A US Interest Rate Rise in June? Not So Fast

Financial brokers discussing stock market quotes, rear view

Here we go again with the Fed…

After keeping interest rates on hold at its April meeting, and giving the impression that a rate rise was off the table for now, the Fed has released minutes from that meeting, which suggest that a rate rise in June is a possibility!

The Fed has no idea what it’s going to do. The only thing you can count on is that they will err on the side of caution. For this reason, I don’t expect you’ll see a rate rise in June.

But that doesn’t stop the markets reacting from every little announcement. The overnight release of the Fed’s minutes from the April meeting saw the US dollar take a big jump higher. That knocked both gold and commodity prices, and saw the Aussie dollar fall 1.3% in overnight trade.

After rallying all the way up to 78 US cents, the Aussie dollar is now falling quickly. It closed at 72.3 US cents overnight. The RBA will at least be thankful for that.

I can see it falling closer to 70 US cents before putting in another rally. But ultimately, I think the Aussie will break below the January low at 68 US cents, heading considerably lower as we get into the second half of the year.

Source: Market Analyst

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  The performance of the Aussie dollar looks like it’s mirroring the iron ore price. Iron ore surged on the back of China’s early year stimulus, but in recent weeks it fell sharply.

The iron ore price has stabilised around US$55/tonne for now, but it’s likely to continue falling in the months ahead. That’s because of an expected increase in supply and a fall in demand as China tries to contain steel production in a clearly oversupplied industry.

Bloomberg reports that iron ore stockpiles across China’s ports were 100 million tonnes for the week ending 6 May. That’s the highest level of stockpiles since March last year.

Perhaps it’s just a coincidence, but March 2015 happened to be the top for the Aussie market. Does this mean we’re at another top?

Let’s have a look at a chart of the ASX 200 and see what it can tell us.

Before we do that, keep in mind that I have a naturally bearish disposition. That’s mainly because I think the economy is extremely fragile. I’m sceptical of the ability of interest rates to support asset prices for anything more than a short timeframe.

Having said that, I have learnt to recognise my biases, ignoring them as much as I can when trying to figure out the market.

Sure, I write from the perspective of my biases everyday in The Daily Reckoning. If you’ve got the same biases going on, you’ll probably ‘like’ what I write. It has nothing to do with the truthfulness or accuracy of the content matter. It’s all about confirmation bias!

There’s nothing like a bit of confirmation bias to make you feel good. It’s like a little pat on the back that you may or may not deserve. But I’m sorry to say it won’t make you a better investor. In fact, it will make you a worse investor, if anything.

When it comes to making recommendations for subscribers of my Crisis & Opportunity report, I push my biases gently aside and get on with trying to make money.

More on that in a minute. But first, let’s have a look at the Aussie market…

Source: Market Analyst

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As you can see, since bottoming near 4700 at the start of the year, the market has recovered strongly. It’s now coming up against resistance at 5400 points.

I call it an area of resistance because, back in 2015, it acted as an area of support. But when it gave way in August 2015, it fell hard. Since then, the market has made a few attempts to rally. But it hasn’t been able to get past 5400 points.

Former support levels often turn into resistance points. That is what you’re seeing now as the ASX 200 struggles to break through the 5400 level.

Given the extent of the rally from early April (when the index made a ‘higher low’ at 4900 points) it’s not surprising to see the market pause here. That’s a 10% gain in a month, so I wouldn’t be surprised to see a correction unfold in the weeks to come.

But the important thing to keep in mind is that the momentum is to the upside. So, however much my bias might be telling me the market is crazy to keep on rallying from here, just because of lower interest rates, I want to listen to what the market is saying. It’s much smarter than me and doesn’t have any emotional biases to deal with.

Have a look at the chart again. The simple fact is that the market is making ‘higher highs’ and ‘higher lows’. This is a sign that the trend has turned up. You can also see that the moving averages (the red and blue lines) have turned higher. This is another sign of upward momentum.

This is the power of lower interest rates. More capital has moved into the market, pushing stocks higher. I don’t have to agree with it, but to ignore it and pretend it isn’t happening would be negligent.

I run a scan over the market every day to see how many stocks are making new 2–3 month highs. There are A LOT. There are also a lot of stocks making fresh 12-month highs.

On the other hand, there are very few stocks making 12-month lows. This tells me, in spite of my bearish disposition, that the overall market is bullish.

I would be stupid to ignore this important information. Instead, I use it to my advantage. Instead of worrying about a stock market collapse, I continue to look for stocks that offer value, and which are also trending higher.

Granted, there are not many to choose from, but there ARE opportunities out there. I’m finding them all the time for my subscribers.

The important thing to remember in all this is that the market is never wrong. Only you are. Once you stop blaming the market (for not doing as you expect) you’ll become a much better and calmer investor.

And if you’re a DIY investor, isn’t that what you want…to make money with less stress?


Greg Canavan,

For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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