Global stock markets were higher again last week…Europe and Asia (especially China) have rallied strongly the past two months while US markets have gone broadly sideways. Chinese “investors” have been opening 1.5 million new stock brokerage accounts every WEEK for the past two months…the Shanghai Index is up ~37% since early February…up 68% in six months…the German DAX is up 28% YTD…while the S+P 500 is up only 2.5% YTD…the VIX at a 5 month low.
European sovereign bonds continue to rally…with the ECB on a bond buying spree. Yields on gov’t bonds issued by nearly every European country are lower or substantially lower than yields on US Treasuries. For instance, 10 year Treasuries yield 1.95%, compared to 0.23% in Holland, 1.2% in Spain, 0.16% in Germany, 0.36% in Sweden.
Divergence: Markets psychology continues to be driven by divergent Central Bank policies. The USA is on a tightening path while the Rest of The World is easing. This divergence (and local Central Bank money printing) is the reason that foreign stock and bond markets are significantly outperforming American markets.
Currencies: this divergence is also boosting the US Dollar against other currencies. The US Dollar Index rose ~3% last week while the Euro was down ~3.5%.
Recent weak US economic data: triggered a mild correction in the US Dollar from mid-March to Easter…after it had soared to 12 year highs. The recent weakness caused market psychology to consider that the Fed, 1) will not raise interest rates, 2) will raise rates at a later date, 3) will be very timid about the speed and the amount of any subsequent rate increases. In addition to the mild correction in the USD, there was a rally in US bonds and a rally in the US Dollar price of commodities…especially gold and crude oil.
Our view: Our primary market opinion is that the US Dollar will continue higher relative to most other currencies…because there is a significant divergence between America and the rest of the World…in terms of economic growth and opportunity and therefore in terms of monetary policy. We expect this divergence to increase…we expect that the recent economic weakness was temporary and that the American economy will be stronger in the quarters ahead…with market psychology then beginning to imagine that the Fed may raise interest rates more (rather than less) aggressively.
We expect the global supply of crude oil to overwhelm demand. We expect WTI prices will drop.
We thought we saw signs of weakness in the broad US stock market…however we only took small short positions…out of respect for the powerful uptrend that has been in place for the past six years…and we are now close to ‘throwing in the towel” on this trade. We think the stock market will fall if/when the market perceives Fed tightening to be more aggressive than current expectations…but timing is everything in trading and we appear to have “jumped the gun” on this trading idea….although…the runaway Chinese market sure looks like the sort of thing you see before a big break!
Short term trading: We remain short of CAD, WTI Crude and US stocks. We added to our short CAD positions last week and established new positions short the Yen.
