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Chameleon Asset Strategies Blog

We get our weather from the Pacific… will we import the market carnage also?

02 May 16 Written by  Published in Blog
We get our weather from the Pacific… will we import the market carnage also?

Accelerated by the Bank of Japan’s decision to take no further action Thursday, Nikkei futures fell by 10.8% last week. It’s a topic for another time, but global financial markets have become insatiably addicted to free money and ever greater amounts of stimulus. The mere thought of interrupting the morphine drip incites panic as seen in Japan. It’s no secret that Japan has a multitude of economic problems, but it is still the world’s 3rd largest economy and one would be wise to pay attention to what is happening there. The world’s 2nd largest economy, China, has also been experiencing a severe slowdown in economic activity. While the true state of affairs is somewhat opaque, we do know that Apple sales in China dropped 26% this quarter. Not exactly a beautiful picture.

So will the mess cross the Pacific and infect our markets also? You wouldn’t know it by looking at the S&P flirting with all time highs, but I think that it already has. We haven’t met the technical definition of recession yet, but GDP sliding from a 3.9% peak print in 2015 to last week’s .7% doesn’t inspire confidence. Nasdaq futures have broken the uptrend and moved down through support. There will be bounces here and there but I’m expecting the selling to continue for a while as it is exhibiting textbook bear market behavior.

   

The dollar index has recently weakened very significantly against other currencies around the globe. This weakness has helped commodities stage a bit of a rebound, but I don’t think that this tailwind is going to continue. The Europeans, Chinese and most certainly the Japanese are not happy about their relative strength to the dollar as it makes their exports less competitive. Given that our Fed is still contemplating another rate hike and the rest of the world is considering further easing it seems that central bankers would prefer to stay within this range vs allowing another destabilizing force to be exerted. I don’t know who will flinch first but I think the odds favor a little dollar strength from here.

 

All the best,

Stephen

 

Read 394 times Last modified on Monday, 02 May 2016 19:50
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