The Aussie market had another Pavlov’s Dog moment yesterday.
The prospect of another interest cut saw stocks surge 2.4%.
Lower interest rates = higher asset values…all other things being equal.
But all other things are never equal. Especially not in 2020.
No sooner had the punters got all excited about a return to the good old days (interest rates down, stocks up), US markets opened, and things turned decidedly sour.
Overnight, the Dow Jones fell nearly 2%. The NASDAQ tanked 3%, the S&P 500 declined 2.4%. With gold falling over 2%, gold stocks got slammed. GDXJ, an index of the gold juniors, plunged 7.7%. Comex silver fell 6.6%, with copper down 3.4%. Iron ore declined 3%.
The one thing the Aussie market has going for it relative to the US is that stock values (at least amongst the blue chips) are much more compelling. So falls here should be more muted than in the US.
But the carnage that went through the commodity markets last night should be a concern to all those who rode the liquidity/Fed is printing money/here comes the inflation narrative. A stronger US dollar put a sword through many of those markets overnight.
And it might just be getting started.
Before having a look at some charts and seeing where we stand, an interlude…
I’m writing today’s Rum Rebellion from hotel quarantine in Sydney. Today is day seven. You didn’t hear from me last week because I was in the process of moving out of Melbourne. Well, to be honest, my amazing wife did the bulk of the packing and organising the move. I just followed instructions.
The only way you can leave Melbourne is to not come back. During the dark days of Melbourne’s draconian lockdown, the pull of family became too much. So we decided to move back to Wollongong to be closer to family.
In a throwback to the dark days of 20th century Europe, you need ‘papers’ to cross the border. Permits, evidence of permanency of the move…and then go straight into hotel quarantine (or our considerable expense) for two weeks.
All for a virus that has a survival rate of 99.98% for those who get infected in the 20–49 age bracket, and 99.5% in the 50–69 age bracket (according to the latest figures from the CDC in the US).
Anyway, quarantine is a challenge with two kids in tow…an 11-year-old and a seven-year-old. But they’re looking forward to the other side (beaches and grandparents and cousins) as much as we are. So they’re being pretty stoic about it.
Thankfully, we have a decent apartment to stay in, and a balcony to get fresh air each day. The food isn’t too bad either. It comes three times a day, left outside your door. We’ve had one test for the rona so far, and another in a few days’ time.
So there you go. A month ago I could never have imagined I’d be writing to you from hotel quarantine. But drastic events require drastic actions. And when life stops and you have time to ponder, you understand and see what is important in life.
And, to a lesser extent, markets.
Speaking of which…
In this free guide, discover how a currency crisis could drain the supply of circulating cash…and how you can keep your standard of living when going through it. Download the free guide now.
Strength returned to the US dollar overnight
As I just mentioned, strength returned to the US dollar overnight. The whole narrative around the Fed printing money and creating inflation has been the driving force behind a lot of trades over the past few months.
But as I’ve pointed out to subscribers to my Crisis & Opportunity service, the US dollar is actually in a secular bull market. I recommended it as a buy just last week. You can see this long-term rising trend in the chart below.
The recent weakness in the US Dollar Index was a product of massive fiscal and monetary support for the US economy. But it wasn’t enough to change the trend.
The US dollar appears to have just put in a ‘higher low’. So, this move may just be getting started.
And as for the Aussie market, yesterday’s knee-jerk reaction to the prospect of another interest rate cut seems pretty futile. As you can see in the chart below, the ASX 200 broke down out of its lengthy consolidation pattern a few weeks ago. The moving averages are turning down again.
Probability suggests yesterday’s rally will be short-lived.
Interest rate cuts don’t pack the punch they used to
The response to COVID by the Aussie government was huge. Including the balance sheet support provided by the RBA, total stimulus in response to COVID was $289 billion, or 14.6% of GDP. That’s largely in the economy and priced in by the market. What’s another rate cut going to do?
Oh, and then there’s the coming turmoil as the US election approaches. If Trump wins, the establishment Democrats will be apoplectic. They will dispute the result, there will be riots and social unrest.
In short, the next few months are going to be ugly.
But on a positive note, it will create a great long-term buying opportunity for those brave enough to wade into the market.
Editor, The Rum Rebellion