Geopolitical market update
Perhaps the most interesting aspect of the market action over the last two months has been the persistent resilience of the stock market as it has largely recovered from the fearful expectations that were present in late August. If you remember, the morning of August 24th saw the Dow Jones Industrial Average open down more than 1,000 pts before recovering intraday. Immediately afterwards, many analysts were predicting the market would make lower lows. In the 2 months since the panic climaxed on August 24th, we can looked back and see the market has stabilized.
Just because the market has stabilized, doesn’t mean that the risks that were present in late summer no longer exist. China is still mired in a substantial economic slowdown. The Federal Reserve’s Keynesian monetary policy has Janet Yellen and the FOMC boxed into a corner. Similarly, Congress game of playing “kick the can” with the national debt ceiling is looking more and more like “kick the grenade.” The Eurozone remains a complete disaster with deflation strengthening its grip as the continent braces for the cultural and economic impact of the largest migrant crisis to hit Europe in hundreds of years.
These geopolitical developments are real risks to the global economy and are likely to persist in the years ahead. Sovereign governments around the world, because of their general irresponsibility and fiscal mismanagement, are facing massive liabilities and potential insolvency. The depressed price of oil is going to exacerbate an already volatile political climate in the Middle East. With all these major geopolitical risks combining to create an almost perfect storm of economic turbulence, it is important to consider the U.S. dollar as the asset most likely to outperform well during a possible season of crisis. The dollar remains the reserve currency of the word has recently signaled that it is ready to resume it’s advance relative to other global currencies.
Since March of this past year, the dollar has been in a major sideways consolidation pattern. The specific type of pattern where price has a significant rally and then goes sideways is called a “Flag-Pattern” or in this case a “Bullish-Penant” and it is a common type of continuation pattern. We at GFC expect the dollar to rally in the months ahead and to ultimately climb to new highs as the U.S. dollar is likely to benefit from its perceived safe-haven status. With all the current geopolitical risks still in need of reaching a point of resolution, the dollar is likely be the main benefactor of international capital flows in 2016 and beyond.