Investment News: crisis, what crisis ?
Frank Vranken
Chief Strategist / Passionate about financial markets / Advising people how to invest and how to protect their capital and let it grow / Build long term relationships earmarked by trust & sustainability /
Yesterday evening, the Nasdaq touched upon an all-time record high. The Index is up over 10% year-to-date while the S&P500 ended back in positive territory since January 1st. This morning, Bloomberg news is reporting that the Worldbank sees the worst global economic contraction since World War II. How does that mesh with the festive mood on Wall Street? The answer remains the same. It’s all down to liquidity and the abundance of it.
Keep it flooding
This week, the Federal Reserve will make it very clear again : the money printing presses are expected to keep rolling full steam. It can hardly afford to do otherwise now that it has managed to repair the beaten down financial markets. And yet, over the past 9 weeks, government bond markets witnessed large redemptions according to broker research. Last week’s surprise jobs data can only reinforce the idea that bond yields should be higher compared to where they are today. That is not in the interest of the Federal Reserve which in response might have to buy more treasury bonds, which possibly is not what it had in mind. Letting 10-year US bond yields grind above 1% will make the debt servicing more expensive and should take some shine off the relative attractiveness of US stocks.
The timing of US elections is important
The question is whether the momentum in US stocks can be stopped if liquidity injections continue unabated. According to research of Bank of America, if one were to apply the percentage rise of the past 3 biggest bear market rallies in US history, then the S&P500 could very well hit levels between 3278 and 3630, between now and November 2nd. The latter concurs with the timing of the US election.
Hence, the focus needs to be on the US yield curve and absolute bond yield levels. The gauge for US bond appetite might very well be the strength of the USD. The latter has been soft lately but nobody knows whether we’re heading into a long term period of greenback weakness. That said, the probability that the Fed will be the buyer of last resort and apply yield curve control is increasing as bond yields are rising.