The buzz from the Yellen back-down continues. US stocks were up again overnight; oil surged 2%; while gold jumped around 1.5%. Silver had a strong session too, up 4%.
Having deemed that the cat is out to a long lunch, the mice are scurrying around having a great time. They’re picking up as much as they can, hoping to hand it off to one of their mates at a higher price before the cat comes back.
And it could be some time. As Jim Rickards puts it in his forthcoming issue of Currency Wars Trader:
‘Now the June rate hike is off the table, and there will likely be Fed no rate hike before the election in November.’
As yes, the US election. Hillary Clinton is the official Democratic nominee, after her closest rival Bernie Sanders conceded defeat yesterday. Does that mean we’ll see a Clinton/Trump showdown in November?
I couldn’t think of a more depressing prospect, but it’s looking likely. This is the choice of leaders you get after eight years of financial repression. There are no good choices. It’s just a case of ‘less bad’.
But enough of US politics smearing today’s Daily Reckoning; you can read about this long running fraudulent circus elsewhere.
Let’s get back to the markets…
So the recent poor data on the US employment market means a June rate hike is off the agenda. Jim Rickards reckons July is out too, and that you won’t see one in September just before the election.
That means money will remain easy and greasy until December at least. This is why the party is getting louder, and why the S&P 500 is approaching all-time highs again.
But I wouldn’t pop out the bubbly until you actually see new highs achieved. Who knows, stocks might be bumping up against the ceiling here. To show you what I mean, have a look at the chart of the S&P 500 below.
It shows the performance of the world’s most important stock index since mid-2011. It peaked in May 2015 at 2134 points.
The S&P 500 has had a rough time in between, but now it’s approaching the May 2015 highs. In last’s night session, it closed at 2119 points, the highest close since July last year, and just 0.7% from the all-time high.
All Yellen and the Fed have to do is keep quiet for a few days and it will be cork-popping time.
But therein lies the problem for the world’s economic and stock market managers. Do they really want the S&P 500 breaking out to new all-time highs because the US economy looks weak?
The only reason the Fed is now on hold (and asset prices are shooting higher) is because recent data points to the US economy slowing. Whether this trend will continue is hard to say. Judging from the market’s response, you’ll get the good old goldilocks outcome. That is, data not too weak to threaten recession…and not too strong to cause a rise in interest rates.
Not for the RBA, though. It’s sitting back watching the Aussie dollar rise again, after helping to knock it down with the May interest rate cut. You can see the movements based on central bank decisions in the chart below:
The Aussie dollar jumped again overnight. It’s back trading at over $US0.74. That will no doubt be an annoying development for Glenn Stevens and co.
A lower Aussie dollar is about the only thing that can help promote growth relatively quickly right now. It makes our mineral exports more competitive, and increases demand for the major industries of tourism and education.
In other words, a lower dollar does a good job of stealing growth from other countries relatively quickly. It’s either that, or we wait for structural reforms to deliver the gains.
But with an election coming up, and politicians busy lying their way through the next few months in order to secure another three years of power, reform is so far off the agenda it’s not funny.
Which brings us back to the dollar…
Can the Aussie weaken substantially with Yellen and the Fed out to a long lunch?
The answer to that question is yes, but for help we turn to our old friend China.
If China takes its foot off the stimulus pedal, which it has appeared to do over the past few months, iron ore prices should continue to pull back. Weakness in our major export should put pressure on the Aussie dollar.
The iron ore price has bounced recently. The Qingdao port price is around US$52 per tonne, after recently falling below US$50 per tonne. But with supply increasing, and demand under pressure, I would expect the price to continue falling in the months ahead.
This week saw the US and China gather for their annual ‘Strategic and Economic Dialogue’. Treasury secretary Jack Lew urged China to stop dumping their excess steel, which is causing havoc for US steel producers.
According to Quartz magazine, US Steel is laying off 25% of its workforce due to low prices. With the US economy struggling to create jobs, this is only going to become a bigger political issue.
A trade showdown between China and the US would not be good news for the global economy. You won’t get one while things look relatively healthy, but it is unlikely China will back down just because the US wants it to. It has its own economic development to look after.
And, as Phil Anderson pointed out in the latest issue of Cycles, Trends and Forecasts:
‘China’s economy is contrived, just like it is in the West. Only in China even more so. Local governments, the banks, even many ‘private’ companies are run by the same organisation in China: the Communist Party.
‘The Party values stability in the long term far more than it does short term developer profit. If need be, companies will be bailed out, covered up, put under the carpet or just simply lied about to preserve ‘the system’.’
In other words, China doesn’t care about excess production. They will dump their steel on other nations as much as they possibly can before reeling it in. It’s going to be a delicate balancing act.
And Australia, with so much to lose, is nothing more than a bystander in this great political-economic game.
For The Daily Reckoning
Ed Note: All charts sourced from Optuma.