Swimming Against the Stream
Tomorrow is a big day for European markets and for the Euro. The ECB has been walking a tight rope of monetary policy and has reached the end of the line.
We can expect the Euro to be extremely volatile over the next few days as Mario Draghi is expected to come to a decision. Will they start to reduce their extensive QE program and raise rates? Or will they keep the loose money flowing for longer?
After that, we’ll have a very important Fed meeting on September 20th where the United States faces a similar decision. The US is already much further down the path of monetary normalization but as we’ll discover below not everybody is very happy with that.
Then, September is in for a big finale as we once again reach the US debt ceiling. Over the past few years, investors have become accustomed to the bickering between the Democrats and Republicans and government shutdowns are not infrequent.
With Donald Trump in the White House already threatening the US economy with a shutdown, the markets may start bracing for this option fairly soon.
eToro, Senior Market Analyst
Please note: All data, figures, and graphs are valid as of September 6th. All trading carries risk. Only risk capital you can afford to lose.
It seems that extreme politics may finally be catching up with the financial markets. Wall Street returning from their long weekend did in fact play a bit of catch up with the rest of the markets and sold a bit on the North Korean escalation.
The Dow Jones fell a bit more than 1% yesterday and the declines in Europe were about 1% since the start of the week. Asian equities are all over the place with some up and some down since the big nuclear test on Sunday.
So there isn’t any sort of global panic sell off as Kim Jong Un may have liked. It’s more of an orderly adjustment to risk as the possibility of a nuclear strike becomes less obscure.
Valuations in the stock markets are still very close to their all time highs in most major countries and even though volatility has ticked up, it’s still lower than it was three weeks ago.
Here’s a graph of the VIX volatility index since the Brexit Referendum (red circle) and Donald Trump’s election night (green circle).
The black circle is the all time lowest level for this index since it was created in 1990. Notice any trend?
Bank of Canada tonight for those of you who like trading the Loony. Having been to Canada recently I can tell you that things felt very cheap there. Even though the Canadian Dollar is currently at 23% discount to the USD but the purchasing power seems to be about equal.
My travel recommendations aside, the weaker price of crude oil has had a devastating impact on the Canadia economy and many jobs were indeed lost. At this point the markets seem to have already priced this in and by the graph below we can see that the worst (yellow circle) may be behind us.
Now the question is does the price go back into the current range or fall back to normal levels last seen in 2013?
The answer to that question may very well come from the BoC and what they decide to do with their interest rates.
In fact, one of the members of the US Federal reserve went on record last night stating that the Fed may be at fault for the weak US economy at the moment.
It’s not very common for a big banker to swim against the stream but that’s what Niel Kashkari President of the Minneapolis Federal Reserve did by stating that the rate hikes that Yellen has been doing over the past year and a half were in fact premature and may have done some “real harm.”
At this point, many economists fully expect the Fed to take drastic action on September 20th to start the gradual process of selling off $4.5 Trillion worth of bonds and other assets that they’ve bought since the financial crisis. Will this be premature as well?
What ICO Lockdown?
Crypto markets have already fully recovered from the news that China will halt all ICO activity in the country. They’re not quite at their all time highs, but they weren’t when the news broke either.
A well known professor of economics at Yale University, who I’ve taken classes with before and really respect, named Robert Schiller has recently come out against the current valuations of Bitcoin and saying that this is the classic example of a bubble.
Well, he’s not the first to call it as such and though there are many skeptics to the digitalization and decentralization of modern money, I didn’t notice anybody shorting Bitcoin during the recent pullback.
Of course, Schiller’s point is not lost. All cryptos are still highly experimental and as with any good experiment results may vary based on location and timing. For example, Japan at the moment working hard to get bitcoin excepted in more and more physical locations and Australia about to make bitcoin easily tradable for AUDs.
Looking at the chart it’s easy to see that we’re still in an extremely strong bullish trend. A strong break of the all time high of $5000 would no doubt bring in fresh interest and fresh investors. On the other hand, if we do see a reversal the next major support line isn’t until $3000.
Wishing you an amazing day ahead!!
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The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.
Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.