Investing.com | Jan 16, 2018 07:00AM ET
For an in-depth review of US stock indexes, see our Week Ahead.
Despite that (or perhaps because) US markets were closed yesterday in honor of Dr. Martin Luther King, the dollar index extended its fourth day of declines. The greenback fell against every major currency, registering a fresh trough of 90.28, the lowest since January 1, 2015 and a close of 90.46, the lowest since January 2, 2015. As we predicted in our Week Ahead post, gold gained.
The biggest major to gain was the euro, which extended gains that have pushed it to its strongest level since 2014. In Sunday’s Week Ahead, we provided an in-depth analysis of the dollar, as well as the problem the strengthening euro creates for the ECB. We wrote:
“A stronger currency lowers the price of imports and is a headwind for European exporters, potentially constraining economic growth down the road.”
Sure enough, yesterday’s fourth day of advances for the euro weighed on European stocks, as evidenced by the struggling Stoxx Europe 600 Index. Major financial networks explain the rising euro as the fundamental reason for the region’s recent weak stock market action.
If economic growth will indeed spur a lower euro, then this is "unfortunate" for the ECB as well as European firms and shareholders, as Europe’s economic growth is expected to resume its upwards trend after the strong start of the year. In fact, economists in Bloomberg’s monthly survey raise forecasts to 2.2 percent growth, a near decade high right after last year’s 2.4 percent outlook. Last year's 2.4 growth came as a contrast to projections made at the beginning of the year, when economists had expected momentum to dwindle and were forced to continuously upgrade their projections, chasing the actual performance. It is important to note that while economists may analyze cold data, they are people too. Therefore, we raise the question: how much of their current high economic forecast is to compensate for last year’s continuous undershooting projections? Only time will tell.
Here is our attempt to simplify an ever-tangling web:
So, which is it? Will the strong euro slow down economic growth, or will (per the Bloomberg survey) economic growth accelerate?
Honestly, this apparent contradiction is unclear to us, but what is crystal clear is that stock investors don’t like a rising currency. It is also clear that yesterday’s decline of European stocks cannot be explained by expectations for higher borrowing costs that follow economic growth for two reasons: (1) no rate hike is expected before 2019, and (2) if the economy will in fact continue to expand at an even faster rate, then this will prove the rising currency doesn't hurt growth at all.
Technically, the index completed a bullish ascending triangle, but with only a 0.95 upside breakout, and not even satisfying an aggressive 1 percent minimum, it is potentially a bull-trap. This is highlighted by the weekly high-wave candle which represents a lack of leadership and is often produced before a reversal.
h2 2 Bullish Euro Developments/h2Following our Week Ahead post there were 2 bullish developments for the euro:
Today, the dollar steadied as the euro declined.
As discussed, European stocks rallied. The Stoxx Europe 600 advanced, but not as much as the MSCI Asia Pacific index, as Japanese shares closed at multi-decade highs and shares in Hong Kong even hit a record.
A warning from Japan’s finance minister regarding wild swings in the foreign exchange market ended a five-day rally for the yen.
It also just so happens that the price reached the channel bottom, where supply increases.
Most base metals fell as did crude oil, potentially ending a sixth straight day and its longest rally since July, wiping out most of yesterday’s gains.
The market structure complex wheels are picking up speed with the return of the US market after Monday's holiday, global equity averages extending records on global economic growth, last week’s apparent taper tantrum and earnings season switching to a higher gear. It is becoming increasingly more complex to read all the many apparent contradicting signals. Investors will focus now on corporate results, ahead of central bank meetings in the US, Japan and Europe before the end of the month.
h2 Up Ahead/h2Stocks
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