What the dollar, euro and yen have in store for the stock market -- MarketWatch

[bsteadman]

What the dollar, euro and yen have in store for the stock market

MarketWatch
By L.A. Little
4/6/2016

Excerpt:

Looking beyond equities and considering the underlying mover, it's currencies that continue to be the story, along with the central bankers who keep playing musical chairs with those instruments.

As has been the case for years now, the way to improve a country's competitive advantage has been to depreciate the currency. It's today's version of the 1930's Smoot-Hawley Tariff Act — you simply devalue your currency, and suddenly, you are competitive. Like almost everything else in today's smoke-and-mirrors world, it's only a short-term kicker, but it gets the central bankers a little farther down the economic road, as they desperately wait and hope for increased growth prospects.

Just take a look at the yen and euro long-term charts if you need proof. The euro has devalued 30% over the past five years, while the yen is down a whopping 40%-plus. Almost all GDP and equity gains are directly tied to these devaluations. It's no different than what the U.S. equity markets did in years past when our central bankers found the magical money tree.

Europe and Japan, in particular, have sold their heart and soul to the “rob Peter to pay Paul” economic theory, and they have no backup plan. Expect currency devaluations to continue and for the dollar to head higher yet again in the coming weeks/months. Europe and Japan have no other choice.

The problem with the U.S. economy

As for stocks, with another round trip in its back pocket, U.S. equity markets are once again poised to peter out at the high end of what is likely to be a multiyear trading range. Let's be clear, though, this last trip up looks a lot better from a breadth perspective than the one in October and November 2015, as now you have gobs of little stocks moving the market higher vs. a few large-cap tech stocks which was the case before.

The problem, as mentioned, is that the world just isn't growing at the rate needed to keep this market climbing. Companies are not increasing sales for the most part, profits margins are shrinking — not expanding — and gross margins are falling. Earnings guidance has been lowered tremendously this quarter with earnings-per-share (EPS) guidance hitting decade-long lows (FactSet), while consumer spending is lower, not higher. In general, the U.S. economy, which remains the envy of the world, right now is struggling to produce enough growth to support the valuations that stocks are sporting once more.

What the charts say

Technically, the picture remains the same as well. Ever since the break-dance lower piece printed in August 2015, this market has been unable to find a reason to rise other than to recoup sharp selloff losses suffered in August 2015 and January 2016. In fact, the entire technical picture looks very much like what we witnessed off the August lows of 2015 — a rapid “V”-shaped recovery that eventually just faded away and rolled over.
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View the complete article, including images, at:

http://www.marketwatch.com/story/wha...ket-2016-04-06

[bsteadman]

Wall Street is wagering that the ‘great dollar correction’ is just beginning

MarketWatch
By Joseph Adinolfi
4/5/2016

Excerpt:

Is the dollar in the midst of a “great correction”? Or is this the new normal?

Increasingly, market strategists and investors seem to be betting on the latter, driven by the notion that the world’s largest central banks have given up on trying to influence exchange rates with monetary policy, for a number of reasons.

Meanwhile, the recent uptick in U.S. inflation is eating into what’s called the real interest-rate differential — the difference between returns on U.S. dollar-denominated assets and those priced in foreign currencies when adjusted for inflation. This lowers the return on dollar-denominated assets relative to those denominated in other currencies, making the buck less attractive to investors. Many other developed economies like the eurozone and Japan have struggled with too-low inflation for years.

And traders have taken notice. Data reported Friday by the Commodity Futures Trading Commission show that the aggregate total of bets that the dollar will strengthen has fallen to its lowest level since July 2014 (...).

“We’re coming out of a massive dollar overvaluation,” said Vasileios Gkionakis, head of global currency strategy at UniCredit Bank. “Central banks are stepping back a bit from their currency obsession.”

A chart shared by Société Générale (...) currency strategist Kit Juckes shows how a widening inflation gap between the U.S. and Europe—expressed by calculating the difference between 2-year swap rates minus headline consumer-price index—suggests the dollar has further to fall.

In comments made last week, Federal Reserve Chairwoman Janet Yellen explained her outlook for the dollar, emphasizing that the central bank would take a cautious approach to raising interest rates. Yellen, and other Fed officials including Chicago Fed President Charles Evans, have cited the risks of raising interest rates before rising inflation has been firmly established.
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View the complete article, including images, at:

http://www.marketwatch.com/story/wal...ing-2016-04-05