Last week, Federal Reserve Chair Jerome Powell’s testimony went according to the script as he signalled the Fed’s tacit willingness to cut interest rates- most probably by 25 basis points- in July. US equity indices progressed to mark new record highs, painting the picture that trading markets is easy and that they are predictable and not random.
For me, alarm bells are ringing, and I feel we are on stock market “RED ALERT.” While I acknowledge that trending markets are a powerful force, I also remember recent history of both a Nasdaq collapse in 2000-2001 and the market meltdown of 2008. I am also minded to consider the ultra-wise mantra of investment wizard George Soros who constantly looks for “flaws” that can change market dynamics. He describes part of his competitive advantage as “recognizing changes in the rules of the game.”
Maybe the current change of rules is for the Fed to bow to political pressure and focus on bolstering markets and ease on the monetary side. The Fed of late 1929 and the early 1930’s did the opposite and raised interest rates to curb stock market speculation. We all know that the result was a massive stock market crash followed by the “Great Depression.”
By stoking stock markets with a rate cut, borrowing becomes less expensive. Markets may well be buoyed for a period. But a correction will inevitably come, and the Fed and other central banks will have fewer tools to react when markets tank. In the words of Roger Babson, a business theorist in the early part of the 20th century who predicted the crash of 1929, “Sooner or later a crash is coming, and it may be terrific.” Caveat Emptor!
This is a week of inflation gauges, with New Zealand 2Q CPI released on Monday expected to rise to 1.7% Y/Y, UK CPI out on Wednesday expected at 2.0% Y/Y for June, Canada CPI, also out on Wednesday expected at 2.0% Y/Y for June, and Japanese CPI released on Thursday expected to read 0.7% Y/Y for June. (Last week’s US CPI came in at 1.6% Y/Y for June despite a pick-up in the component ex food and energy.)
This week’s other big data are Chinese Q2 GDP, on Monday expected at 6.2% Y/Y, US retail sales on Tuesday expected at 0.1% for June and Australian employment numbers (a key metric for the Reserve Bank of Australia) out on Thursday, expected at +9,000 new jobs created with the unemployment rate stable at 5.2%.
Fed Chair Jerome Powell will be in France this week and expected to make a speech at a Bank de France Dinner on Tuesday evening.
I maintain my bullish stance on Japanese Yen, Gold and EURGBP
Last Good luck and good trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You can Too.
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