SK: Dollar Weakness Should Be Worrying Equity Bulls
Dollar strengthed briefly after the ADP jobs report but still looks weak.
US long bonds still look invariably weak and are trading just above critical support levels.
Equity bulls should be taking notice.
Well it looks like the S&P500 (INDEXSP:.INX) is going to make another attempt at 2,300 this week where we will see if the index can permanently break out of its trading range. It broke out to the upside on the 24th of January but hasn't been able to significantly stay above the prior record high of 2,279. Yesterday the ADP jobs number of 246k jobs in January resulted in a spiking of bonds yields, a stronger dollar (NYSEARCA:UUP) initially, and a slight rally in equities. However the S&P came back to the finish the day where it started at 2,279 which means the breakout could end up being a failed one.
I continue to watch bonds very closely. At present the 20 year US bond (NYSEARCA:TLT) is trading slightly below the $119 level. Bonds continue to trade very near support levels and one can not be confident of significant rising equity prices until TLT recovers at least $125 a share. I firmly believe that if capital leaves the bond market (on mass), capital will have to eventually leek out of the stock market. No technical support levels have been hit yet though so most equity investors (as long term sentiment charts illustrate) remain long equities markets.
Inflation is definitely on the rise in the world. Spanish inflation hit 3% in January which must make it very difficult for the ECB to know when to move on interest rates. I maintain that economies like Germany for example should have higher interest rates but the rest of the union hasn't been able to grow at its growth rates up to now. In fact one of Donald Trump's advisors took aim at Germany a few days ago stating that the heavily led exporting country had taken advantage of a weak euro over the past few years. This is largely true but one cannot blame Germany for quantitative easing programs in Europe.