Authored by Richard Breslow via Bloomberg,
If you did a word cloud search on today’s market stories, you would probably get back, “on poor volumes”. Traders have, very understandably, hunkered down to wait for Jackson Hole, the G-7 and Labor Day. Although, as far as the last of those items is concerned, it remains to be seen if the first two will give them the luxury of that final week of August vacation.
After these events, let’s hope investors aren’t left scratching around for strategies they can live with, and letting their imaginations run wild, until the central bank meetings scheduled in September. That would be an inexcusable communication fail and hardly just the clever by-product of policy makers thinking they will get more bang for their buck with shock and awe. Investors are well positioned to welcome any additional easing central banks can be goaded into throwing their way.
Sadly, and tellingly, what traders aren’t set up for is their governments actually implementing the policies that would have a good chance of turning things around. Even though we have a pretty good idea where we should start. You can’t follow the Yellow Brick Road without taking the first step in the right direction.
Germany, and, to be fair, some of the others, need to fiscally spend in order to increase private-sector demand, the bane of the European existence. And there is no shortage of worthy projects to invest in. European banks being incentivized to offer cheap loans as a cure for the weak economy is a dangerous fantasy. And, let’s face it, the world can’t afford a perpetually crippled Europe. Especially at a time they have looming, as well as existing, internal problems that no amount of monetary policy liberality can cure.
The U.S. needs to stop weaponizing trade. Swiveling its ire back and forth between targets to fit the moment has put the entire global economy on edge. The tragedy of this coming weekend’s G-7 wouldn’t be a disgraceful inability to agree on a final communique, but if they use a China respite to focus on Europe. It won’t do any good and it’s not the way to go about righting past wrongs.
Investors have had no alternative but to agree with Singapore’s Prime Minister Lee Hsien Loong when he said that U.S. and China tensions won’t be resolved in the near term and this is negatively impacting his country’s economy. Cue the calls for an autumn ease and more positions, even at these expensive levels, to prepare for it.
Ordinarily, it would be natural to assume that this low-turnover holding pattern would have little probative value and be mostly about stopping out the weak hands before the big events get underway. But there are still some takeaways.
The dollar is bid because people need it.
And as long as we don’t address some of the world’s ills, no amount of jawboning will stop it. Nor any heavy-handed unilateral intervention. There are a number of overly popular safe-haven trades being aggressively recommended. None of them are in denominations emerging-market countries have used to fund themselves. And none of them want to enjoy this status.
The Bloomberg Dollar Index, MSCI Emerging Market Currency Index and the euro are all at important technical levels that are unlikely to be stable for long. These should be followed in tandem. One is unlikely to make a lasting move without confirmation from the others.
Global bond yields are just not ready to rise. It’s how one needs to be positioned, but it sure is distasteful. If central bankers are cheered by these levels rather than stay up every night, they are severely misguided. “Sanity” should replace “fear” in the “greed” coupling.
And equities. Hated by many. Volatile. But as much as they have bent, they have refused to break. And yes, have shown dip buyers have remained active. The S&P 500 handily held support in the most recent sell-off. It has now rallied into its resistance zone.
The next one percent will be a very important test as to which direction is the correction and which the next trend.