Today’s Key Market Drivers: 19th July 2019

US Dollar falls after New York Fed President Williams encourages Fed to lower rates.


New York Fed President John Williams at a Central Bank conference made his case that the US Fed should take action to reduce the risk of low inflation and consistently low-interest rates. Williams comments were seen as dovish and given his influence at the US Fed it was viewed as another sign the Central Bank may lower the official cash rate more than the 0.25% the market expects. CNBC reports this Friday that “financial markets quickly reacted, pricing in almost a 70% chance of a 50-basis point cut at its policy meeting on July 30-31 at one point.

The pullback on the US Dollar is the reason why we are seeing the Aussie and Kiwi Dollars rally higher on Friday and is also the reason why we are seeing stock indexes through the Asian trading session rally also.

Why stocks rise and fall in value.

When will blue-chip stocks likely rise in value?

When the return on investment for cash in the bank is extremely low and Central Bank interest rates are being lowered globally this is a time when blue-chip stocks are generally a popular investment for funds, investment banks and sovereign wealth funds. The reason being is that the return on investment for the dividends these blue-chip companies pay is often greater than bonds and cash in the bank and the demand for the stock pushes the value of the share price higher. Simply put low-interest-rate environments are historically great times to invest in stocks.

Low-interest rates also mean companies listed on the stock exchange can borrow money and the repayments on their borrowings remain low. The money they borrow helps them build their business and drives company earnings and profits and thus contributes to investor demand that lifts the share price higher.

When do blue-chip stocks fall in value?

What is important to note is that if Central Banks are aggressively lowering interest rates, they are doing this because economies are weakening and there is always a point in time that the global economy slows enough that it begins to impact consumer and business demand and company earnings begin to suffer. So, whilst stock markets traditionally do well in low-interest-rate environments if company earnings begin to suffer it won’t matter how low-interest rates are investors will sell stocks and put their money in cash or bonds. This is the time blue-chip stocks often reverse the uptrend and begin to fall in value as large and small investors sell.

Another time when blue-chip stocks fall in value is when interest rates are rising. As interest rates rise banks offer higher returns for cash on deposit and Government Bonds often offer a higher return on investment when interest rates are rising. If traditional fixed income returns are rising this becomes attractive as a low-risk investment and investors, therefore, sell stocks (considered riskier) and this selling activity causes demand for the shares to fall and thus the share price declines.

Focus your attention on a set of numbers over time.

Trading is simply a game of numbers and if you took away from the money and you simply played with chips instead of the value of money there is no question you would play the game better over time. This is why I don’t like traders using demo accounts for anything more than learning to use the platform. Thinking you will learn how to trade using a demo account is silly because there is zero emotion and you will act very differently when you have real money on the line. Anyone who thinks or says differently has never traded real money.

Your attention must be on a series of trades over time and the #1 focus on each of the individual trades must be no major drawdown. If you can detach yourself from the money (and you can) and play the game of trading over a series of trades with the sole objective of winning greater than you risk, provided the strategy you are using is consistently applied each time, you will ultimately come out on top with a meaningful return on investment.


Sometimes the hardest thing and the right thing are the same.

AB

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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