GLOBAL ECONOMICS AND POLITICS
Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.
Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.
Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.
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In Charles Dickens’s “Great Expectations” (Chapter 2), a character says: “Ask no questions, and you’ll be told no lies.”
STOCKS: THE EMERGENCE OF SOME NOTABLE DIVERGENCE
In first quarter 2020, prices for an array of stock marketplaces cratered at approximately the same time as the S+P 500. They thereafter reached a major bottom “together” in late March 2020. Over subsequent months, magnificent bull moves occurred.
However, since around early mid-February 2021, prices for the S+P 500, European stock indices in general, and broad international benchmarks (including American stocks and those of other countries), have diverged from emerging stock marketplaces in general, China’s Shanghai Composite Index, and Japan’s Nikkei signpost.
Some important and widely-watched American large capitalization stocks have retreated fairly significantly in recent months despite the S+P 500’s onward march to new highs. If more marketplace leaders within the large capitalization stock fraternity (especially American ones) begin to decline, the greater the odds of price convergence between that group (picture the S+P 500) and small cap stocks (in the US and elsewhere), emerging marketplace stock realms (including China), and Japanese equities
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Great Expectations- Convergence and Divergence in Stock Playgrounds (8-14-21)
“People think of history in the long term, but history, in fact, is a very sudden thing.” Philip Roth’s novel, “American Pastoral”
OVERVIEW AND CONCLUSION
Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span, and the arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.
The US Treasury 10 year note’s 7/6/16 major bottom at 1.32 percent probably ushered in an extended period of rising rates, which probably will connect with (lead to) a peak in the DJIA and S+P 500. This subsequent upward yield shift is only partly on stage, and so far its entrance has been modest. Despite the massive amount of money printing in recent years by the central banking fraternity, the ultimate extent of the rate increase may not be massive. The yield repression (and quantitative easing) era that began during the dark ages of the global economic disaster has not exited. The heavy hand of central bank yield repression (manipulation) not only was extraordinary, but still looms large.
Yet the Federal Reserve has started to raise the Federal Funds rate modestly and given orations about normalizing policy further by reducing the size of its bloated balance sheet. In recent months, monetary tightening talk relating to some other central banks such as the European Central Bank has increased. Moreover, marketplace “tantrums” involving tumbling equities can result from various intertwined causes, not just central bank wordplay and behavior. Yet worries about a “taper tantrum” involving falling stocks as a result of “tightening” of (reduced laxity in) central bank policy schemes nevertheless also have escalated.
Thus in the current marketplace horizon, not only the reality of somewhat higher government rates, but also (alternatively) the widespread perception of an emerging substantial threat of such (or further) yield climbs (whether induced by central bank policy shifts or otherwise), eventually can help to push stock marketplace benchmarks downhill.
Lead/lag (convergence/divergence) relationships between marketplace arenas are not written in stone. What role does the broad real trade-weighted US dollar play? History unveils that sometimes a rising TWD accompanies rising stocks, but sometimes it links with falling stocks. Sometimes TWD depreciation connects with climbing stocks, sometimes with slumping equity signposts.
In the current marketplace theater, audiences nevertheless should monitor the broad real trade-weighted US dollar (“TWD”; Federal Reserve, H.10; March 1973=100; monthly average) closely. The TWD provides further insight regarding probabilities of the S+P 500 (and DJIA; and other advanced nation and emerging equity marketplace) trends. Increasing UST yields do not always (necessarily) mandate appreciation of the TWD. The steady depreciation of the broad real-trade weighted United States dollar since around first quarter 2017 currently entangles with the modest ascent in US 10 year Treasury note rates that began in early July 2016.
Given global central bank yield repression (and other easy money policies), arithmetic moves in the UST 10 year government note (and in short term rates) may appear (at least initially) to be rather minor. Also, rising American interest rates (or fears of this) may not be the only source for a stock marketplace tumble. A weakening TWD can assist US stock marketplace weakness, particularly if other factors exist (such as fiscal/budget or other debt troubles, severe cultural divisions, significant political quarrels, and issues regarding the quality of Presidential leadership). The TWD made a major high in December 2016/January 2017 around 102.8. It currently is around 96.8, a 5.8 percent decline. Though this depreciation is not massive, it is significant. Around 96.0 is crucial support; a sustained breach under this level probably will encourage weakness in the S+P 500 and Dow Jones Industrial Average.
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History on Stage- Marketplace Scenes (8-9-17)