foxex: Investor Signal Preference for Risk-On Trades

Thursday, September 5, 2019

Investor Signal Preference for Risk-On Trades

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Thursday, September 05, 2019

1. Investors Signal Preference for Risk-On Trades

2. Global Currency Easing Means U.S. Stocks are Attractive Again

3. IBM Rallies Strongly as Currency Talk Buoys Investors

Market Moves

Small cap and micro cap stocks rallied more strongly on the day than did large cap stocks. The S&P 500 and the Nasdaq 100 stocks rose to their highest levels in a month after opening higher to begin the trading session, closing 1.2% and 1.8% higher respectively. The Russell 2000 small cap index and its micro cap index counterpart backed off their highs later in the trading session, though both closed higher than the large cap indexes.

This dynamic hasn't occurred all summer so today's trading action marks the first intraday indication in the past three months that investors are willing to take risks. Such indications are usually a bullish sign because it means that investors no longer need to move their money away from risky assets and instead may seek them out.

Global Currency Easing Means U.S. Stocks are Attractive Again

On September 12 the Governing Council of the European Central Bank is scheduled to meet to discuss rates and policy. Institutional investors are watching this meeting closely. Most of them appear to expect consideration for more quantitative easing.

Since so many countries in Europe have established negative interest rates for their currencies, investors are becoming increasingly concerned about the effects of these rates over the long term. Should the discussions feature talk of even lower (more negative) interest rates, investors will likely seek more risk-related assets as the only viable alternative.

Currency movements are beginning to show signs that investors are anticipating even more negative interest rates. For example the U.S. Dollar has been showing a strong surge against the Chinese Yuan, and the Australian Dollar-Japanese Yen pair jumped for the second time in two days. This pair works as a good proxy for global risk appetite because the Yen has a negative interest rate, while the Australian Dollar maintains a positive interest rate. (See charts below.)

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IBM Rallies Strongly as Currency Talk Buoys Investors

One company that historically shows vulnerability to currency movements is IBM (IBM). Many of its customers are multinational corporations and may pay for their products or services in any number of different denominations. As a consequence IBM's share price is influenced by currency moves. Perhaps this is the reason IBM shares jumped so significantly today without any particular news regarding analysts or corporate officers making announcements. Such moves may indicate the start of a strong new trend. (See chart below).

The Bottom Line

Stocks moved significantly higher amidst talk of global currency easing. This expectation is bullish for stocks in general and particularly bullish for those stocks with multinational reach. IBM shares are likely an example of this as the shares closed nearly 3.5% higher today.

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