Bad News Bears
Real Bears Or Scarecrows??
Well, there seems to be a deluge of bad news surrounding global equities. How should investors view the situation?
1) Oil prices breaching US$78 per barrel, mainly due to Israel stepping up military action against Lebanon. Geopolitics are unstable at the moment, and instead of the usual flight to safety, now its a flight to gooey safety of the enveloping oil, Oil is now seen as a good inflationary hedge, political hedge and solid asset for the medium term.
2) Bank of Japan should end its 5 years of zero interest rates policy and hike rates very soon. Many see this as a sign of tightening, my gawd, how much lower can you go from zero. The uptick should be seen as a very positive sign - that there is strong investment demand, sound export growth, good bank lending (finally), and higher prices (no more stagflation). Japan growth story complements the China and India growth cycle very well.
3) Bernanke did the thing expected of him. Non farm payroll figures hints at a peaking of rates, but the higher oil prices may tilt the balance. Overall, we are very close to a peak in interest rate cycle unless oil goes charging towards US$90. Then all bets are off.
We have to remember that all the negatives are surrounding pretty positive fundamentals. Companies in the US are still managing corporate earnings growth past the 10% mark on average, and cash in the bank has never been higher for many US companies. Growth is still too strong at China, good moderation in India, Japan is chugging away nicely. Commodities are better behaved after the recent correction, demand is underpinned by real production in China and India. Rates cycle are near peaking, rates are high because global demand is firm. (please read blog on "Understanding Bubbles" posted on 29 June).
Overall, oil prices spike is based largely on fears, not on real changes in demand and supply. Traders are profiting from overplaying on fears and worst case scenario. Each conflict will see a lot of hands to calm the waters or pacify the differences. I see it as temporal in effect. Underlying forces in equities still good, but a substantive run probably won't start till end of October.