Futures aren’t the only markets looking to the future these days. Financial markets are also trading at levels reflecting what investors think will unfold in the months ahead.
Stocks, interest rates and the dollar are all looking past the here-and-now to the what-might-be. If any or all three are wrong it could increase volatility, something that’s been lacking from many markets this fall.
Stocks continue to whistle past any and all grave yards, posting a series of record highs while keeping to fairly small daily ranges. Third quarter earnings reports are coming in and beats are winning by a wide margin. Companies’ guidance about year-end profits is also up. The upper range of my forecast for the S&P 500 over the next year is 2,588, just 27 points, or 1%, from the record high posted Oct. 17.
Part of the market’s exuberance, irrational or otherwise, comes from expectations of tax reform, including cuts to corporate taxes that could boost dividends and share buy-backs substantially. Producing an economy that grows at a faster rate would be the icing on the cake if it happens.
The next chairman of the Federal Reserve, due to take office in February, could have a lot to say about that, of course. President Trump likely won’t reappoint Janet Yellen to the post, and the candidate appearing most favored right now, Stanford economist John Taylor, is a believer in a rules-based monetary policy, rather than one giving policy makers discretion to make changes. In particular, the Taylor rule, as it’s known, is a model for forecasting interest rates that would bring higher rates if applied now. This added to expectations for faster rates hikes than the Fed has already telegraphed. The first of those quarter-point increases is likely to come in December.
Most of the movement in interest rates likely will come on the short end of the curve, but term debt should also get more expensive. Still, current fundamentals point to a rate on the 10-year note of around 2.15%; it’s currently around 2.30%, though that’s still cheap by historical standards. The Fed’s move to begin shrinking the trillions it longer-term debt it bought to keep rates low, known as quantitative easing, is expected to also exert some upward pressure on rates. That QE, by the way, is the type of discretionary monetary police Taylor doesn’t favor.
The dollar also appears to be leaning forward in response to a potentially more hawkish stance from the Fed. Higher rates tend to support a currency, though rates are only one of myriad factors influencing currency values. Based on these the dollar index traded in New York should be around 91.1. Instead, it’s moved above 93.45, trying to form a head-and-shoulders bottom that could spark a rally in the greenback to 97.5.
A stronger dollar is typically bearish for dollar-denominated commodities, especially crude oil. Except when it isn’t. The dollar lately has had an ever-shifting relationship to stocks and commodities. When optimism seems reign supreme, a stronger dollar can follow other markets higher. When the greenback is a bastion of safety, those seeking a haven can drive its value higher too while they bail out of stocks and commodities.
President Trump is expected to announce his choice to lead the Fed by the time he leaves for a trip to Asia Nov. 3.
Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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