FYI | Jun 17 2015
By Peter Switzer, Switzer Super Report
I know I once joked with you that Greece as an economy and world power peaked in 340 BC but stock markets are still nervous about the negotiations that come to a head at the end of June.
But the Greeks aren’t the only curve ball that we have to cope with in coming weeks — there’s the possibility the Fed will raise interest rates in September and it meets on Wednesday, so all eyes and ears will be on what the Chairman Janet Yellen has to say.
This in turn could have a big impact on the bond market that many experts tell us is poised to explode or implode! Either way, it is just another uncertainty to throw into the mix for stock players.
On top of these issues the Yanks get a lot of economic data and we hear a fair bit from our Reserve Bank with two speeches, the minutes of the last meeting of the board and the RBA Bulletin being released.
I think we will be in a passive, follow the leader mode until we see what the Fed says and how the bond market reacts. And then how Wall Street responds will be crucial to how our market performs.
And adding pressure to all of this will be the Greek negotiations which oscillate from positive to negative and given how stock markets have responded to both sorts of news, I have to admit that Greece could be a big fly in the ointment for our stock market’s overdue recovery.
Let’s start with Greece as I am actually writing this from the place and if you looked at the Greeks out enjoying themselves you wouldn’t think unemployment was 26%! The next date to focus on is June 18 with the weekend bringing the optimistic tidings that the “Greek government is ready to submit counter-proposals and that Athens and its creditors are closer than ever to a deal.” (CNBC) That’s the official line and it would be great to get this big question mark for stocks out of the way.
That’s the optimist’s view but this from CNBC concerned me: “Worried about Greece, the ECB told all the central banks in Europe to get liquid, resulting in the sale of German and U.S. government bonds, which pushed yields inversely higher.”
I can’t believe the EU and Greece are happy to roll the dice on default and the drachma!
The next issue to be aware of is the Federal Open Market Committee meeting on Wednesday with its June statement expected to give stronger hints about when interest rates will rise. September is the consensus view following a good run of economic data, but the Fed could hold out to be doubly sure that the US economic recovery is firmly entrenched.
Moving too soon, some argue could see the Yanks be in a situation similar to the Kiwis where the central bank there started raising rates last year and then as export prices fell, the Governor Graeme Wheeler had to U-turn and start cutting again!
That said it should be remembered that exports are only 10-15% of the USA’s GDP, which means higher rates and a higher greenback should have a lesser drag on the economy.
On the subject of good economic data the latest reading of the Michigan Consumer Sentiment for June came in at 94.6 compared to final May read of 90.7 and that’s progress.
Okay this takes us to the third issue to be mindful about — the bond market and how it could respond to the prospect of rising interest rates in the USA.
Since the GFC, bonds were the investment of choice for anyone scared of risky assets such as stocks.
However, as official rates start to rise thanks to the Fed, bond yields will have to rise and this happens when groups like mutual funds try to dump their low yielding bonds to get into higher yielding ones. UBS calculates that total US bond fund assets have surged to $US3.54 trillion as of March 31 and that was about a trillion dollars greater than from five years ago.
So bond prices will fall as sellers outweigh buyers and this could lead to a stampede, scary headlines but I don’t think it has to hurt stocks permanently. It could be a short-term thing driven by the uncertainty of the bond market meltdown.
Experts on the bond market say a stampede has to be avoided as it pushes bond prices down sharply which then pushes up yields very high and that’s when stocks could have some rivals.
This is why what Janet Yellen says this week will be vital. The message has to be that when rates rise — possibly in September, which will be the first rise in nine years! — they will be raised slowly and if the markets gets and believes this message then it will be very good for the bond market and then stocks.
A few months back I talked about the old “sell in May and go away” maxim and it looks like this year it has been a wise strategy as our S&P/ASX 200 index has gone from 5,901.80 on May 5 to 5,545.3 where we finished on Friday. That’s a 6% loss and given the dramas likely over June and September, when the first rate rise could happen in the USA, the second part of that maxim “and do not return until St. Leger’s Day” — September 10 — which could be a wise strategy.
The best buying could come earlier than this but timing the market is always hard and its even harder when a Grexit is added to the first US rate rise and then a possible bond market meltdown.
One final point, if a Greek debt settlement helps us believe in the economic future of the Euro zone and the first US rate rise not only does not KO the bond market but also pushes up the greenback, which then takes our dollar down, just when our economic fortunes are on the improve here, then this sets us up for the overdue stock market recovery.
I’m wishing for a lot but it’s all very possible.
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Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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