It’s been about 3 months since I made the last fundamental review video (back in May), and now I think it’s a good time to do a follow-up video with what’s been happening in the markets since then.
If you remember, the big picture theme was the idea of the world going “back to growth”, following the 2008 financial crisis, and let’s see now if there have been any changes to the economic landscape, especially in the 3 major economies: the U.S., the Eurozone, and China.
Beginning with the U.S., remember the overall theme that drives the U.S. Dollar right now (and the rest of the world) is the potential of a rate hike.
If you remember, last year the Federal Reserve was hinting at a rate hike in 2015, and because of that a lot of people were initially expecting the rate hike to happen in March or June… but as the economic data did not show any significant improvement (at least not to the Federal Reserve’s satisfaction), expectations of the rate hike got pushed back to September or December.
Now we are approaching that period, and based on what we’ve been seeing, the rate hike should be pushed back even further. Why do I say this? Let’s take a look at the economic indicators in the U.S.
We can see, first of all, that the inflation number is low (the CPI remains low).
We have been seeing some improvement in the labor market, but other than that most of the other indicators are generally declining or mostly flat.
So not to much improvement in the United States compared to 3 months ago. That’s the first factor we have to consider.
Next, let’s take a look at the Eurozone. If you remember, the theme at that time was the potential of a Greek exit, and now that episode is over so there are not too many fundamental drivers pushing the Euro besides the potential of an interest rate hike in the U.S.
Let’s next take a look at the economic data.
We have seen improvement in the inflation numbers, although generally speaking it’s still at a low level. Besides that, everything else is mostly uninspiring or improving just a little bit.
So (there is) not too much improvement in the Eurozone as well, although I think they are doing noticably better than 3 months ago.
Next, let’s take a look at China. We see a flat Chinese GDP, the inflation number is improving slightly, and the trade balance is doing pretty okay. This is all data from the past 3 months or so, and the one thing to note is that the GDP, CPI and trade balance numbers are provided by the Chinese government, and there is a lot skepticism about the accuracy of these numbers.
The manufacturing PMI number though, is done by private companies and so they are believed to be more accurate. So as you can see, what the Chinese government is saying compared to what private observers are saying is quite different.
Even without these numbers we can see recently the Chinese stock market crashing and a lot of other problems we’ll get to in a moment. So generally speaking China is doing worse than 3 months ago.
Now let’s take a quick look at the other economies. Japan, sight improvement. The U.K. has been weak for some time, and the weakness is continuing. Australia, a little bit of improvement. And Canada, because of persistently low oil prices, they see continued weakness in the economy.
If you see the general pattern here, we can see that most of the economies are still struggling despite the low interest rate environment around the world. So I don’t think there’s too much growth going on especially if we consider the measure that were taken to achieve even that.
Recently, there was a Chinese Yuan devaluation, and that was a very bearish development in the global economic landscape, and also right now we see not just the Chinese stock market going down, but the U.S. (and the rest of the world’s) stock markets are also going down.
Because of that, a lot of people are now not expecting a U.S. rate hike in September and perhaps not even December.
So, going back to the original theme of “back to growth”, are we really out of the financial crisis?
If you look at a lot of the data since 2008, there hasn’t really been any real growth in the world. We might see a little bit of growth here and there, but that can be explained by the generally loose monetary policies by the central banks, so I think we will just have to see if the economic data improves.
Based on what we’ve been seeing, a lot of the signals and a lot of the data has been uninspiring and might suggest a further slide down, perhaps into recession in many economies around the world.
As traders, we’ll have to keep all of this in mind as we take our positions and not to be too optimistic about an improvement in the economic landscape until the data tells us so.
The general takeaway of this video is that overall, the situation has not improved, and in my opinion it has actually become worse.
As time drags on, I think more and more people will probably come around to this idea and will be adjusting their investments and trades accordingly, and hopefully we’ll be able to benefit from those actions because we would have taken those positions ourselves a lot earlier on.