I find the price action of equity markets disturbing. Friday is a case in point as the US Dow Jones rallied over 3% after a week of strong gains.
Friday’s catalyst was attributed to a positive jobs report, which even the Bureau of Labour Statistics qualified as prone to a large degree of error!
And so, a combination of huge monetary and fiscal stimuli creates what can only be considered a bubble; a bubble that hasn’t quite popped as rampant speculation pushes markets to all-time highs despite the fact that the real cost to economies of the Covid outbreak is as yet unknown. Similarly, in the US, the FAANG behemoths dominate weightings in certain indices, and their dominance distorts what might otherwise be flat to downwards pointing markets.
There is uncertainty everywhere, whether that be in post-Covid World or with respect to violent and anarchistic protests, to tit for tat trade tariffs, to oil price manipulation, to US elections. In my mind, the prevailing optimism bias in equity markets is unmerited and the downward trajectory in the volatility Index (VIX) will soon become a screaming buy!
To this week, and the stand-out event is a US interest rate decision. I would imagine the Fed will keep interest rates on hold for the moment in case they need a quarter of one percent for future needs. US inflation will be released too although until markets get back to some kind of normalcy it’s difficult to gauge the relevance of this number. What we can be sure of is that inflation will creep up in the future, and then we will see if the Fed is true to its mandate.
Commodity currencies have had a good run of late. In my post of 4th May, I mentioned my positive view on the Australian dollar. I am now more neutral on the AUD and am mindful of the market’s ability to re-trace. Talk of possible Chinese/ Australian tensions supports my view. Similarly, GBPUSD had a strong rally last week and for me there is a certain vulnerability in “Cable’s” rapid advance.
My advice is to trade with caution. The markets can turn very quickly despite the current seemingly bullish outlook.
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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