“Success builds character, failure reveals it.” (Dave Checkett)
Same Ol’ Themes
The status-quo of lower interest rates and higher
stock markets remains in place despite signs of turbulence and anemic growth.
Basically, no glaring changes to the big picture factors have emerged. The
Fed's aggressive tone about improving the economy is fading, as possibilities
for interest rate hikes are less believable and hard to visualize. The
illusion that stock market stabilization is an economic revival is not only
absurd but dangerously misleading.
In a world where returns are limited, sources of
capitals are seeking shelter or desperate exposure in riskier assets. The
definition of "risky" is being discovered, but for now, piling on
Western equities remains appealing. A lack of alternatives leads to decisions
that are more survival driven rather than a reflection of optimism. By all
means, from Brazil to Eurozone to China to US, a robust economic activity is
very difficult to spot. Lowered expectations and relative arguments sometimes make
investors lose perspective. After all, the harsh realization of a lack of
alternatives combined with lack of growth defines the reality.
Unconvincing Growth
Desperate investors seeking yield versus limited
investment options with heightened risk describes the current environment.
Stock markets movement is not determined by the profits of public companies or
the perception of economic prosperity. Instead, it's the Central Banks' and
financial media's tone that determines how to digest and how to perceive risk. For
now, the narrative has shifted from rate hike expectations to a Fed that needs
more time for clearer decisions.
In other words, there is less eagerness to hike rates at this stage.
Amazingly, there seemed to be no basis for the rate hike in late December and
justifying "growth" has turned into a difficult PR exercise.
Wrongdoings are not admitted by government agencies, but the slumping global
economy is not recovering by any measures that's convincing to the average
observer. Not to mention:
“It is clear that the US Federal Reserve is now trapped. The
FOMC dares not tighten despite core inflation reaching 2.3pc because it is so
worried about tantrums in financial markets and about that
other Sword of Damocles - some $11 trillion of offshore debt denominated
in dollars, up from $2 trillion in 2000.” (Telegraph March 17, 2016)
Less Abnormal
The correlation between equities and commodities in
the near-term begs critical questions: Are markets becoming more synchronized?
If so, is that an early warning sign? Is there a collective demise ahead? Crude
prices dancing along stock market indexes may not be a familiar sight, but
today many areas seem out of whack. In terms of oil, the OPEC nations jointly
need the price of Crude to rise in order to maintain some stability. From
Russia to Saudi Arabia to Iran and even the US, rising Crude prices can lessen
the blow recently felt. Therefore, it is hardly shocking if there is further
supply cuts driven out of desperation. The suspenseful part of this puzzle is
grasping the supply glut which is cannot be dismissed. In fact, the players in
the oil market are plenty:
“Three months since the U.S. lifted a 40-year ban on
oil exports, American crude is flowing to virtually every corner of the
market and reshaping the world’s energy map. Overseas sales, which
started on Dec. 31 with a small cargo aboard the Theo T tanker, have been
picking up speed. Oil companies including Exxon Mobil Corp and China Petroleum
and Chemical Corp have joined independent traders such as Vitol Group and
Trafigura Pte in exporting American crude.” (Bloomberg, March 18, 2016)
However, these days unfamiliar trends are
ever-so-common from negative rates to “Brexit” to outrage against establishment
politicians. Basically, the free-market concept has turned into a massive
bureaucracy. Instead of betting on prosperity, markets are anticipating
man-made decisions by government organizations. The whole concept of
speculations has turned into a massive obsession of government agencies and decision
makers. In the case of “Brexit” and the US primaries, it is fair to say that a
segment of the population is fed up with bureaucratic approaches. No matter
what pundits say, the economic weakness is stirring all types of reactions.
Perhaps, voters' rumblings globally is a more accurate measure of sentiment
rather than the theoretical approach by Central Banks.
Article Quotes
“With the real possibility now emerging that
Britain could exit the EU, Chinese investors are getting nervous. One
of China’s richest businessmen, Wang Jianlin—founder of real estate and
entertainment group Dalian Wanda and owner of a British luxury yachts company,
a five-star hotel in London, and a $114 million mansion for himself—warned
during a visit to the U.K. in February: ‘Brexit would not be a smart choice for
the UK, as it would create more obstacles and challenges for investors, and
visa problems for tourists.’ Should Britain exit the European Union, he added,
‘many Chinese companies would consider moving their European headquarters to
other countries.’ The clear implication, of course, was that Brexit could bring
an investment exodus….With the referendum in Britain now just three
months out, Chinese stakeholders are becoming increasingly vocal. In
February, the spokesperson for the Chinese Foreign Ministry reiterated
Beijing’s position, saying: ‘China has always supported the European
integration process, as we would like to see Europe play a greater role in
international affairs.’ In a somewhat coordinated action, Wang Jianlin
delivered a speech on February 25 at Oxford University, saying: ‘It’s hard to
say whether they [the British] would have a better life outside the EU. It’s
easy to exit but hard to re-join. There are certainly many disadvantages if
Britain exited the EU.'” (The Brooking Institute, March 17, 2016)
“JP Koning writes that the U.S. provides the world
with a universal backup monetary system. Removing the $100 would reduce the
effectiveness of this backup. The citizens of a dozen or so countries rely on
it entirely, many more use it in a partial manner along with their domestic
currency. The very real threat of dollarization has made the world a better
place. Think of all the would-be Robert Mugabe’s who were prevented from
hurting their nations because of the ever present threat that if they did so,
their citizens would turn to the dollar. Foreigners who are being
subjected to high rates of domestic inflation will find it harder to get U.S
dollar shelter if the $100 is killed off. Ashok Rao writes that there is
an information trade-off. Imagine if criminals transacted only in $10,000
notes. It would be reasonably easy for intelligence agencies to sneak a
traceable note to probe criminal networks. This would be close to impossible
with a $20 note (not the least because this is a high velocity note used by
normal people). Ashok Rao writes that the demand for criminal service is likely
many times more inelastic than supply; especially drugs. A tax would hurt poor
consumers, not drug dealers. A more direct method might be to increase the
expected penalty of criminal activity.” (Bruegel, March 7, 2016)
Key Levels: (Prices as of Close:
March 18, 2016)
S&P 500 Index [2,049.58] – After double bottoms in January (1812.29) and
February (1810.10), the index continues to recover. Major upside hurdles
remains around 2,100.
Crude (Spot) [$39.44] – Like in equities, a
double bottom formed in January and February this year, which has led to price
stabilization.
Gold [$1,252.10] – A recent rally from the
$1,049.40-1250 range showcases some recovery. The next critical challenge is
breaking about $1,300.
DXY – US Dollar Index [95.08] – Since early
December, the dollar strength has slowed. October 15, 2015 lows of $93.80 serve
as a near-term benchmark. However, the $95-100 range is so familiar at this
point and it is too early to call a major trend shift.
US 10 Year Treasury Yields [1.87%] – A well-defined
range has formed between 1.80% and 2.20%. The bond markets are not convinced of
rising rates.
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