The US may be jumping straight out of the inflation frying pan into a financial crisis boiling pot.
As expected, the market was extremely volatile yesterday, and in the main US stocks ended somewhat sideways rather than collapsing as was the clear risk.
We did get our forecast weakening of the US dollar. I would expect some bounce effect here for the US dollar, as people think perhaps they will just play safe again for the moment. This remains an approach fraught with medium to long-term danger, however. There will be increasing discussion of the ‘risk’ of default, as well as the ongoing struggles against trade and fiscal deficits.
The USA is now $31 billion in debt with an economy that is highly dysfunctional, and the Republicans are keeping the prospect of default on the table.
The only reason to buy US dollars has been well and truly yanked away, and everyone is waiting to see if the tower can remain aloft for much longer. Expectations of ongoing aggressive rate hikes are now a thing of the past as businesses and consumers alike seeing bank after bank fall, are bound to become just that more cautious.
Though inflation will remain a serious problem for some time, there are other forces now at work to reduce demand and to lower prices. This renewed financial crisis is a win-win for the Fed in its fight against inflation.
Do not expect rate cuts however.
A steady policy hand is now the most appropriate path forward. The Federal Reserve Chairman should be cautious in his rhetoric at this point. Not giving a definitive end of hikes for now statement, but more of a “it is appropriate, given recent upheavals in the banking sector, to pause for a moment to more fully consider the unfolding ramifications.” Central banking is easy really!
As highlighted in yesterday’s report, this provides a momentary relief ‘factor’ to equity markets, but in the end, the fact that all regulators agreed there was indeed a risk of serious systemic risk and that extreme measures were appropriate, is the most damning of billboards ever offered from Washington.
There are serious problems afoot and the issues run deep, are new to many, and at this point appear entirely unmanageable.
This is why we are very likely entering a new phase of price adjustment across global markets, and this will be keynoted by simultaneously falling US equity values, and the US dollar.
The dollar is in trouble. The Euro and Australian dollar could well weaken on the day, the Australian dollar likely to remain vulnerable, but the Euro could resume yesterday’s strength at any moment in the coming days.
As I have previously stated, any even small military conflict between US and China forces would likely see global investors exit the Australian stock market and dollar at great speed. Suggesting such risks may seem extreme, but should not be neglected when re-assessing one’s global investment strategy.
The outlook for US and Australian equities remains somewhat dire regardless.
Market commentary from Clifford Bennett, chief economist at ACY Securities
