THE MSCI ALL-WORLD STOCK INDEX IS TESTING ITS EARLY 2018 HIGH -- ITS FOREIGN STOCK INDEX IS LAGGING WAY BEHIND -- AND IS TESTING RESISTANCE OF ITS OWN -- GLOBAL CENTRAL BANKERS ARE IN A NEW RACE TO PUSH HISTORICALLY LOW RATES EVEN LOWER
ALL COUNTRY WORLD INDEX TESTS PREVIOUS HIGH...Global stock indexes are once again testing overhead resistance barriers. The weekly bars in Chart 1 show the MSCI All Country World Index iShares (ACWI) in the process of testing its previous high set at the start of 2018 (see red circle). Any test of a prominent previous peak always bears close watching. Weekly momentum indicators also suggest a potential overbought condition.
The 9-week RSI line (top box) is nearing overbought territory at 70. While the 14-week slow stochastics oscillator (middle box) is already well into overbought territory over 80. That doesn't mean that the ACWI won't clear its 2018 peak. It just means that global stocks have another chart barrier to overcome. More than half of the ACWI (56%) is comprised of U.S stocks (which have already hit new highs). Foreign stocks (which are lagging way behind the U.S.) are holding it back.
FOREIGN STOCK INDEX IS ALSO TESTING RESISTANCE...The weekly bars in Chart 2 shows the MSCI All Country World Index ex US iShares (ACWX) lagging way behind the ACWI in Chart 1. That of course is because the ACWX doesn't include the U.S. which is the strongest market in the world. Chart 2 shows us what the rest of the world (which includes foreign developed and emerging markets) looks like. And it looks much weaker. That shouldn't come as a surprise because weakess in foreign economies is one of the main reasons that global central bankers in the Asia-Pacific region, Europe, and the U.S. are starting to lower interest rates again. And that weakness is reflected in weaker stock markets.
Chart 2 shows the ACWX up against some potential resistance of its own. The red lines on the chart measure Fibonacci retracement levels measured from the early 2018 peak to bottom formed last December. And it shows the ACWX testing the 62% retracement line which often acts as a potential resistance barrier (red circle). The ACWX is also testing previous highs formed during the second half of last year. There again, that doesn't mean those resistance lines won't be broken. It just means that foreign stocks have to clear those barriers to resume their uptrend. Another upleg in foreign stocks is probably needed to push the ACWI in Chart 1 into record territory.
LET'S HOPE GLOBAL CENTRAL BANKERS KNOW WHAT THEY'RE DOING...Maybe it's just me, but I find the sudden dovish turn by global central bankers to be somewhat puzzling. And a little disturbing. Mario Draghi yesterday signalled that the ECB was ready to lower rates in September for the first time in three years; and resume its bond buying (QE). Most yields in the eurozone are already in negative territory. The reason being given is that the eurozone economy remains dangerously weak, and needs more stimulus. And higher inflation. The problem is that negative rates haven't boosted its economy or inflation. Yet it's now ready to push yields even deeper into negative territory. That hasn't worked so far. So why keep doing it?
Central bankers in Australia, South Africa, and South Korea (among others) have already lowered rates this month. And the Fed is expected to do so next week. The Fed apparently believes a pre-emptive "insurance" rate cut is needed to prolong the economic expansion which is the longest in history. That insurance is needed because there's little monetary ammunition left when a recession finally does hit. That's because interest rates are already near the lowest in history. And who put them there? The same bankers that are now concerned that they're too low. So their solution is to lower them even further. Which may help keep the global stock rally intact (and keep a bid under bond prices). But which also begs an obvious question. If central bankers are using up their ammunition now in order to preventa recession, what are they going to do when the next recession finally does arrive?
