TREND ALERT®: Global equity markets sinking, gold rising. Trend or fad?

Posted 5/4/16


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TREND ALERT®: Global equity markets sinking, gold rising. Trend or fad?

Global equity markets sinking, gold rising. Trend or fad?

KINGSTON, NY, 4 May 2016—After US markets suffered their worst opening of a new year in the history of the Dow - and with global equities swooning - the mood on The Street brightened over the past two months as stocks in both developed and emerging markets rebounded sharply.

However, it was not true price discovery or basic economic fundamentals, such as supply and demand or corporate profits, that boosted the markets. In the new world economic order of Bankism, equities were artificially juiced by central bank cheap-money-pumping stimulus and negative/zero interest rate policies... schemes undreamed of in the history of the world.

On January 29, with stock markets in turmoil, hoping to weaken the yen to increase exports and juice its recession-ridden economy, the Bank of Japan launched a negative interest-rate policy shot that was heard around the world. 

In March, the European Central Bank increased its government bond-buying scheme from 60 billion to 80 billion euros per month and added corporate bonds to its portfolio... while sinking deeper into negative interest-rate territory.

China - with a debt-to-GDP ratio of 250 percent and new borrowing in the first three months up more than 50 percent from last year's pace - continues to pump up its sagging equity markets and economy with cheap money. Chinese banks made 1.37 trillion yuan ($211 billion) in new local-currency loans in March, while social financing rose 2.4 trillion yuan ($369.38 billion) that month.

Yet, as the debt bubble builds, last Friday, China's largest banks lowered their reserve-requirement ratio - the amount of cash they are required to set aside to cover bad loans. Indeed, the International Monetary Fund estimates some $1.3 trillion in Chinese corporate debt is high-risk. Then, on Tuesday, The People's Bank of China announced it would shove more money into the market to ease the liquidity strain by continuing to pump hundreds of billions of yuan in reverse repurchase agreements (reverse repos) to purchase securities from debt-burdened banks.

Suffering its worst economic expansion in 25 years, China, the world's second-largest economy, continues to lag despite the unprecedented yuan injections. On Tuesday, China's Caixin Manufacturing Purchasing Manager Index came in at 49.4 in April, down from 49.7 in March, the 14th straight month the PMI remained in contraction territory.

And in the US, with first-quarter GDP coming in at a tepid 0.5 percent, anemic wage growth and overall growth in manufacturing and retail trending between decline and lackluster respectively, the Federal Reserve, which raised interest rates only a paltry 25 basis points in some 10 years, is keeping them low in fear of rattling the unsettled domestic and world equity markets.

Trend Forecast: With 40 percent of the global economy operating in a negative, zero or 1 percent interest-rate environment - and with risks of market instability increasing despite these unprecedented cheap-money measures - we maintain our forecast for a gold bull run when the precious metal pierces the $1,400 per ounce mark.
©MMXVI The Trends Research Institute®