U.S. and global governments and central banks, through intervention activities, may have the potential to sustained global growth for two to five years before the next major economic downturn or recession begins. Achieving this lofty objective will require an ongoing rebalancing of U.S. and global currency, interest rate, equity and commodity markets through intervention fiscal, monetary, trade and regulatory policy activities.
Engineering domestic and global growth over extended periods or the next two to five years is an interesting and challenging undertaking. How will markets likely respond to this ongoing process?
- Dollar: More weakness than strength, but near term expect more strength than weakness as the dollar corrects its downside move.
- Interest rates: A slow proportional rise for short duration interest rates to longer term 30-year rates. Why? Interest rates have been artificially suppressed and are now compromising retirement plans, pension funds, etc., and the Fed’s ability to respond to near term or future financial crises. U.S. and global equity markets will be sideways to up during this period with corrective price action along the way to limit excessive speculation and bubbles. Note, corrective price action is underway in many global equity markets and may remain in place for one to multiple months.
- Commodities: Aggregate global commodity demand will build and climax as the U.S. and global economy in general enter the next recession 2 to 5-plus years out.
Looking at the week ahead
These markets are likely in a multi-month period of realigning with periods of risk-on and risk-off and choppy chart activity.
- U.S. Dollar Index: The dollar may have more weakness than strength this week, but most likely the dollar is entering a multi-month period of more strength than weakness.Since February 1, 2018, the dollar has been correcting sideways mostly in time, but now, if the dollar sustains its breakout, one should anticipate the potential of a stronger upside multi-month move in the dollar before the index moves significantly lower.The primary trend of the U.S. dollar is down, but the final low may take a year or multiple years to unfold.
- 10-Year US Treasury Yield: The 10-year treasury yield likely corrects some of its recent gains this week. On April 25, 2018, the 10-year US Treasury Yield broke the 3 percent barrier. Near term, the upside in this market is likely limited to 3.3 and the downside to 2.7. The ongoing current realignment of global markets, in general, will set the stage for the next hard asset advance in equities and commodities one to three or more months out.Currently, this market is gaining favor with many investors. Market participants expect the Fed to raise their fed fund rate in June, and continue reducing their balance sheet monthly. These actions, happening in tandem, will lift the yield curve at both the short and long-end.
- S&P 500: The trend in this market remains up, but one should anticipate an additional one to three or more months of potentially stronger corrective activity, so exercise caution, and at least consider the potential of a 20 percent correction from the high. Just let price action provide guidance.
- NASDAQ Composite Index: This market remains in a corrective period and its energy and leadership comes from the likes of Facebook, Apple, Google, Amazon, Netflix, Microsoft, etc., and these high-tech giants are building headwinds on several different fronts extending beyond consumer privacy rights. Just let price action provide guidance.
- CRB Index: With ongoing global equities realigning with global currency, bond and commodity markets, the CRB Index needs to hold near term support at 195 and longer term support at 180; otherwise, major across-the-board commodity weakness could emerge. Ongoing global stimulus- driven growth, coupled with geopolitical concerns, appears to be near-term supportive of the commodity sector.
- $WTIC Light Crude Oil: This is a market that appears to be in Breakout Mode. Interestingly, a strong breakout will be more positive than negative for the commodity sector as speculative investors and value investors enter this sector in general and the commodity sector as a whole.An interesting array of factors, from fundamentals, to global policy drivers, to social, economic, political, and military uncertainties, keep this market at elevated levels, and they do not appear to be losing their influence anytime soon.
Ag Sector and Trade: Pragmatically, U.S. leadership, exporters, speculators, investors, citizens, etc., have real reasons to be concerned about the lack of global trade fairness and transparency, and, pragmatically, they also must be concerned about near term market negative impacts of ongoing trade positioning with grain producers, especially the soybean sector, at the top of the list.
- Grains: Will grains continue to be the beneficiary of an ongoing multi-month correction in many global equity markets? Are grains considered a value investment? Are grains presently considered one of the better speculative opportunities? The answer to all three questions is likely yes. We are about to find out if any additional near term price strength can be achieved in the grain sector as global money managers search for value investments.
- Soybeans: An optimist would say current price action appears to remain corrective, with little reason not to revisit the $10.80 area. Ending the week above $10.80 and holding will be near term bullish. Reality is this market has spent two-and-a-half months moving sideways without a bullish or bearish commitment, so we sit back and watch the price action.
- Corn: Corn appears to be building a base to move higher. Corn appears to be focusing on its June 2016 high of $4.39. That said, near term corn needs to hold $3.84 per bushel or bearish momentum could begin building.
- Wheat: Wheat closing above and holding $5.00 per bushel opens the door to an advance to $5.47 per bushel.
- Long Grain Rice: If U.S. long grain rice producers can limit production to the March 29, 2018, USDA Planting Intentions Report, this should be a reasonably good year for our long grain rice producers. Planting for the present global long grain rice market demand is very important to the economic health of the U.S. long grain rice sector.
- Cotton: Cotton prices remain strong with the objective of moving to and possibly through the 89-cent area.
Mini-Recessions: What one should consider is the possible future emergence of mini-recessions to slow inflationary forces and limit economic excesses. Debt Limits Growth: The major headwind to U.S. and global growth is building debt, but an array of fiscal, monetary, trade and regulatory policy mechanisms, both domestically and globally, are in place and being rolled out to address growth and debt issues. Ultimately, the U.S. will have to become much more creative in their policy drivers, but that is a discussion for another day.
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]
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