David Long

January Trading Insights from David Long

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During the last six months of last year we discussed and watched the yield curve flatten and knew the economic cycle in the USA had peaked. The US Fed continued to raise rates, increasing the funding costs for banks and institutions. The last hike was in December to 2.50%. This had the direct impact on the stock market throughout the year. In November the US President announced his displeasure with the US Fed’s policy. So, in the December meeting, despite raising rates, the Fed got dovish in its statement. And stocks rallied ever since. Cynical to think a conspiracy? Did the Fed fold to market price and or Trumps comments? Is the US Fed truly independent as they claim?

Just today (Jan 31st), the Fed adjusted its statement from “strong growth” down to a “solid growth”. Further dovishness and the markets loved it. No more rate rises equals expansionary growth with lower costs. I am dubious about that, costs are the same if rates are on hold at these levels, so profits will be limited. Prices are a ways from their highs but historically still overvalued. Bonds went bid as interest rate yields tumbled. Leading to a weaker Greenback, not weaker, slammed actually. Commodity currencies did well. But post this FOMC euphoria might see a re-focus of the market on US/Sino trade talks and the Chinese economy again, so be cautious weighing into them.

It is hard to see what will happen with the trade talk still in the way. China has injected huge amounts of stimulus in last few weeks, which has helped the Shanghai stock market (along with global stocks) and their banking systems. But what will it look like if and when trade is negotiated? This outcome will have direct impact on AUD and NZD and to a lesser extent CAD. IMF sees weaker global growth for 2019, and now the Fed (at Trumps insistence?) finally agree. This could see lower commodity prices due to lack of demand.

Brexit continues to weigh on the UK market. Was surprised with the buoyancy of the sterling recently. Way over done with plenty of risk still there. Mar 29th unlikely to be met now. EU playing hardball and May is stuck between the proverbial rock and hard place. Will she even survive politically? Far too much uncertainty there to warrant any long-term investment or buying.

For the European year ahead, do not expect anything much from ECB. Draghi finishes up in October and will want a good legacy. However, the Euro economy is stagnant and the German powerhouse showing signs of stumbling. Eurodollar has been sideways from May 2018 with 1.15 being support, to break under it in Oct 2018 and now the 1.15 is resistance. So that 1.15 is the pivot level for almost a year and here we are back at it. Cannot see it breaking too far above it, next ceiling at 1.18, or too far below it, the floor currently 1.13 and under that 1.08.

So where will global growth come from? Facebook announced positive results just now, maybe Mark has the answer.

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