Everyone's feeling the heat from rising tariffs and higher interest rates. No one expects it to be pretty. It could end up being a long drawn out process that gets worse before it gets better.
The US Federal Reserve
The message here is clear. The US Federal Reserve is slowly draining excess liquidity from emerging markets. That makes investing during these times particularly tricky.
The smart money flow index has just plunged. There’s a risk that you’re going to see another leg down in US stocks very shortly. What will happen next?
I’m working on the assumption that the US economy will peak in 2018. In fact, the market may well have peaked in January 2018. What evidence do I have for that?
The US dollar rally has barely paused for breath since getting underway in February. Late last week, it took its toll on commodities. Oil fell nearly 3%. Iron ore fell 3.7%, while aluminium declined 0.7%. What will happen next?
Prime Minister Malcolm Turnbull may be one step closer to passing corporate tax cuts. This comes after One Nation’s Senator, Pauline Hanson, backflipped and announced she would back the company tax plan. Ms Hanson struck a deal with the Turnbull government. But what does this tax cut plan mean for Aussie businesses and workers?
What’s far more important is how investors reacted to the Fed’s outlook and their decision to increase interest rates. After the rate hike decision, US bond yields spiked, almost clearing 3%. But even before bond yields reach that 4% market, there’s one group of stocks that could fall regardless. Some believe 2018 could be the tipping point for big US tech.
Aussie stocks bounced back strongly yesterday, and are set to open flat today, in a sign that the concern over a trade war is overdone. Perhaps Trump’s team have done their homework. Perhaps they now see that a ‘spend as much as you want’ policy in government doesn’t quite gel with ‘let’s reduce our trade deficit’.
This is why Grant and others have been saying the 35-year long bond bull market is at an end. The biggest participant in the market (the Fed) is no longer propping up bond prices. Grant believes US 10-year treasury bond yields could reach 4.5%. Such an increase in bond yields would cause millions of investors to flow out of stocks and into bonds.
Clearly, there has been too much cash in asset markets over the past few years…especially in fixed income markets. But now, the Fed is concerned that this excess cash will show up in consumer price inflation — which is, apparently, a lot worse than asset price inflation. The bond market will feel the biggest impact of this tightening.