For all my talk of lazy summer months, the S&P500 made record highs yesterday, in conjunction with that Nasdaq 100 (the more tech/ growth biased index) has been at year to date highs, and the Hang Seng is at the highest levels since 2011. Trying to fight the rise of asset valuations is clearly a fools game. Markets have shrugged off geopolitical risk, the threat of policy normalisation from at least 2 major central banks (BoE, Fed) and powered upwards. Where else can people put their money right now?
In the currency space we’re seeing something slightly different. The experience, certainly of the post 2008 world has been of the equity rises dollar falling variety, but this is not happening right now. EUR/USD is lower than at any period since early November 2013, and while there are signs of weakening momentum with some positive divergence on the daily RSI charts, it’s tough to find definitive support levels that could halt its slide before about 1.3150. Other major currency pairs appear to have the capacity to tolerate further dollar strength, not least GBP/USD and USD/JPY before we approach territory where the dollars march might be halted. Emerging market currencies reinforce the thesis that the carry trade is not a real participant in this risk rally. USD/ZAR, USD/MXN, USD/BRL, all look like they could go higher in the short term (USD up). I think this is noteworthy, and one could argue that it makes sense. Normalisation would jeopardise the carry trade, but under the right circumstances why wouldn’t equities continue to rally if major economies are confident enough with their underpinnings to move interest rates into a post crisis era?
Yellen speaks today, the theme will be labour markets. As I mentioned at the start of the week, both the Bank of England and Federal Reserve have made comments about wage growth being weak despite improvements in overall people at work. The feeling is that normalisation might not have to occur until employers are forced to bid up wages to attract workers. It’s entirely possible that Yellen says something to this effect, and risk markets will love it. It’s dovish, while acknowledging that the macro situation is correcting. But it also means that we aren’t able to earn decent interest on our cash, so… equities anyone?
Not much on the data front today. In fact it’s all about Canada, with retail sales and inflation number to come.