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 MARKET REPORTS |
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Economics
Global markets still firing, while US falters
November 12, 2007
Clifford Bennett, Chief Economist, Sonray Capital Markets
The world has changed and markets are only just starting to reflect the
new reality. As with any shift or transmission to a new medium, there is
plenty of volatility at the time, and the new is dramatically different.
1. The “internet and personal global communicator device age”, is the
most significant economic and social shift in several centuries.
2. Global communication accelerates productivity and trade
everywhere. Anyone can compete to sell to anyone, anywhere in the
world, and that is what is happening.
The reach of these two fresh realities of economic life is impossible to
quantify. This is perhaps the most pertinent point to we investors and
traders of markets. It is not possible in real time in the middle of a long term
historical shift, to be able to accurately determine how long or how far the
shift might take us. There has never been a more important time to stick
with the trend so to speak.
Volatility has in terms of the last 50 years of modern markets at least, often
been a harbinger of a major reversal in trend. That is why some people such
as myself have been warning of the potential for a sustained down-trend in
at least US equity markets. There is no doubt the volatility of this year in all
markets has been unprecedented.
My view of the US dollar has been stated many times before, but the key
point I would like to convey today is that made in the report on the 30 year
charts of a few weeks ago. (The 30 year US dollar chart is again included
after this commentary.)
The US dollar is currently revisiting levels seen many times before in
terms of its overall value.
The difference is that this time the US dollar is fundamentally over-
valued, even at these levels, because of the fresh economic patterns of
the new global village economy. (Intra regional trade based on the points 1
and 2 above.)
Therefore a further 10% to 20% decline in the value of the US dollar is
likely over the next 1-2 years, but could happen as quickly as six months,
if G7 or any group central bank activity attempts to draw a line in the sand
prematurely. It is important central banks maintain their current mantra?s
and stand firm on allowing a steady decline in the US dollar. A premature
intervention, say near Euro 1.50 or 1.55, would generate a few months reprieve perhaps, but would at the same time amplify volatility to levels
beyond what has been previously seen. Without intervention, or perhaps
more importantly without premature intervention, the US dollar may
bottom at around Euro 1.65 to recover and stabilise near 1.5500 1.5000.
Premature intervention could lead to at first a substantial bounce for the
US dollar, but may then be followed by an all out panic against an ailing US
domestic economy compounded with a loss of stature as the world?s reserve
currency, and political stagnation. Such a world jettisoning of US assets
could see the US dollar decline as far as Euro 1.8500 over the next 2 years.
The US economy is beyond question at a delicate place with the prospect
of a „hard? rather than „soft? landing increasing in probability daily. As long
as the Bernanke Fed can continue to react to real events despite its own
personal bias and desire to hold firm and even hike, the US may still manage
a „soft? landing. Another 50 points reduction in the Fed funds rate by the end
of January would be helpful in this regard. Without the further
encouragement of lower interest rates it is likely many businesses will want
to cut back severely on inventories over the next few months. The forecast
here remains the US economy flirting with negative growth over the next
three quarters.
Implications for the global economy are not as severe as many would
suggest. In fact I would suggest that a zero growth period for the US
economy over the next 12 months, would only take 0.5% to 0.6% off the
pace of global economic expansion. This is the worst case scenario I would
suggest, therefore continued strong global growth paralleled by a
realignment of economic and to a degree political power toward Asia and
Europe, is a very strong probability scenario.
Equity markets face a tough call on the balance between a sharp US slow
down, and continued strong growth elsewhere. Historically the US equity
market has guided global equity markets. I have written before of how this
relationship is expected to break down. China will barely notice a bear
market in the US if there is one, and Asia, then Australia, then Europe, then
the UK, will with time follow suit shifting back to bull markets guided by the
China bull market, rather than the US bear market.
My fresh equity market forecast, despite the bearish tone of the last couple
of days, is that any volatility in equity markets at the moment is a
changing of medium to a sustained bull market to higher levels over the
next few years, higher than any of us are currently forecasting.
The current weakness and volatility is a product of uncertainty regarding
the US economy, but does not correctly value the changed greater
efficiencies of the global village economy.
In this regard it is possible to envisage global markets at first reacting
adversely to further evidence of a US slow down, as is the historical
precedent, but then with time recognising the new independent
robustness of the global village economy relative to the US. This means
significant caution regarding equity markets and also commodity markets
may currently be appropriate, but the outlook for 2008 is one of higher
volatility, and higher equity and commodity markets generally.
Equity markets, even US equity markets, based on their degree of global
village participation, may rally significantly through 2008 alongside a
severe US economic slow down.
Key Forecasts:
- Fed will cut three times by 25 points in 2008.
- US economy will flirt with negative growth Q4, Q1, Q2.
- US equity markets remain at risk near term.
- China to remain a powerhouse.
- Global economy to remain firm.
- Commodities volatile but bullish.
- Gold target at US$495, of US$800 to US$1100, now in range, bullish.
- US dollar to continue accelerated collapse next 6 months.
- Carry trade is old news and over, the USD/YEN decline to be savage.
- RBA to raise rates to 7.0% within two meetings.
- Australian dollar will continue to climb, 93 cent target achieved,
next parity $1.00, but in 2008, then 2.08 2.12 in following year.
- Global equity markets may suffer momentary drag from US market
weakness occasionally, but remain strong.
- Australian equities increasingly aligned to global growth.
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
More articles from this week's CompareShares newsletter:
Resident Trader: Lessons from a week rather forgotton
Stocks: Stock picks for the long haul: BHP and Coca Cola Amatil
Superannuation: Putting SMSF eggs in one basket
Commodities: Why oil refiners are getting hammered
Stocks: Stock to watch - Wesfarmers
Markets: Markets over-reacting to US slowdown
Smart Investing: There is such a thing as a cheap lunch
Expert Panel (CFDs): Pairs trading scenarios
Companies: BHP talks Rio value, steelmakers howl
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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