Tomorrow, should Chairwoman Janet Yellen and the rest of the voting members on the Federal Open Market Committee ignite lift off on the first rate hike since 2006, a majority of analysts believe a reactionary stock selloff would follow. After all, rock bottom low borrowing rates have been the key driver of a long-running stock bull market that’s only been truly tested one time (a few weeks ago).
And today we have news that inflation in both the U.S. and the euro zone has shrunk to 0.1% – meaning there is essentially no inflation in the two biggest and most important economic blocs in the world.
Further muddying the rate-hike waters, we have China’s snap currency devaluation, the stock market swoon there, and economic slowing worse than we can imagine. Moreover, we have the rest of Asia, except Japan, on tenterhooks concerning a potential U.S. rate hike, a move that could devastate small economies everywhere that are dependent on U.S.-led financing.
We have trouble in second-world economies, most notably Brazil and Russia, although we should consider, too, countries like South Africa, Chile, and even a handful in Eastern Europe that are stumbling.
The long and short of it is that while the U.S. has its own problems, it is still the big dog, the cop on the beat, the heavyweight champion of the economic world. What happens here, affects everyone and everything. So the Fed has to tread more lightly than as if walking on eggshells.
Of course, all these currents, cross currents, rip tides and mini tsunamis are wreaking havoc among traders and investors. The unsettled atmosphere has sent an enormous amount of money to the sidelines, creating a more volatile situation, given that fewer trades and less money are shoving prices of equities and commodities around with ease like checkers on a board.
Some of the reactions are irrational (and very opportunistic), as we shall see by Friday. Gold, for instance, which should retreat in the teeth of low inflation and rising bond yields (in the U.S. and Germany), jumped by $18 an ounce at one point in late morning trading. The price rise was assisted mightily by a softer U.S. dollar.
Alrighty… after the dust settles, the smoke clears and we regain some sort of sanity – regardless of when rates are raised, September, October or December – we will see some crazed sky-is-falling reaction. That you can bet on 100%.
You can also bet it will be short lived and when we get back to business as usual, strong equities investments will grow stronger, commodities will remain soft and banks will lower their commercial and consumer interest rates after having raised them in a knee-jerk fashion.
Let’s see what tomorrow brings!ial.
Wishing you as always, good trading,