Liberating our Malaise
It’s hard not to think that the very intense spotlight being shined upon the US dollar makes it a key determinant of market direction in the near term.
Keeping in mind that none of this has any bearing on our investment process – which focuses our resources on the identification of high quality business, those with bright prospects, trading at rational prices – let’s take a quick look at how the currency might influence markets.
A weakening US dollar would be expected to result in a reversal of the current pressure on emerging markets, commodities, commodity countries including Australia, and their currencies.
Further strength in the US dollar, many believe, will increase pressure on the global financial system, increasing the risk of a financial correction.
Listening to the comments of Crispen Odey, who is lauded as one of the UK’s “most brilliant” hedge fund managers, one concludes he believes in this latter scenario. He believes the turmoil that began last month has only just began, that stock markets worldwide are overextended by 30 to 40 per cent and in response he has moved about 29 per cent of the $11.7 billion he manages into cash.
A regular monthly survey of 100 institutions by Investment & Pensions Europe found only six participants predicted the dollar would fall over the next 6 to 12 months. Typically when everyone is on one side of a trade there is little further it can go and a reversal can occur swiftly.
If the strength in the dollar is currently due to market expectations the US Fed will raise rates, then it is important to note that they haven’t and that most recently the US payroll report undershot expectations, the ISM Manufacturing PMI fell by nearly a full point in September to 50.2, gross exports fell 3.2 per cent in the second quarter; and the Atlanta Fed’s GDP model now forecasts 1.1 per cent real GDP growth in Q3—down from 1.8 per cent estimated just a week and a half earlier.
So on the balance of probabilities, it might be that we will soon see some optimism return to the local stock market amid a weaker US dollar.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Michael Shapiro
:
When the recent turmoil has started in August, I also thought that this is the start of something big. I still think so. It’s been a long time since QE has ended in US. Asset prices tend to sink when liquidity disappears. Earnings Growth in US is turning negative largely due to high US dollar. With monetary tightening and lagging earnings growth, there is nothing to keep US Equity prices up. The recent and coming dead cat bounce is entirely due to the rapid pessimism in the trading community as hedge fund managers and other investors were unusually quick to liquidate their long positions. The market may rally through October, it always gives traders a second chance to get out. There will be a second, and perhaps a third quake in the markets in November and January, when we finally enter the long overdue bear market. This is exactly what happened in 2007, the first ructions started in August, followed by a massive rally through October. The Fed might be dumb enough to raise interest rates as well fooled by this latest rally in the markets. This time the world has way more debt, way more derivatives and a sick Chinese economy. I for one will be selling some stocks and selling call options against the rest of my Porfirio in throughout the rest of October.
Roger Montgomery
:
Thanks for sharing you thoughts Michael. It will be interesting to see if what you are suggesting transpires.
John
:
Hi Roger,
Above you have noted Crispen Odey’s view on a pending significant downturn in the markets. I’m very interested in your view Roger. Do you think there’s still more “shake out” to come for the markets over the next 12 months.
Kind regards,
John
Roger Montgomery
:
Crispen is regarded as one of the UK’s investment legends. Moving to 30% cash indicates he’s putting his clients’ funds where his mouth is.
james williamson
:
What are your thoughts on MQG? It has been trading strongly lately and famously is positively correlated to a falling USD (or so the media says). Is MQG on MIMs radar?
Roger Montgomery
:
It has not recently appeared through our filters James.