KINGSTON, NY, 14 JUNE 2018—U.S. equities have bounced back from correction territory and the Nasdaq hit new highs.
Yes, the U.S. economy is sound as evidenced by the boost in consumer spending, which The Street attributes to President Trump's tax cuts. But when it comes to equities, the Trump market bump is the direct result of his corporate tax cuts and tax initiatives, which are driving stock buybacks to record highs.
In May alone, there were $173.6 billion in buybacks, the highest monthly total ever. And, in just the first few days of June, corporations have already purchased $50 billion of their stocks.
However, while buybacks will continue to push stocks higher, a series of global economic indicators are challenging its longevity, especially the rout we see in Emerging Markets.
The more the dollar rises, the lower emerging market currencies fall. And the lower their currencies fall, the costlier it becomes for them to pay back their tens of trillions in dollar-denominated debt.
The Argentina peso, the Turkish lira, South Africa's rand, the Mexican peso, Brazil's real… to Russia, Pakistan, Philippines, India, Indonesia, Sri Lanka… mid-level and emerging market currencies have hit new and multi-year lows.
And, the deeper their currencies sink, the higher their interest rates will rise, thus slowing economic growth.
Also, with the U.S. Federal Reserve again raising interest rates, EM debt will grow heavier as their currencies sink yet lower.
Also, with the European Central Bank's announcement to likely end its massive bond-buying program in December, that too will slow the cheap money flow that has also juiced stock markets.
Following President Donald Trump's snub at last weeks G7 summit, International Monetary Fund chief Christine Lagarde attacked U.S. tariff and protectionist trade policies warning, "The clouds on the horizon that we signaled six months ago are getting darker by the day."
TREND FORECAST: While a series of tit-for-tat tariffs have been threatened across the globe, we do not forecast that they will lead to a trade war. Rather, it is the beginning of trade readjustments.
Nations with massive merchandise trade surpluses with the United States, such as China, Germany, Japan, Mexico, etc., will not retaliate with measures that would destroy their highly profitable trade relationships. Rather, they will negotiate compromises.
And, with the Fed expected to aggressively raise interest rates, not only will it put more downward pressure on Emerging Markets, it will temper the Trump Bump.
Also, aggressive interest rate hikes will pressure gold, as the opportunity cost of holding gold increases. However, prices will rise should geopolitical unrest escalate.