[This post created June 2019 to preserve previous trade plan notes. Future notes will appear directly as blog posts]
Talk of backtracking the Fed rate hike policy should have boosted stocks but it hasn’t. This can only signal a steeper correction ahead. Key metrics for the rate hold:
• Inflation slips under 2%
• US Treasury yield curve inversion
• Excessive rate rises in commercial borrowing
• The outlook for the real economy deteriorates more significantly
Dot plot shows 1 or 2 rate rises in 2019 and none in 2020.
The dollar should fall in anticipation of EU hardening but they have backed off and US economics doesn’t look great. In a major stock correction dollar will rise. The new factor is “de-dollarising”. Emerging Markets, fed up of being at the whim of the US Fed, may sign up to the EU drive for increased reserve currency status. That would mean a US stock correction coinciding with a dollar sell off, a near-perfect storm of US recession that would dwarf the 2008 credit crunch.
The 2.9% inflation doesn’t translate into wage growth because the inflation is due to trade tariffs. Again, countering inflation with higher rates may not apply to a tariff-lead inflation. Highly leveraged corporates will be hit by rising borrowing costs eventually, rate hikes eat into profit margins.
The crossovers of cash rates with Bond Yields and Dividend Yields point towards a sell-off in both of those markets.
Debt ceiling vote. If the politics is truly confrontational, we can assume that Trumps wants a shutdown.
Borrowing Costs are generally on the rise. China has a problem, as do most G20 and EM countries. Dollar strength compounds the problem. This may be one reason for the Fed to slow down, though historically they have shown little concern for the effects of their policies on others.
Trade wars are a damp squib, not affecting markets, there remains a possibility of unexpected outcomes.
Small and Mid cap companies are already reporting earnings misses, these business are usually the canary in the coalmine for GDP.
Bond selling continues, the Fed is off-loading $50bn per month.
ECB monetary policies remains on track. EU inflation at 2.1%.
UK Parliament edges towards ruling out a no deal Brexit and this is boosting the Pound. Beware the Ides of March (the next vote is on 14th March).
Oil prices are now in the firm grip of Trump, Putin and Mohammed Bin Salman. Three individuals, rather than any nation or institution. This can only add to volatility. For the moment, Trump has pushed up output and brought down prices. Putin and MBS are struggling to balance budgets and have announced a bi-lateral supply deal. Saudis are looking for $70 at time of writing.
Gold could be in demand if countries, especially Emerging Markets, decide to move away from Dollar reserves. $1360 will be the next pivotal price on the weekly chart. “De-Dollarising” is appearing more frequently in the press, would also benefit Euro, Yen and Swiss franc.