Yesterday, the ASX 200 traded above its all-time closing high, but it couldn’t manage to finish above it.
So we watch and wait for the headlines proclaiming that stocks have finally reached a new, all-time high, 12 years after the 2007 peak.
Will today be the day?
I don’t know. It depends on whether Philip Lowe is giving a speech somewhere.
Absent that, it comes down to a coin toss. In the US overnight, stocks held their ground. The Dow was up a little, the S&P 500 was down a little.
We’re in the midst of quarterly reporting season over there. And so far, the news has been good. The economic slowdown predicted by the bond market hasn’t hurt corporate earnings any more than what the market expected.
Don’t forget, when it comes to markets and stock price moves, it’s all about expectations. From The Wall Street Journal…
‘Corporate profits are proving to be more resilient than expected in the second quarter, nudging the stock market higher this month and distracting from anxieties about trade and economic growth.
‘Average earnings among S&P 500 companies that have reported are up 0.7% from a year earlier, according to FactSet. That has helped improve analysts’ forecasts for earnings to a 2.6% contraction for the quarter, better than the more than 3% pullback they had been predicting last week.’
So there you go. The market expected a 3% earnings per share contraction in the second quarter. Instead, it looks like being ‘only’ 2.7%. It’s not much of a difference, but that’s the power of expectations.
The risk now is that the Fed will think conditions are ‘better than expected’ and be less inclined to cut rates, or to cut as deeply as the market now hopes.
Perhaps anticipating this, President Trump took to Twitter overnight to lay into the Fed…
‘The Fed “raised” way too early and way too much. Their quantitative tightening was another big mistake. While our Country is doing very well, the potential wealth creation that was missed, especially when measured against our debt, is staggering. We are competing with other…..
‘….countries that know how to play the game against the U.S. That’s actually why the E.U. was formed….and for China, until now, the U.S. has been “easy pickens.” The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!’
Trump is clearly concerned about a strong dollar as we move into a slower growth global environment. He sees Europe and China as currency game players and wants the Fed to join in.
Here is the chart that Trump has a problem with. It’s the US dollar index…
In late June, it looked like the dollar was set to break below support, and head into a downward trend.
But then the euro started to weaken again, which saw the dollar strengthen. Hence Trump’s frustration. He’s trying to jawbone the dollar down.
Even for Trump and his trusty Twitter account, that could be a hard task.
The thing is, the US is the best of a bad bunch when it comes to a currency for global capital to invest in.
The euro has the benefit of being a creditor trading bloc (which means it produces more than it consumes) and its central banks hold a decent amount of gold.
But on the other hand, the region is turning into a socialist nightmare. As a result, economic growth is perpetually weak. Without decent growth in China and the US, the export-dependent Eurozone would be in all sorts of trouble.
China is a communist nation, and heavily controls its currency. So Trump’s not going to get much respite from the Middle Kingdom.
The US is a massive global debtor (meaning it consumes more than it produces). Under the ‘rules’ of a freely floating currency system, as a result of this debtor status, the US dollar should weaken considerably. On the other hand, creditor trading blocs like Europe, China and Japan should experience strengthening currency values.
The idea behind this is that a weaker dollar would lead to higher interest rates in the US, less consumption and more production. The opposite would happen in the other trading blocs.
The result would be a rebalancing of the various trade imbalances that exist around the world.
Absent a massive currency upheaval though, that is not going to happen. The post-Second World War economic environment was all about rebuilding Europe and Japan as factories to service US consumption.
This global economic structure has been in place ever since. The only reason it has continued for so long is because the US broke away from gold in 1971, which removed any type of rebalancing discipline on the global economy.
It’s been getting out of hand ever since.
And, each year, we move deeper and deeper into uncharted territory…
Editor, The Rum Rebellion
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