A complex set of questions on how the global Indices will continue to sustain gains is emerging, while troubling contradictory concerns are arising as two important risk adverse indicators are showing signs of strength. While the returns on Indices have been good this summer and no melt down has taken place even with the Federal Reserve continuing to discuss a more hawkish monetary policy, Wall Street has managed to engage investors.
Are the gains being made in equities because financial institutions have few other places to venture with their capital? In the meantime, the JPY and gold continue to show that they are still attracting risk adverse crowds. So while it is summer now, what might happen in the fall is real and growing concern.
Many equities continue to show that they are unwilling to give up gains easily, yet volumes are dropping as the summer holiday season grows and this will continue as August deepens. However, the Nikkei has shown nervous sentiment and tomorrow’s banking holiday in Japan may be a welcome relief. The JPY is showing a growing amount of risk adverse trading and this may not be about to end any time soon.
A two year support level could be tested if the JPY continues to go lower, and if those low water marks are touched, a stronger JPY via USD selling could turn a rather calm trend line into a fast and ugly market for a Japanese government that doesn’t want to see a JPY that is too strong.
Last Friday’s Non-Farm Employment Change outcome from the States surprised many with a better than expected report. The jobs data helped turned gold’s short-term trading upside down. The precious metal had been putting in steady gains prior to the U.S. figures, particularly based on worries that were ramped up about the growing ‘respectability’ of near zero interest rate policies and the prospects of even more ‘dovish’ policies coming from some central banks.
The Bank of England last Thursday not only lowered their rate as every investor suspected, but made it clear via their Monetary Policy Summary that another rate cut could come relatively soon and quantitative easing mandates has been endorsed, like buying Gilts, as the BoE deals with the Brexit. Gold found a slew of investors last Thursday, lured by the potential to preserve capital and the ability for it to perhaps create profits instead of sitting on what appears to be negative yields from government bonds that will come.
Adding to the hornets’ nest of concerns for investors is the price of Crude Oil, which has managed to also turn in some gains recently adding to the summer fun. Even though demand has not seen a significant increase by most measures, the value of Crude has come off of its lows in recent trading.
Will WTI test the $50.00 USD levels it saw in early June or will it again slip into a consolidated range in which it faces pressures from a global economy that shows an inability to leap forward? Crude Oil Inventories will be reported from the States in a little while, but last week’s big storage numbers which were a surprise did not kill off the gains it had made previously after having tested lows only days before.
The greater point is that the broad markets are now within a summer trading mode. Ranges are in place and are waiting to be energized, but it is also likely that financial institutions would prefer a couple of more tranquil weeks to enjoy summer.
However, when fall comes will the nervous sentiment that is within the markets start to grow more powerful? Will the race for the job of President in the U.S. make investors nervous and will this translate into a sudden jolt to the markets in which they turn downwards? The answer to that is likely a no, considering that for better or worse Hillary Clinton who is a known quantity is probably going to win the White House, unless the Trump team suddenly unifies and gets its populist act together again which seems increasingly doubtful.
Troubles could come from a European banking sector if more cracks emerge in Italy. And if equity markets take another hit and Crude Oil prices begin to fall again, this could certainly cause problems. The economies of Asia, particularly China and Asia, are pressure points that have the ability to deliver bad news quickly.
Interest rate policy globally via central banks remains a constant sore point among many investors. The financial markets seem to be sitting on a fragile foundation which could cause a rupture, but perhaps the markets as they frequently do, will be able to dance around the problems and continue a march forward and find solutions for the follies that surround them.
Risks must be weighed and that is why we are continuing to see equities do relatively well even as risk adverse positions such as a stronger JPY and solid gains in Gold continue. The markets are all in play and traders will have to remain nimble.