Markets rallied yesterday on the back of last week job report but the latest data from the US was not bullish. US factory orders fell more than expected, yet investors are happy to focus on the job report. You can see the economic data in the US is deteriorating, I think it is a matter of time before future job reports come in lower than expected. The crisis in Italy could spread to Europe, emerging markets have been rattled by the surge in the dollar, the situation is more complicated for emerging markets but I think the dollar will ultimately drop which will ease the pressure on EMs. The tariffs are another threat to global growth, yet stock markets are going up.
This is due to bullish sentiment, when people are in bullish mood they ignore the risks. As I said before investors have been in “buy the dip” mode for the last ten years, the decline in January -February was not enough to stop them buying the dip because it was the first major decline in two years like a first wave. They will stop buying the dip after prolonged and sharp decline like a third wave down which will happen. It takes a long time and a deep decline for the bulls to turn to bears.
The dollar has rallied to 95 in three waves, as the long term trend is down this rally is counter trend and it could be over. If so the dollar will resume its decline and this will benefit GBP/USD. The problem with the dollar is knowing if the rate hikes are priced in. If people have priced in two or three rate hikes then 95 is probably the top. If not the dollar will move higher before topping. Now if the US economy continues to disappoint , people will think the Fed will hike once or twice or not at all, in this case the dollar will fall. Today we saw a strong UK services PMI, this gave a boost to GBP/USD. I expect GBP/USD to rally short to medium term, as a result the FTSE 100 rally will run out of steam.