Uncomfortable Divergence in Capital Markets Podcast Talking Points:
- Despite worsening global growth outlook, Fed jumps on accommodative central bank bandwagon further supporting risk assets
- The US Dollar has failed to fall against other G3 FX as other economies growth prospects remain weak
- Vale, the world's largest miner is shutting down its largest Iron Ore mine causing the iron ore price to trade at 4-year highs due to this supply disruption
- Prefer to listen to market views? Check out Trading Global Markets Decoded, the DailyFX Podcast
What’s going on?
At the beginning of the year, traders were ready for what seemed to be a downward trend in the economic cycle. However, after the Fed announced that they will refrain from any hikes and be patient, this may have given a signal that it is too early to be defensive.
What does this mean?
Commodity prices along with oil are higher since the start of the year and it seems that price volatility will continue in 2019 especially with sanctions placed on Venezuela and the shutdown of Vale’s largest mine. What is interesting is that the market communicates a different message from the Fed. Currently, P/E ratios are high, which indicates that prices are high, and earnings may be low suggesting that the market is at its peak. The Fed’s dovish standpoint gives the impression that the market has not reached its peak and encourage investors to buy, which conflicts with what the market is telling investors.
Why is this important?
The increase in commodities prices indicates that the prices are volatile, and this may be beneficial for traders. However, by the beginning of 2020, the price trend may reverse.
What’s going on?
Despite the Fed’s dovish approach, the USD has remained strong.
What does this mean?
When looking at EUR/USD, USD/JPY, or AUD/USD, the dollar is still in a favorable position. For instance, the EUR is struggling around 1.15 partly due to the uncertainty in the European market. Italy’s economy is going through a recession and their bond price dropped once again. Germany struggles with demands causing factories to close. These factors have contributed to the depreciation of the Euro against the dollar. When comparing JPY to the dollar, the JPY is still having a hard time catching up to the USD and in the case of the AUD, the dollar is in a stronger position as the Australian market faces uncertainty due to the central bank’s potential interest rate cuts.
Why is this important?
A strong currency is important for both a developed and developing country. It signals potential growth and thus encouraging investors to enter the market. This is of most importance for the developing countries since their debt is denominated in USD making them reliant on investors in order to pay off foreign denominated debts.
What’s going on?
Vale announced that their company will shut down its largest mine after a judge ruling.
What does this mean?
Vale is the largest miner in the world and was expected to have 31 million iron ore production in 2019. However, with the shutdown of their largest mine, this will reduce supplies and in turn increase prices.
Why is this important?
Iron Ore traded to four-year highs this week on the dual support of expected Chinese stimulus and supply disruptions from Vale. In light of US Dollar strength mentioned above, traders should continue to watch Iron Ore's price rise. Such strength can weigh on potential growth down the road with input costs rising making future projects more expensive.
WANT MORE?
Sr. Analyst, Tyler Yell, CMT covers this indicator and more in the DailyFX podcast; Trading Global Markets Decoded that you can access here.
--- Written by Tyler Yell, CMT, Nancy Pakbaz, CFA
Follow Nancy on Twitter @NancyPakbazFX
