The charts that matter: central banks just keep printing

Central banks made it clear this week that they will support markets with more printed money. John Stepek looks at how that's affected the charts that matter most to the global economy.

Welcome back. We have a slick new look this week. Hopefully you should now find that the charts are easier on the eye.

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Here are the links for this week’s editions of Money Morning.

We have a nice, short podcast for you this week – Merryn and I had a chat about share price valuations (US is expensive, but quite a few other markets are quite cheap), inflation, and V-shaped recoveries. Check it out here.

And I got another very nice review for my book, The Sceptical Investor, which in the interests of blatant self-promotion, I feel compelled to share with you immediately. “It is an easy read and provides a lot of information about the influence of behavioural economics on investing. It also has several, good practical steps that an investor can follow in order to mitigate risk. This is definitely a book worth purchasing and one that I will be coming back to in the future. Highly recommended.”

Made my week, that one did. If you fancy buying it, you can get the audio book here, or the print/ebook version here.

Onto the charts of the week...

The charts that matter

Central banks across the globe tried to make it clear this week that help will continue to be forthcoming to markets, regardless of the underlying pace of recovery. The Bank of England is printing more money, while the Federal Reserve said that it’ll now buy individual corporate bonds. You don’t get much more of an effort to send a positive signal to markets than that.

Yet gold has been in limbo this week. The market can’t decide whether it’s in “risk-on” or “risk-off” mode. Do investors want to pile back into the S&P 500 or do they want to stick with the perceived safety of US Treasuries, the dollar, and to an extent, gold? From a technical point of view (ie watching the charts alone), gold is very close to its all-time dollar high (though well above it in most other currencies) so progress is likely to be sticky. But you should hang on – if we do end up with an inflationary outcome or a financially destabilising one, you’ll be glad you own some.

(Gold: three months)

The US dollar index (DXY – a measure of the strength of the dollar against a basket of the currencies of its major trading partners) has shown no such equivocation. It’s been heading higher which is a reliable sign that investors are jittery. Now, to be fair, the dollar index has been falling for a few weeks now and was due a bounce, in much the same way that you can argue the stock market was due a breather. So this might just be a correction. We’ll have to wait and see. But if you’re bullish, you want to see this red line going down.

(DXY: three months)

In line with the wider move in the dollar, the Chinese yuan (or renminbi) has weakened a little against the dollar (confusingly, it’s weakening when the black line on the chart below rises). So far that’s not particularly noteworthy given the wider context but it’s worth watching, as tensions between China and the US tend to crop up in the exchange rate first.

(Chinese yuan to the US dollar: since 25 Jun 2019)

The yield on the ten-year US government bond was little changed this week although it did creep a little higher, suggesting that last week’s post-Fed panicky moment is over.

(Ten-year US Treasury yield: three months)

The yield on the Japanese ten-year similarly rose a little, back into positive territory.

(Ten-year Japanese government bond yield: three months)

The yield on the ten-year German bund however, slipped a little lower. The main issue for eurozone bonds right now is the feasibility or otherwise of a coronavirus bailout package which involves issuing what is effectively joint debt. The negotiations promise to be lengthy and complex, though a deal of some sort does seem likely in the end. (And remember that in the meantime, the European Central Bank is just buying what it likes so spreads – the gaps in the cost of borrowing between the most and least creditworthy eurozone nations – should behave themselves).

(Ten-year Bund yield: three months)

Copper took a knock last week but recovered its poise. Again it’s had a sharp run-up so the recent jitters might be nothing more than that – just profit-taking.

(Copper: three months)

It’s a similar story for the Aussie dollar.

(Aussie dollar vs US dollar exchange rate: three months)

Yet again, cryptocurrency bitcoin remained in its current near-comatose state.

(Bitcoin: ten days)

This week’s US weekly jobless claims figure continued the run of improvements, although barely. It was however, worse than expected. The number of new claims fell to 1.51 million (down from 1.57 million last week, which was revised up from 1.54 million). Economists had expected the figure to come in at 1.3 million. The four-week moving average now sits at 1.77 million, compared to last week’s 2.0 million.

(US jobless claims, four-week moving average: since January 2016)

The oil price rallied as investors continue to come to terms with the fact that while oil might be doomed in the long run, we’re still going to need some of it, and demand might bounce back quite sharply now that people are getting on the road again and even thinking about flying.

(Brent crude oil: three months)

Amazon had a solid week, rallying sharply from a minor drop last week. One analyst now reckons the shares could end up hitting $5,000 in the long run (though the analysis in question only has a 12-month price target of $3,200). I’m not sure that’s whacky enough these days to count as a proper “top of the market” call (I’d rather see $20,000 or better yet, $100,000 – but it’s certainly enthusiastic.

(Amazon: three months)

Electric car group Tesla also saw its share price recovery from last week’s dip. Analysts at Jefferies grabbed a few headlines by sticking a $1,200 price target on the company, double their previous target.

(Tesla: three months)

Have a good weekend.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.