NewsWire: Banks and bad European politics could boost the dollar this week
From the Stansberry NewsWire team:
Wisdom is the reward you get for a lifetime of listening when you rather would have talked.
Those are inspirational words from Mark Twain. And truer words are hard to come by. One of my former employers was the best listener I’ve ever met. He taught me to take a notebook to every meeting and spend more time writing than talking. It became a useful tool. As much as I wanted to talk about the wonderful assistance I could provide, the more I listened the more useful I became to the people I was trying to help.
This is not unlike the stock market. As much as you want it to behave a specific way, you need to listen for clues and hints about what the future holds. Over time, this aids you in predicting reactions and avoiding pitfalls.
Last week was a stark reminder of that lesson. There have been many different forces at work. Sometimes riding out the swings is better than getting drawn into making a mistake.
Monday, we walked in the door to China announcing tariffs on U.S. goods in response to tariffs imposed by the U.S. This led to another $200 billion worth of Chinese goods being hit with a 10% tariff.
Again, China said it would respond in kind. Both sides dug their heels in, possibly setting up for a protracted fight. If it drags out, expect industrials and materials to remain under pressure due to heavy overseas sales.
European political turmoil made its mark once more. German Chancellor Angela Merkel found herself facing a potential revolt from one of her largest backers and majority coalition partners, the Christian Social Union. They’ve given the chancellor a two-week ultimatum to make immigration changes. If she agrees, she runs the risk of upsetting her other coalition partner, the Social Democrats.
If the situation were to wind up dissolving her government and forcing new elections in Germany, this could put further pressure on the euro and boost support for the dollar. In turn, that could weigh on the S&P 500 Index due to its exposure to overseas sales, while boosting the Russell 2000 Index due to its lack of overseas sales.
Elsewhere, Italy raised eyebrows by appointing two euroskeptics to key finance posts.
Also on Monday, the European Central Bank (ECB) hosted its Central Banking Forum in Portugal. Last year, ECB President Mario Draghi warned that deflationary momentum had changed and said inflation was on the rise. He signaled that the punchbowl was being drained as the party was in full tilt. And since that moment, that’s exactly what has been happening. The takeaway this year? The spread between the dollar and euro is likely to continue rising, while rate-hike paths keep diverging. Actions that could further weigh on the euro and boost the dollar.
Thursday, the Fed released their bank stress-test results. They’ve been very vocal about talking up the health of banks, and the data didn’t disappoint. The nation’s largest banks have added $800 billion in common equity capital since 2009. And capital levels now, following the most severe stress test, are higher than where they were in the years leading up to the financial crisis.
That should be a boost for the sector heading into this Thursday, when the Fed releases the Comprehensive Capital and Review results. Expect a boost to bank buyback and dividend plans.
The last big event was Friday. Markit released its flash PMI data for June. This gives us a sense of the global growth picture. Already we’ve seen that Japan and Europe are seeing better than expected growth. U.S. data confirms the rising growth trend. This could further pressure the divergence between the euro and dollar.
The second most important week of the year is behind us, but it feels like the markets are walking away with more questions than answers.
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