The rumor that a deal had been worked out between Greece and the European leaders was the cause of the closing rally on Wednesday. Thus far there has been no confirmation to the fact other than statements the EU wanted Greece to stay. There has been economic data reported in Europe and it isn’t positive. The German manufacturing data fell the most in three years validating concerns of a slower growth rate and the headlines are full of information, speculation and concerns over the current outlook for the Europe. This is nothing new and it will continue for the foreseeable future. Investors are struggling to embrace the reality of the future for Europe and the impact the balance of the world. The uncertainty is driving volatility in the US and globally. It will take time to resolve and gain any realistic clarity to the situation and investors will have to adjust accordingly. Thus, expect more of the same looking forward. Taking all this in perspective what opportunities are there for investing?
The dollar remains one area to put money to work. The upside isn’t going to produce high returns, but it will offer more of a return than cash. UUP, PowerShares Bullish Dollar ETF is a simple way to capture the positive sentiment and momentum towards the US dollar. Fear relative to the outlook for Europe means the dollar is a natural benefactor. If you want more adventure to the dollar play you could short FXE, Rydex CurrencyShares Euro Trust ETF. The break below $126.30 support recently sets the next target at $123.30 short term. A strong dollar has other impact around the globe to consider as reciprocal opportunities as well.
Commodities will fall in the face of a stronger dollar. Weaker oil, agriculture and metal prices would benefit global economies such as the US and China. Thus, being short commodities is a consideration looking forward as well. As we have seen already with 4% rise in the dollar over the last month, oil has declined 16%, Copper is down 10.9%, Cotton is down 22.4% and gold is off 6.7%. Cheaper commodities benefit the consumer relative to discretionary income. The average consumer will have more money weekly to spend. Watch restaurants and discount stores to be the first benefactors short term. PEJ, PowerShares Leisure and Entertainment ETF is worthy of digging into for the winners as this plays out.
China stands to be a benefactor overall from a stronger dollar. More exports to the US would be the first thought, but cheaper commodities for a developing country helps expansion, etc. FXI, iShares China 25 ETF is down 13.4% since May 1st and offers some value opportunities for investors who are patient. The consumer and financial sector stand to be the primary benefactors as this unfolds.
Treasury bonds may finally be heading lower with yields rising in response to the dollar. It isn’t happening currently as the fear factor over Europe has sent the bond up 4.2% this month with the yield move to 2.78% on the thirty year bond. The ten year bond hit a new all time low this week on yield. This scenario will take time to play out relative to the bond, but the downside of the bond is something to watch and as it develops take advantage of.
The rumors will continue be spread across the headlines and the outlook for the global economies will remain weak, but the opportunities from a stronger dollar will be the next stage of the markets to unfold. If it fails to develop, the downside risk to both the US and global equity markets will only grow. It is important to have a belief relative to the outlook for the markets., but as we state repeatedly, they will be validated one day at a time going forward. If our beliefs are wrong we will know long before we expose our capital to the risk they present. Stay focused and disciplined as we watch all this unfold.