Are Interest Rates Set to Rise?

Dear Reader,

Yesterday I discussed how, over the last century, the world had become increasingly centralised.

Centralisation leads to greater control. You’ve seen this play out most notably in the monetary arena. Today, central banks exert a greater control over money than ever before.

This is significant because money is the denominator of everything in our society. It defines the value of labour, assets, and for many, self-worth.

That the US Federal Reserve is back pumping liquidity into the financial system goes a long way towards explaining why the global equity bull market continues. According to the Wall Street Journal, the Fed’s balance sheet has increased $300 billion since September.

This was in response to ructions in the opaque ‘repo’ market. Short-term interest rates shot higher. In response, the stock market fell sharply in late September/early October.

That additional cash in the system doesn’t just increase the market value of stocks once. It flows through the system, again and again. Cash moves around like a hot potato. It’s liquid. And in this environment, as it facilitates a stock purchase and sale, prices move higher with each iteration.

At the same time as the Fed pumps in additional liquidity, you’re seeing strengthening global growth. Check out the chart below. It shows a measure of global economic activity as measured by JP Morgan and IHS Markit.

Free report: Aussie dollar crunch coming (find out why)

Global growth has been slowing since early 2018

But it’s now turning around. From the press release:

The pace of global economic expansion improved to a four- month high in November, as rates of growth picked up in both the manufacturing and service sectors.

Five of the six sub-sectors covered by the survey saw output increase in November. Rates of expansion ranged from a marked rise at financial service providers to mild growth in both the intermediate goods and business services sectors. Capital goods was the only category to register contraction.

Output growth was led by China, which saw its rate of 48 expansion hit a 21-month record. Economic upturns were 46 also seen in the US, euro area, India, Brazil and Russia.

Money Morning

Source: J.P.Morgan, IHS Markit

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That’s why you’re seeing strength in the Aussie dollar. The Aussie is a good barometer for global growth. It spent the August to October period putting in a bottom…or at least what could prove to be a bottom. And this week, it traded at a four-month high.

A move above 70 US cents would confirm a new upward trend for the dollar…and for the global economy. So that level is worth keeping an eye on.

What about the equity markets?

Let’s have a look at the US and Australia…

Firstly, the S&P 500. It’s clearly bullish. As you can see in the chart below, the US benchmark index recently broke out of the already healthy trend channel it’s been trading in during 2019.

Money Morning

Source: Optuma

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This suggests we could be at the start of a melt-up phase for markets. A combination of an improving global economy and a docile Fed feeding the recovery with additional liquidity will do that.

But if we zoom out and look at it from a longer-term perspective, you can see how dangerous this melt-up phase could be. The chart below shows the bull market from the 2009 low. It’s already one of the longest bull markets in history.

A melt-up phase from here would put a pretty solid exclamation point on it.

Money Morning

Source: Optuma

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The Aussie market looks a little different. The chart below shows the All Ordinaries index. Like the S&P 500, it has respected its rising 2019 trendline. However, Aussie stocks have yet to convincingly break out to new highs.

Money Morning

Source: Optuma

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The upward trend is still firmly in place. If the US market continues to push higher, you would think that it will drag Aussie stocks higher too.

A break below the rising trendline would be bearish. But right now, the odds of that happening appear to be low.

It’s worth pointing out the complacency in the Aussie market though. This often comes with bullish conditions. The Aussie VIX index, a measure of market volatility, is back trading towards long-term lows. These are the lows where previous sell-offs have occurred.

The message then, is that the longer-term trend remains bullish. But we’re potentially approaching another short-term sell-off.

What would be the catalyst for that?

A realisation that a global recovery is underway, and that central banks might start to tighten next year?

If such thinking comes into the market, it could easily lead to a big sell-off.

Download your free report and learn about the earnings crisis facing Aussie iron ore stocks in 2020…and the mining companies to own instead.

For now though, that’s all conjecture. Although here’s some food for thought that I’ll leave you with for today.

The chart below shows the ASX 200 Property Trust Index. Property stocks are very sensitive to interest rate changes. The index peaked in July. It made a ‘lower high’ in December. It’s now at risk of moving into a downward trend.

Are property trust prices telling you that interest rates are heading higher?

Money Morning

Source: Optuma

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Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

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