KINGSTON, NY 25 APRIL 2018—In this, the season of equity market volatility that began in early February, a key trigger sending stocks reeling is the prospect of interest rates rising faster than anticipated.
This week's trading started off on a down trend in the U.S. with growing fears that interest rates would rise four times this year, instead of the anticipated three increases, putting further pressure on the overvalued and overleveraged markets.
Also this week, high anxiety swept over the Street as 10-year Treasury notes hit the 3-percent mark for the first time since 2014. Not only will Treasury yields impact rates on the $26 trillion of outstanding US corporate, municipal and mortgage debt, but as rates rise and the cost of borrowing increases, corporations are expected to slow down stock buybacks.
Moreover, should 10-year yields climb above 3.5 percent, expectations are that the higher yields rise, bonds will become more attractive than investing in stocks.
Can markets endure an aggressive schedule of interest rate hikes and higher bond yields?
Our forecast: Short term, yes; long term, no.
IT'S INTEREST RATES, STUPID
Long denied when they were doing it, and chastising us for identifying the scheme for what it was, now even the mainstream Presstitutes acknowledge that it was Central Bank's trillions in cheap money Quantitative Easing and zero/negative interest rate policies since the Panic of '08, that kept markets growing and solvent.
The numbers prove it: Corporations have bought back $5.1 trillion of their stocks over the past 10 years. And the Fed Funds Rate, which flooded Wall Street with cheap money, is still at an extremely low 1.5 percent.
MORE THAN AMERICA
In fact, so concerned about rising rates slowing down its economy and putting pressure on its markets, Haruhiko Kuroda, the Bank of Japan Governor, said this weekend, "I think the Bank of Japan must continue its very strong accommodative monetary policy for some time."
Kuroda said the BOJ would keep short-term policy rates unchanged at negative 0.1 percent and the 10-year yield target would remain at 0 percent.
On the European front, Mario Draghi, President of the European Central Bank, expressed similar concerns and vowed to continue its €30 billion a month bond buyback policy and keep interest rates in negative territory until 2019.
TREND FORECAST: As forecast, the Trump Rally has ended. While markets may move higher, it will only be temporary. Volatility will increase. Not only are markets overleveraged and overvalued, they remain vulnerable to wild card trigger points that will drive them into bear territory and possibly crash them.
Among our concerns are geopolitical dynamics that could lead to the onset of full-fledged war in the Middle East.
Just on Monday, for example, oil prices hit a three-year high over fears distribution could be disrupted after Yemen's Houthis fired two ballistic missiles at a Saudi Aramco facility, escalating the war that the Saudis launched three years ago.
Should oil prices break above $100 a barrel, the impact will drive equity markets and retail sales down worldwide.