Foreign Exchange Daily Update | Investors Ignoring Key Facts
Investors ignoring key facts
Back on the 16th Oct I wrote 6 reasons why I thought the markets were staring down the barrel of a shotgun. Global stock markets have since recovered somewhat (still way off their highs though) but and it is a BIG BUT, I get the horrible feeling that investors are ignoring key issues and burying their heads in the sand. Sure I might be wrong, but surely the evidence and the facts cannot be kept under wraps for much longer.
So what am I referring too you might be asking. For starters, Chinese consumer demand will ultimately undermine world economic growth and in turn lead to a deeper slump in stocks. Unilever, Nestle, Tesco, Coca Cola, Macdonald’s, Rolls Royce and Ford to name but a few have all reported a slump in sales growth and issued profit warnings citing difficult trading condition. I truly believe that stocks are overvalued and a catastrophic correction is on the cards.
The US markets
The US markets cheered after “signs” that the FED and ECB could act in concert to pump more money into the system after the October sell-off spooked investors (including myself). The “Vix” indicator (“fear index”) that measures market volatility, has fallen back to more normal levels in a sign investors believe everything is ok. The Vix spiked to two year highs in mid-October as growth fears gripped markets. I believe this lull is simply the calm before the storm. UK markets have might have staged a recovery coming back from below 6100 to 6405 (presently) though still some way short of highs of 6,904 in early September. Can investors really ignore these profit warnings for much longer?
The stock Market
While stock markets may have been lulled into a false sense of security by the soothing words from central bankers, investors should take a look out of the window at the brutal reality in the real world. As I mentioned above, the number of US/EU/UK companies issuing profit warnings in Q3 has reached the highest total since the 2008 banking crisis. Having spent the past five years pushing through price increases whilst wages stagnated leads me to believe that many companies may have (now) hit a profit ceilings. Look no further at the recent UK wage growth numbers and it is all there to behold. It is no wonder that Gov. Carney has cited disappointing recent wage growth numbers as a REAL WORRY and why (together with CPI at 1.20%), the BoE are likely to DELAY raising interest rates until well into 2015.
Whilst the findings (ECB Stress Test) on Sunday showed “only” 25 EU banks likely to fail and requiring a capital injection, can we really assume then that everything is ok and that there will not be a repeat of the “Lehman Brothers” fallout we witnessed. My fear is if the EU and China continue to slump (have I mentioned oil prices!!!) this will have a resounding impact on GDP (economic growth) in the US and UK. Already we saw UK Q3 GDP fall 0.20%. Could this be the start of a continued fall in GDP? As much as it pains me to say it, whilst “cheap money” still exists, it is the ones who need it most that can’t get their hands on it. The banks can borrow from their CB’s at silly rates, but passing that on to the end user, well that’s another story altogether. Try go and get a mortgage now from your bank, and they ask you how much you spend on food, petrol, school fees and entertainment. You cannot honestly believe the banks are doing their bit to pass on that “cheap money” to the end user.
The FOMC rate
And so to what can only be described as A MASSIVE MONUMENTAL event taking place tomorrow. The FOMC rate decision takes place after UK markets close with confirmation of the end to QE3. It is Pres. Yellen’s press conference after the announcement that has the world biting their nails to the bone. Whilst we cannot know what she and her fellow FED members have discussed and decided, I believe that the results could spell the beginning of the slump (in stocks) that I mentioned above. In turn, the USD could be sold off heavily (to Pres. Yellen’s delight given that she raised concerns recently about the strength of the USD) and give Gold a boost to potentially $1285.
For today then you will probably see stocks enjoy another rally of sorts and the USD trade sideways to weaker. No point slapping on career ending trades until tomorrow at the very least.
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