is on record calling for dollar parity

as far back as October 2011, when the euro still traded
north of 1.30. The chart below details the substructure of
Primary wave B, the euro’s two-year contracting triangle five waves and eventually pull the currency well below
that ended on November 9 at 1.1300. parity with the dollar.

Elliott wave triangles frequently end on news, and this
one coincided with Donald Trump’s surprise win in the
U.S. presidential election. That day, the euro underwent
a massive 3.5% intraday swing, concluding Primary
wave B and sending the currency sliding nearly 7% to a
low of 1.0518 on November 24. That point signifies the
beginning of Primary wave C, which should unfold in
The bottom graph of the Daily Sentiment Index (www.
trade-futures.com) shows that a high degree of pessimism
developed around the euro’s November low. The euro DSI
fell to 5% bulls on November 23, its lowest percentage
in about two years. The near-term rally underway now
should alleviate this lopsided sentiment extreme before
the broader downtrend recommences.

Follow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFF 19

The State of the Global Markets – 2016 Edition Europe

THE CREDIT MARKETS

From the January 2017 European Financial Forecast,
(published Dec. 30)

In a crowded contest for most reckless bond

market behavior, 2016’s craze for ultralong
debt probably took the top prize. Our view
remains that over the coming years, social
mood will complete its transition from
optimism to pessimism. When it does,
the dislocations that have developed in
global debt markets will be rectified with
massively falling bond prices, sharply rising
yields, and a near universal disdain for most
forms of public and private debt. Ultimately,
investors will shun even those bonds issued
by the world’s ostensibly safest borrowers,
leading to an unprecedented collapse in
global credit.

Europe’s market for century bonds (debt

with 100-year maturities) offers a sneak
peek into this collapsing house of cards.
Belgian and Irish century bonds (expiring
in 2116) have plunged nearly 30% since
their all-time highs, while prices on 70-year
Austrian debt are off 17%, peak to trough.
Fifty-year bonds in France, Spain and
Italy (next page) have likewise joined the
global sell-off, “leaving the investors who
bought the bonds facing large losses.” (FT,
12/12/16)

These charts explain why EFF has been

so adamant about steering subscribers
away from long-dated debt and toward the
shortest end of the yield curve. In October
2014, for example, we explained the bond
market’s lurking dangers this way:

An optimistic mood extreme pushes bond investors
to make one of two critical errors: They purchase
debt securities issued by weaker borrowers, exposing
themselves to nonpayment. Or they purchase longer-
term debt, exposing themselves to rising interest rates.
Both tactics try to maximize returns in a low–interest
rate environment…. —EFF October 2014
In July of this year, we further illustrated the massive
duration risk in European debt (a measure of how long
a bond takes to pay back its initial investment), arguing
that today’s bond market was probably even more
dangerous than it was before the 2008 stock market
collapse, which touched off the worst credit crisis since
the Great Depression. We stand by that assessment, but

Follow this link for the most up-to-date analysis of European markets: http://www.elliottwave.com/wave/MIEFF 20

The State of the Global Markets – 2016 Edition Europe

at the tail-end of this mania, it’s difficult to

express just how crazed investors became.
Just three months ago, for example, Italy’s
sale of 50-year debt was more than three
times oversubscribed, drawing €18 billion
of investor bids for the €5 billion issue. At
the time, we wrote that peaks in social mood
generate “all types of screwball behavior on
the grounds that everyone else is doing it, too.”

In Italy’s case, the sale was successful despite

a looming constitutional referendum that
promised to oust Prime Minister Renzi and
send the government into chaos. Guess what?
The referendum did fail, Italy’s government
is chaotic, and as the lower line on the chart
shows, Italy’s 50-year bond emerged as “one
of the biggest casualties of the global sell-off
in debt markets….” (FT, 11/16/16) Peak to
trough, prices fell to 84 on November 23, a
14% loss in just four weeks. According to the
FT, “Investors chose to look beyond Italy’s bad
loans, stagnant economy and the referendum
in order to secure positive yields.”

That is a near-perfect description of the

behavior to avoid in the future.

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass
psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in
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While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no
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Phone: 770-536-0309. Fax: 770-536-2514. E-Mail: customerservice@elliottwave.com. All contents copyright © 2016
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 Thank you for downloading The State of the Global Markets – 2017 Edition,
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