Investing.com | Jul 19, 2017 06:29AM ET
by Pinchas Cohenh3 Key Events/h3
Equities in Asia and futures in the US, UK and Europe advanced following both the S&P 500 and NASDAQ Composite closing at record levels, with the latter also achieving a record high. This came even as hopes for a Trump reflation took yet another step backward after the GOP healthcare bill was scrapped—and its savings which would have been used for tax reform—and weak inflation data.
The low CPI, compounded by the Fed’s slower path to raising rates, caused top failures for the yen and gold, turning them into bullish consolidation patterns with an upside target equivalent to the size of the patterns.
On one hand, the ever-rising concern about both US President Donald Trump’s ability to enact fiscal stimulus, as well as weak global inflation data—most recently in the UK, where it dropped to an unexpected 2.6 low on lower gas prices—sent Treasuries, bunds and gilts higher.
At the same time the dollar closed at its lowest level since September 8.
On the other hand, US stocks achieved fresh records. The apparently never-ending US equity rallies are challenged only by the apparently continuous Trump scandals and agenda failures. The new highs, despite yet another failure to move Trump’s pro-business agenda forward, may suggest investors are no longer counting on him for growth.
However, if that’s the case, why would equities rally even after weak inflation and the Fed plan for a slower path to interest rates hikes? In fact, equity investors responded to the Fed’s dire and somewhat embarrassing announcement that it was lowering its economic outlook by buying yet more equity. Investors believe stocks will continue to rise on a worsening economy and the use of cheap money to prop up equity valuations.
Therefore, even if one would argue that inflation is weak because of Trump’s failure to kickstart the economy per his platform, the latest record-highs prove that investors are not only over Trump but also over growth.
Unlike equity investors, bond and dollar traders don’t benefit from a slower path to rising rates propping up high equity valuations. Hence, they are buying bonds now, and selling the dollar. The only potential benefit to bonds would be a breaking point in these lofty stock prices and a sell-off leading to higher Treasury prices.
Bond traders—and 'old-fashioned' equity traders—who still buy on a growing economy are waiting on earnings results to see (1) whether they will be strong enough to warrant record share prices and (2) to determine if the global economy is able to handle higher interest rates. The focus will be on central bank meetings in Japan and Europe this week alongside earnings reports released today by companies such as Morgan Stanley (NYSE:MS) and Qualcomm (NASDAQ:QCOM).
Traders have reduced their bets regarding an additional hike this year from the July 7 high of 60 percent to the current 40 percent, based on the current effective Fed funds rate and forward overnight index swap levels.
h3 Upcoming Events/h3Bonds and currencies
Stocks
Commodities
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.