Can't you see; it all makes perfect Sense
Monthly Market Commentary: June 1, 2018
According to Aden Tumerkan of Palisade Research, "The dollar’s recent rally over the last month is triggering a problem for investors globally. It reminds me of that old saying from the Nixon Administration years, ‘it’s our dollar – but your problem.’
So, what exactly is going on?
The stronger dollar is now a threat to global earnings growth. Two weeks ago, I published an article highlighting the ‘not-so-great’ data that the mainstream was ignoring. But the most important of them was the South Korean Export Growth Indicator (what I call SKEG) and its accurate history of forecasting global earnings.
This indicator in early May turned negative – signaling an upcoming global earnings recession."
The Bank Credit Analyst recently opined: "The two key elements affecting the performance of EM financial markets are the U.S. dollar and commodities prices. The combination of a weak U.S. dollar and higher commodities prices is typically bullish for EM. The opposite also holds true: A strong dollar and lower commodities prices are bearish for EM."
My more reserved comments about emerging markets may surprise some of my readers. After all, I have argued vocally over the last two years or so to overweight emerging stock markets based on more favorable valuations and better long term growth prospects than in the US. This view was correct over the last two years and is probably still valid in future, but only in the long term. For now, as I shall explain, dollar strength is negative for emerging markets and for European equities. Dollar strength is a symptom of tightening global liquidity and likely slower global growth ahead.
Furthermore, looking at the recent performance of financial assets (currencies, bonds, and equities) a fair observation is that the era of low volatility, which investors enjoyed over the last few years, has given way to much higher volatility in all asset markets.
In the current environment my priority is to avoid major losses through a broad diversification of assets, a strategy which I explained repeatedly in earlier reports.
I concede that some astute traders will be able to achieve large gains by taking risky bets. But these traders will require perfect timing because of the increased volatility. Furthermore, if I look at the performance of asset markets over the last twelve months or so, I believe that the correct exposure to currencies will be a key factor for the performance of investors.
Kind regards and wishing you a wonderful summer