Our readers wouldn’t be surprised at the ongoing turmoil in the global stock markets as we’ve been warning about the decreasing liquidity and global economies’ slowdown:
However, we feel China’s currency devaluation increased investors’ worries further, so that the plunge became rapid and radical. For investors who’ve got concerned about their positions, we explain which trend in the markets is unchanged and what we can buy during the turmoil.
The yen is still a long-term sell
The Japanese yen has been the popular short-selling target for speculators and will remain so after the current turmoil.
The yen has been preferred during the turmoil. This is because the low interest rate promoted investors to borrow the yen and sell it to purchase risk assets, and this has to be reversed when the investors need to close their speculative positions.
Thus, the yen has to go up during the turmoil, but it never means the long-term trend of the weak yen is changed. In addition, even without the Fed’s rate hike, the yen is still a long-term sell.
What the Fed is thinking
As we explained in the following article, the Fed is more carefully watching the financial markets than the real economies:
In other words, the Fed will raise the interest rate unless the long-term interest rate is elevated too much, or there is a radical crash in the stock markets.
However, the Fed would accept a correction in the stock markets. No central bank wouldn’t expect it when it’s going to raise the rate. Consequently, the question is how much further the stock market will plunge.
Yet, even if the Fed withdraws its rate hike, the yen is a long-term sell, because the Fed’s aim is not to simply raise the rate but to do so earlier than the other central banks.
This means that no matter how late the Fed’s rate hike might become, it wouldn’t be later than Japan’s rate hike. This is also according to the situation of the Japanese economy:
However, investors must expect high volatility of USD/JPY. We expect the correction of the currency pair into 115 or, if the stock markets tumble further, 110 might be possible. With this expectation we’d start buying USD/JPY when it reaches around 120. For the long-term view on this currency pair, see the following articles:
- 2015-2016: What will happen to USD/JPY when the BoJ expands the QE further?
- 2015-2016: Bank of Japan’s monetary base and timeline for QE and its expansion
The interest rates will remain low worldwide
The second long-term trend we believe to continue is the low interest rates around the world. The tumbling commodity markets suggest a deflationary force as we pointed out:
- The commodity market crash leads to worldwide deflation: gold, crude oil, natural gas, copper and iron ore
The world economies must choose further easing or a deflation, either of which would suppress the long-term interest rate, and it would to some extent continue even after the Fed’s first rate hike. This means we’re bullish on property stocks.
We can consider buying property stocks in the areas with quantitative easing ongoing. However, in Japan the consumption tax hike in 2014 is weakening the consumption, so the best option would be property stocks in the eurozone.
We may recommend Fraport (XETRA:FRA; Google Finance), which owns Frankfurt International Airport. This stock would benefit from the low oil price, the weak euro and the recovering land price.
How long will the plunge continue?
This would be the biggest question our readers have the greatest interest in, but the greatest answer is keep your portfolio in a way that any further fall wouldn’t hurt your assets. Due to our bearish view on the stock markets, our portfolio has more short positions than long positions, and we’re not going to cut short positions no matter how much further it goes down.
However, for some of our readers who insist on knowing the bottom, we may say this could be the biggest fall in the last few years. Seeing the chart of S&P 500 (Google Finance), the biggest recent fall is about 10% in late 2014, so we should be ready for a fall of 15% this time. This is simply because the catalyst is the biggest in the last few years: the Fed’s rate hike, China’s slowdown and the tumbling commodity markets. As S&P 500 already fell by 5%, we should be prepared for another 10%, which will lead the index to around 1800.
Not yet the market crash
Despite our bearish view, we still predict that this isn’t the end of the worldwide QE bubble. This is because investors are still buying bonds during the turmoil, which means the central banks are capable to deal with the situation. The biggest problem, however, will arrive when all the central banks are ready to stop the QE, and it isn’t the time yet.
Please read carefully the following article to know what really is going to happen in this too liquefied market. The plunge this time is relatively easy to deal with, compared to what’s happening in the future.