Category: US Markets

The US Dollar Index has rallied to its strongest level in more than 13 years as the market continues to digest the ramifications of the FED’s more aggressive interest rate policy trajectory.

Financial markets weren’t surprised when the FOMC announced an increase to the Fed Funds target from .50% to .75%. The move had been widely expected since the October meeting and the FED funds futures had been pricing in a 100% percent certainty of the move.

However, financial markets were not expecting the FED’s “dot plots” to reflect expectations of at least three more rate moves during 2017. Since Wednesday’s announcement, we have seen the EUR/USD trade back below the 1.0400 level and the USD/JPY break the 118.50 level for the first time since February.

It’s important to remember that with a stronger USD comes headaches for other Central banks around the world who will incur a higher cost of servicing USD denominated debt. The stronger USD also poses a risk for the US economy especially in an environment of rising US finance costs.

In short, if the new administration doesn’t come up with a viable stimulus package quickly, the US economic growth story could fade. This could translate into a significant correction in US Stocks, US Treasury rates and the Greenback.

However,  before hitting the sell button on long US asset trades, it is important to realize that for the dollar rally to end, dollar bulls need a reason other than year end profit taking to give up on their trades. The latest round of economic reports continues to support the bullish move in the US Dollar.

Despite a stronger USD, manufacturing activity in the NY and Philadelphia regions accelerated. Consumer prices also grew 0.2%, which was in line with expectations and jobless claims dropped to 254K from 255K. The NAHB housing market index jumped to its highest level in 11 years.

The stronger USD over the last month should have softened these data: weakened the trade figures, manufacturing activity and made it more difficult for the Fed to achieve its inflation target, but we need to see evidence of that before selling the USD and US Stocks.

In the meantime, US assets remain in a strong uptrend targeting 20,000 in the DJ 30 and a move in the direction of parity for the EUR/USD.

This is a 5 minute video looking at the buy and sell signals within the Dow Jones top 30 stocks.

Investor Signals now offers US stocks and we can work in partnership with you to build and manage a portfolio that captures both long and short trading signals.

email me leon@investorsignals.com if you’d like to discuss what we can do to help with your US portfolio exposure.

Global financial markets were very nervous going into yesterday’s European Central Bank (ECB) policy meeting…..and for good reason. Since the last ECB meeting in October, the EUR/USD has dropped over 6% and the US SP 500 has gained just over 5%. In this sense, expectations were high that ECB chief Mario Draghi would announce additional stimulus measures, extend the current QE timeline, or both.

Over the last 12 months, the ECB has often fallen short of expectations, disappointed investors and triggered violent price responses in the currency and equities markets. In fact, five out of the last six ECB meetings have ended with the EUR/USD trading higher and global equity markets trading sharply lower.

In the lead up to yesterday’s announcement, some analysts suggested that the ECB was concerned about the lower level of the EURO, and that the recent string of better-than-expected economic data out of the Euro-zone would allow the introduction of tapering monthly bond purchases. However, after listening to Mr Draghi’s press conference, it’s clear that the ECB wants to see a lower EURO and considers a weaker currency an integral component to reaching their 2% inflation target by 2018.

The consensus for the new ECB policy measures was for the bank to extend the duration for six months, keep the monthly rate at €80 billion and expand the bond pool to reduce the risk of supply shortages next year. Instead, Mr Draghi announced the QE program would be extended by another nine months but the monthly amount would be reduced to €60 billion per month. At first, the EUR/USD spiked 120 points higher to 1.0870, and Euro stocks dropped sharply,  on the idea that scaling back the monthly purchases was the start of an exit strategy.

The tapering effect on the market was brief as Mr Draghi spent most of his press conference talking about the possibility of more stimulus, the acute downside risks to the Euro-zone economy and even saying that “there was no tapering in sight.” The math is pretty easy; six months of €80 billion per month equals €480 billion, while nine months of €60 billion per month equals €540 billion. By any measure, that’s a lot of Euros that need to be put to work, which is why G-7 stock indices all rallied strongly.

On balance, the ECB made a decisive policy move to further weaken the EURO, reflate the Euro-zone economies and attempt (again) to kick-start some inflationary momentum. As a result, the downside price trend in the EUR/USD will likely continue and G-7 equity indices will remain buoyant