What a US Rate Rise Means for Your Investments Today

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I’ve long said to expect a US interest rate hike this year. US Federal Reserve Chairperson, Janet Yellen’s continues to confirm my forecast with her comments. In her own words (but with my emphasis),

My own preference would be to be able proceed to tighten in a prudent and gradual manner.

We also want to be careful not to tighten too late because, if we do that, arguably we could overshoot both of our goals and be faced with this situation where we would then need to tighten monetary policy in a very sharp way that could be disruptive.

If there is a negative shock to the economy with interest rates pinned at zero, we don’t have great scope to respond by loosening policy further, whereas with a positive shock of course we can tighten monetary policy.

Indeed, US interest rates are going in one direction, and that’s up!

Why?

Because the Fed has no other choice.

This isn’t about inflation.

And it isn’t about unemployment.

This is purely about the Fed having a job during the next financial crisis. Adjusting rates is the only policy tool that the Fed has available — the days of money printing are over!

This should be no surprise…

Why money printing is over forever

The Japanese government has been printing money for 20 years! And where’s that got them?

Absolutely nowhere!

The US money printing program didn’t achieve anything either. In fact, it merely postponed and amplified the next financial crisis. Which I may add, is in bonds and NOT stocks.

And the European Central Bank’s (ECB) money printing program?

Again, don’t expect anything miraculous there!

So, at the end of the day, money printing is only good for the bond holders. And it ensures that governments can issue even more bonds (i.e. borrow more money). Of course, this means that they can promise and spend more…

Now, while government spending sounds good in theory, it actually doesn’t do much for long term economic growth.

In fact, if you’re wondering, the majority of Aussie government spending goes towards interest repayments on debt (19.8%), social security (35.1%) and healthcare (16.1%). And although most of this sounds good (and necessary), it doesn’t create sustainable long term jobs. At least not outside of government anyway!

And there you have it…

Money printing, which benefits government and the bond holders, does absolutely nothing for the real economy! The experiment has sucked the economy dry. And central bank credibility has been hit hard for it.

This is why I say that the days of money printing are over!

And, as I’ve long said, you should expect US interest rates to rise higher. The first rate hike should come in either September or October. And I’m backing a second rise in December.

When interest rates start to rise, so will the US dollar. And this means that Aussie dollar will weaken. Yet this is still some time away.

In fact, before it happens, we’re likely to see a bounce in the euro. And this should affect your stock market investments.

If the euro rallies, what about the stock market?

Starting with Greece, here’s why…

After all the controversy, the country still remains in the Eurozone. This should see confidence return into the Eurozone, at least temporarily.

Eurozone politicians will be in heated discussions into October 17 — the date when Athens’ bridging finance runs out — deciding on whether to keep Greece in the Eurozone. In my view, if not at the mid-September Finance Ministers meeting, this will be the date when Greece will start packing it bags.

But, at the moment, the Eurozone remains. And as Boris Schlossberg of BK Asset Management puts it:

Almost everyone on Wall Street hates the euro right now and everybody is convinced that it’s going to parity [against the US dollar]. And it very well may. But not before I think it hurts quite a lot of complacent shorts.

Indeed, when the entire market hates something, typically you’ll see a rally. And this is what I’m banking on…

And to polish it off, the US equities reporting season hasn’t kicked off to the greatest start. The technology sector overall has not impressed investors. For example, thanks to lower than expected Chinese iPhone sales, Apple Inc. [NASDAW:AAPL] fell by nearly 8%. It also provided weaker profit guidance and a US dollar warning.

So, the data coming out of the US isn’t hot, to say the least. And a weak earnings season may see speculators punt on a later rate rise. This should strengthen the euro. Furthermore, with Greece remaining in the Eurozone, Europe has stabilised for now.

As such, expect a short term bounce in the euro. And, following the money trail, this should see capital shift into bond market. Indeed, we’re already looking at a nice trend emerging in the bond market. Italian 10-year bonds have had their best run since the summer of 2008!

And with poor financial reporting results, this should see stocks trade lower in the meantime. Indeed, the correction which I called before the May high is not yet over.

Take a look at this monthly chart of the Dow Jones Industrial Index. It shows you what we’re looking at in the short term.


Source: Freestockchart.com; Resource Speculator

Click to enlarge

The monthly chart will show you the big picture at stake. This year, we’ve seen the market flat. And therefore, at the moment, it could move either way.

Yet, my analysis shows that it will move downwards. To confirm the ongoing correction, we need to see a monthly close below 17,136 points. This is the January low. If this happens, it’s likely that we’ll then be looking at the 16,300 point region — the main target for the correction. This is shown by the lower blue line.

Nevertheless, it’s still possible that I could be wrong. And the market could move higher if it takes out the May high of 18,351 points. If this happens, we’re looking at a two to three month rally towards the 19,300 point level. This is shown by the black line.

If you want more information on how to play these markets, check out Resource Speculator. I’ve been guiding readers through these choppy market conditions all year. See here.

Regards,

Jason Stevenson,

Analyst, Resource Speculator

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Jason Stevenson

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