Today’s Key Market Drivers: 11th July 2019
Stocks surge to new highs and US Dollar falls after Fed Chairman statement.
US Federal Reserve Chairman Jerome Powell spoke before a Financial Services Committee on Wednesday and confirmed the US economy was likely going to get a rate cut on July 31st. He said economic crosscurrents have re-emerged, business investments have slowed noticeably and trade conditions dampened the economic outlook.
A case for a more accommodative policy on US interest rates has now emerged and the US Federal Reserve Minutes that were released only hours after the Fed Chairman spoke showed the committee was likely to lower the official cash rate at its next meeting.
Aussie and Kiwi surge back higher against the Greenback.
Thursday mornings comments from US Fed Chairman Powell has seen traders abandon the US Dollar against the Aussie and Kiwi Dollars with both currencies rallying half a cent in the past two trading sessions as traders priced in their expectation of what the US Central Bank chief would say.
It is my expectation that a likely trade deal between the US and China in coming weeks will also assist both base currencies higher against the US Dollar as a trade deal is likely going to be positive news for China which is in turn positive for Australia and New Zealand.
Stocks keep rising as the global economies slow.
There is no question the global economy is slowing and many parts of the Australian economy are already in a recession. So why are stock markets in the US continuing to make new highs as economic headwinds continue to blow stronger?
It all comes down to interest rates and where major sovereign wealth funds, hedge funds as well as large and small investors are likely going to get the best return on investment. Interest in the bank is non-existent and has been for the past 10 years as global interest rates hit all-time lows and in some cases below zero. Bond yields (the return you get for lending governments money) have been falling due to the expectation that global interest rates are going to go lower and the other safe haven, gold does not pay a return on investment. Frankly buying Gold is the most useless investment you could ever make along with holding cash in the bank.
Companies around the world over the past 10 years have been borrowing money in incredibly low-interest rate environments and due to low repayment schedules (due to low-interest rates) they have been able to prosper and report handsome profits. If interest rates go lower that only makes their repayments less and offsets some of the slow-down in their businesses that will likely occur as the global economic environment weakens.
The bottom line is this. Until the global economy slows enough that it impacts company earnings, a low-interest rate environment will continue to be positive for stocks and blue-chip stocks particularly because they pay a dividend that in many cases is higher than the interest in the bank or a return for holding government bonds.
There is a tipping point where the global economy will slow enough to begin to impact company earnings even if interest rates globally are 0%. That could occur in late 2019 and early 2020 and thus we should not fall in love with stocks continuing to go higher and higher.
On the agenda today.
There is no let up in US economic data today with the release of US June inflation figures. The US Fed has recently indicated that it expects US inflation to soften in coming months so if today’s CPI reading misses estimates the Greenback’s slide is going to continue and stocks will again likely surge to new highs in the short term at least.
Mistakes are proof you are trying.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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