The U.S.
With a truce in the U.S.-China trade war, the U.S. stock market has risen to new all-time highs. We’re now on the cusp of earnings season, which will begin in about two weeks. U.S. and global data such as PMI reports have recently been signaling possible slowdowns in industrial production and decelerating economic growth (not unlike periods in the economic expansion of the 1990s, which experienced similar episodes of tepid growth). Earnings estimates have correspondingly been lowered considerably; investors will be watching closely to see what corporate profit dynamics have to say about whether and how these incoming data are being transmitted to the bottom line.
Friday’s jobs report will be closely watched by the Federal Reserve as it evaluates what the Treasury bond market is now pricing in as the certainty of interest rate cuts at the end of July.
Given the positive fundamental backdrop of an ongoing expansion, accommodative monetary policy, the likelihood of easing from the Federal Reserve, easier monetary policies from many central banks, good overall credit conditions in the United States, and a lack of any signs suggesting imminent recession risk, we continue to be fundamentally bullish on U.S. stocks, especially the stocks of companies with favorable growth and valuation characteristics in the areas of the economy being shaped and transformed by the Third Industrial Revolution — hardware, software, the cloud, artificial intelligence, networking, defense electronics, financial technology, and cybersecurity.
Europe
Christine Lagarde, currently the head of the International Monetary Fund, will be replacing Mario Draghi at the helm of the European Central Bank when he leaves the position at the end of October. This choice signals that the ECB will likely not be fundamentally changing course, but may indeed deepen its efforts to support the European economy with unconventional monetary policy. “Lower rates for longer” is certainly, at first blush, our assessment of the outcome of this appointment.
A turn of the ECB in an even more dovish direction would also have consequences for the U.S. dollar — a critical variable which we monitor constantly.
Gold and Cryptocurrencies
Certainly, an ECB president who has a dovish reputation, and who has recently been described in media as having “aggressive” and “imaginative” monetary policy ideas, is likely to be a positive for gold. Gold’s recent action may be suggesting that it is, after years, coming back onto the radar of asset allocators as an “uncertainty proxy” for global markets.
With typical volatility, bitcoin led other digital currencies in a rapid pop following the announcement of Facebook’s [NASDAQ: FB] Libra digital currency initiative, and then fell back again just as rapidly. We read some comments from Goldman Sachs [NYSE: GS] CEO David Solomon about that firm’s likely future forays into the digital currency space. Notably, Solomon expressed interest in “tokenization, stablecoins, and frictionless payments” — more or less exactly the types of digital vehicles that FB is targeting with their initiative. He also expressed skepticism that other tech giants would wade into the banking industry themselves, but would probably team with established industry insiders in their digital asset initiatives. Our takeaway? Digital asset adoption is accelerating, and FB, who has thus far not secured any banks as partners in the Libra Association, will be facing fierce competition.
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