Whether you like it or not, for the moment the United States remains the world’s biggest economy. Therefore, its political decisions, strength of its economy, and financial market conditions have what some might think is an inordinate impact on global trends. In January, the themes of 2017 continued, technology stocks the darlings doing all the heavy lifting in other US indices. The outlook for interest rates was that the Fed would continue to raise its target rate to a more ‘normal’ level – currently estimated at about 3 to 4 per cent a year.
By February, the Nasdaq index realised it was on far more slippery footing, the relentless weakening of the dollar index eased a little, and it was not until March that the clamour for higher bond yields reached a deafening crescendo. New Fed chairman Jerome ‘Jay’ Powell duly obliged at his first rate-setting meeting (21 March), raising the Fed funds target band to 1.5-1.75 per cent. What he hadn’t realised perhaps is that banks this year had already been paying quite a lot more than this for money market funds – the sort of rates they had had to pay in 2007 (and some of the highest since 2010).
Acceleration in the bullish Nasdaq trend channel since 2017, when it finally broke decisively above 2000’s then record high, culminated in a massive spike high and shooting star candle in the first quarter of 2018. After a decade-long positive run, more overbought than it has ever been on the RSI, it was gunning for a fall. It’s now testing channel support, poised on the 200-day moving average (6320), with the 50-day one peaking mid-March. As index tracking momentum trading is all the rage, a decisive break and death cross (50-day below 200-day moving average) is likely to set the cat among the pigeons. Expect a drop to 5500.
Despite the Fed’s moves and aspirations, bond vigilantes haven’t taken a blind bit of notice, relentlessly flattening the yield curve since peaking in 2011. Now 69 basis points between two-year and 30-year US Treasury paper – the lowest since October 2007 and not a healthy sign for banking or the economy. Once again, 30-year T-Bond yields appear to have peaked at about 3.25 per cent, keeping inside the secular down trend channel established since 1987. It will take a lot to turn a juggernaut like this.
To refresh your memory as to how long things can persist at the ‘wrong’ level, look at the chart of the yield on 10-year Japanese government bonds (JGB). The Nikkei 225 stock index peaked in 1990, and so too did their bond yields – at 8 per cent, quite a bit lower than those prevailing in other G8 countries at the time, something many felt was an unfair advantage to corporate Japan. Twenty-eight years later and despite massive efforts by the central bank this paper now yields just 2.3 basis points – that’s 0.023 per cent a year. The prospect of elusive inflation returning, an ageing population splurging their meagre savings, and looming healthcare costs mean that this tanker is also unlikely to change course any day soon.
From historically relatively expensive levels, the dollar index has been in a clear down trend channel since Donald Trump took office. The neatness of this train track suggests it’s likely to match ultra-long-term support around the 80.00 area. Your road map is ready.
