Stock markets pause for breath
Last week my article focused on how the E-mini S&P had reached important longer-term resistance levels and how other US stock markets were becoming severely overbought. As it happens so far the E-mini S&P has halted right at the longer-term trendline resistance areas in the 2115/2120 area as we had suspected. Yesterday on Tuesday 4 March we saw the first signs of profit-taking as the E-mini S&P dipped to 2096/2095. We did actually identify this as the first important support area in our daily reports and were pleased to see this held perfectly.
Some still argue that stocks are not expensive and are looking for a rotation out of bonds and into stocks. I also read that one of the biggest factors driving this stage of the bull run is that companies are borrowing money almost for free to buy back stock.
I started trading six months before the crash in 1987. Since then, at least every six or seven years there has been a major setback for the global economy, including the 1997 Asian crisis, the 1998 Russian default and Long-Term Capital Management Collapse, the tech boom crash of 2000-2003 and, of course, the financial crisis of 2008. Each time central banks around the world applied the standard procedure of successfully slashing interest rates to provide liquidity and steady stock market nerves.
Now we find ourselves in a situation where there are growing clouds on the global economic horizon. There’s no question that the Chinese economy is saddled with a frightening amount of debt (282% of GDP I read) and has been showing signs of slowing down for a while now. Russia has its own set of problems in the form of a lower oil price, sanctions which caused a collapse in the ruble, and the knock-on effect of higher interest rates to defend the currency. The risk of political instability is also increasing. Several factors are therefore pushing Russia towards a recession. Other oil-producing countries are starting to run into their own economic problems and risks of a sovereign default grow.
Oil companies in the US borrowed heavily at low yields to finance the shale drilling boom. A significant part of the junk bond market has exposure to these companies with risks of default growing after oil collapsed by 60%. Contagion in the junk bond market could cause a significant shakeout in the stock market as well.
Japan struggles to keep out of recession and only managed an annualised 2.2% growth last year as the national debt spirals to over ¥8 million per person. Australia’s decade-long boom is clearly over as commodity prices plunge with demand slowing from China, ensuring the economy slowed last year, with unemployment expected to rise this year. The eurozone is starting its own version of QE in a desperate effort to fight off deflation.
Currency wars broke out in the second half of last year as central banks slashed interest rates even further, many into negative territory.
US GDP is not doing as well as it should be at this late stage in the recovery and earnings projections are potentially disappointing coupled with an interest rate rise scheduled for June/September. The US could be described as the last hope for the global economy.
The stock and bond markets have experienced an incredible run but global debt is dramatically higher than it was in 2007/2008 and global growth certainly is not. This may have been the best time in history for the super-rich, but I read that the middle class is poorer today than it was in 1989.
Since I started trading in 1987 central banks have fought each crisis and the bursting of every bubble with lower interest rates and more recently quantitative easing to build the next bubble. On the basis that we haven’t had one in seven years since 2008, history suggests an economic crisis is now due.
Sooner or later, the world economy will at least hit a bump in the road and we are likely to see how fragile the whole system really is. How will the central bankers save us from financial catastrophe this time?
Technical Analyst & Trader
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