Bloomberg by Lananh Nguyen & Robert FullemDollar bears are back from the wilderness.
The currency slid to the lowest since November on Wednesday, and options show investors are becoming more pessimistic on the greenback versus the euro and yen. The dollar has almost erased its gains from the so-called Trump Trade, as pro-growth policies from the presidential administration have yet to materialize. UBS AG’s wealth-management unit recommended selling the dollar against the euro, and JPMorgan Chase & Co., the world’s second-biggest currency trader, advised clients to ditch bullish bets in the short term.
“The case has become more compelling” to short the dollar, said Constantin Bolz, a foreign-exchange strategist at UBS in Zurich. The bullish dollar consensus since Donald Trump’s election in November “is turning step by step” as markets question U.S. policies and their effectiveness.
UBS sees the euro-dollar exchange rate climbing as high as $1.15 over the next six months from $1.0796 Wednesday. It expects dollar-yen to fall to below 110 yen in the same period.
The U.S. currency has fallen 3.8 percent this year as traders awaited details on the size and scale of fiscal-stimulus proposals and cues from the Federal Reserve about the path of interest-rate increases. The weakness follows four years of gains as the world’s largest economy recovered from the financial crisis and the Fed began to nudge borrowing costs higher. The Bloomberg Dollar Spot Index dropped 0.2 percent Wednesday.
Technical Indicators
In options markets, protection against a rising dollar is getting cheaper as the outlook on the currency becomes more pessimistic. Risk reversals, an indicator of market sentiment and option positioning, have been signaling a shift away from dollar bullishness.
The EUR/USD one-year risk reversal, the extra cost to protect against euro declines, versus the cost to protect against gains, has been getting cheaper and has plunged as markets discount the prospect of Marine Le Pen winning the French election.
Investors are also less bearish against the euro versus the dollar. The so-called smile of one-year volatility, which reflects the cost of protecting against low-probability events, has flattened.
Similarly, the dollar-yen one-year risk reversal, which reflects the extra cost of protecting against yen appreciation, has gone up. That means investors see yen gains as more likely.
Another bearish signal is the Bloomberg dollar spot index’s 50-day moving average crossing under its 100-day moving average.
Today the stock markets are experiencing a pull-back of 1% or more—the biggest drop in the markets in the last 2 months. What does it mean? Is the Trump stock market rally in jeopardy, or is it just a pause before the next leg up?
Now is a good time to evaluate your investment risk level and adjust your portfolio accordingly. Do you know your risk number? Get your free, no-obligation report on your risk level. This report will let you know if you are taking too much risk or not enough risk.Click here to complete your personal risk profile. You’ll receive your Riskalyze report via email.
Please call (877-340-1717) or email (raegan@womackadvisers.com) with any questions.
Weekly Market Commentary
March 20, 2017
The Markets
Three steps and no stumble…
Technical analyst Edson Gould developed a market rule of thumb known as ‘three steps and a stumble.’ It states stock prices may fall after the Federal Reserve (Fed) raises the Fed funds rate three times in a row without a decline, according to Market Technicians Association. [1]
The idea is three increases show the Fed is serious about keeping rates at a relatively high level for a significant length of time. Higher interest rates could potentially mean higher costs and lower profits for businesses. As a result, stock investors may sell shares and share prices may fall. [2]
Last week, with employment and inflation data approaching Fed targets, the Federal Open Market Committee raised rates for the third time, pushing the Fed funds target rate into the 0.75 percent to 1 percent range, reported Financial Times: [3]
“Fed policymakers’ forecasts for growth and inflation remained little changed, with growth tipped to be 2.1 percent this year and next year, slipping to 1.9 percent in 2019. Core inflation is set to be 1.9 percent in 2017 and 2 percent in the two following years. The possibility of looser fiscal policy emerging from Congress has triggered speculation that the central bank will have to further accelerate its rate-rising campaign, but a number of policymakers are insistent that they want to see firmer plans emerging from Congress before making a call on the impact of possible tax cuts on the economy.”
Major U.S. stock market indices finished the week higher, as did most markets in Europe and Asia. [4] MarketWatch indicated Asian markets were encouraged by indications the Fed may not increase rates as often as expected this year, [5] and CNBC reported European markets were boosted by a better-than-expected outcome for mainstream parties in Dutch elections. [6]
Data as of 3/17/17 | 1-Week | Y-T-D | 1-Year | 3-Year | 5-Year | 10-Year |
Standard & Poor's 500 (Domestic Stocks) | 0.2% | 6.2% | 16.6% | 8.6% | 11.0% | 5.4% |
Dow Jones Global ex-U.S. | 2.4 | 7.8 | 10.8 | -0.4 | 2.0 | -0.6 |
10-year Treasury Note (Yield Only) | 2.5 | NA | 1.9 | 2.7 | 2.4 | 4.6 |
Gold (per ounce) | 2.2 | 6.1 | -2.9 | -3.7 | -5.8 | 6.5 |
Bloomberg Commodity Index | 1.0 | -2.7 | 4.8 | -14.1 | -10.3 | -6.5 |
DJ Equity All REIT Total Return Index | 2.3 | 1.1 | 5.5 | 10.3 | 10.1 | 4.8 |
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
I spy with my little eye…Robots!If you take a cruise anytime soon, the bartender may not be able to lend an ear. According to Financial Times, one cruise line has installed robotic bartenders that produce one drink per minute per arm, and can make up to 120 drinks an hour. [7]
It’s not just cruise lines, either. The food industry in the United States is automating. Financial Times described food preparation at a pizza restaurant in California: [7]
“…Pepe squirts tomato sauce on to a pizza base before his colleague Marta spreads it; Noel has 22 seconds to correct any imperfections and add cheese and other toppings, after which Bruno takes the pizza from the line and places it in the oven. But on this production line, only Noel is human. The others – anthropomorphised by name only – are machines conducting tasks usually performed by people.”
The restaurant has 75 human employees who earn about $18.00 an hour. They all are given opportunities to take coding classes so they can better understand and manage robots as well as the artificial intelligence used to evaluate delivery routes. [7]
Then, there is Sally, a robot offered by a food robotics firm. Sally can produce “… fully-customized, fresh, and healthy salads. Sally’s proprietary technology dispenses measured quantities of more than 20 ingredients – refreshed daily – to create a ready-to-eat meal any time of day.” Alternate versions of this robot will offer Mexican and Indian food choices. [8]
Competition for employees is becoming a significant issue in the restaurant industry, reported the National Restaurant Association. More than a quarter of restaurant operators, who participated in a January 2017 survey, said recruiting and retaining employees is the single most important challenge they face – a 9 percent jump from 2015. That’s the highest level since October 2007. [9]
Soon, the attraction for young children at burger joints may be watching robotic characters pull together kids’ meals!
Weekly Focus – Think About It
“There is a point in every contest when sitting on the sidelines is not an option.”
--Dean Smith, Former Head Coach, University of North Carolina Tar Heels [10]
Best regards,
Womack Investment Advisers, Inc.
WOMACK INVESTMENT ADVISERS, INC.
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* These views are those of Peak Advisor Alliance, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indices referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.
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Sources:
A recent whitepaper "Reassessing the Role of Precious Metals as Safe Havens – What Colour Is Your Haven and Why?" This report confirms that gold and other precious metals such as silver, platinum and palladium offer a safe haven—especially in times when the stock and bond markets are turbulent.
The researchers confirm this (see the referenced chart above) showing that gold historically has a low correlation to other financial assets. As an investor, you want to build diversity in your portfolio to help minimize risk during uncertain times and provide opportunity for growth longer term against inflation and currency risks. This report confirms what many "gold bugs" and contrarian investors have preached for many years: gold and other precious metals, while not dividends payers, do potentially offer unique benefits that other asset classes can't: A hedge. (You can read the full report here on the hyperlink provided)
Most all of the precious metals are still trading well off of their 2011 highs—30% to 50%. Inflation is starting to pick up worldwide and the metals may benefit in the coming months. With the stock and bond markets at record highs, I recommend investors allocate at least 5% to 10% in gold and precious metals. You can do this in various ways with ETFs that track the spot prices of gold, silver, platinum and palladium. In addition to the "bullion" ETFs, owning some gold/metal mining stock ETFs or funds can provide a leveraged exposure to the metals. If you don't have a current exposure to precious metals, start with at least 5%, and build on your positon during weakness—then hold on to them and benefit from this low correlated asset haven.
While there may be many uncertainties concerning the U.S political environment and stock markets, gold (and other precious metals) may help provide a "silver lining" for your portfolio.