Current Trends and the Influence of Central Banks

March 18th, 2013

by Dominic Cimino

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Something very striking came to me recently. While viewing the many charts I observe daily, a rather simple, yet noteworthy observation occurred to me. Observations such as this are normally easily cast aside since on the surface they simply don't seem striking. But this time I was intrigued enough to sit back and reflect, "Wait a minute, this could and should mean something."

As I scrolled down my list of charts, all of which had very strong correlation or inverse-correlation to U.S. stocks several years ago, I noticed the correlation for each seemed to break down at some point during this cyclical market rebound. That wasn't remarkably unusual. However, it did seem awfully strange that as the U.S. stock market continues to move higher in this uncertain and often volatile period, many of these other markets have simply gone into sideways holding patterns. In fact, if you believe Ben Bernanke missed his goal of having a rising stock market with price stability, and if you thought currency markets and the Treasury market have been wildly volatile; you must see these charts. But first allow me to expound just a bit.

During the market thumping of 2008-2009, and during the cyclical market rebound from '09 to the present, the term "risk-assets" was widely used to describe higher beta investments such as stocks, commodities and foreign currencies. Several years ago, most risk-assets seemed to move in unison, either up or down. For instance, during the big break of '08-'09, most risk-assets got pummeled simultaneously. They then subsequently rallied together during the onset of the cyclical market rebound. However, even as the S&P 500 and some other select global stock indices continue to press upward, many other risk-asset markets have begun drifting sideways to the delight of Mr. Bernanke, I'm sure.

The first chart we'll consider is the Goldman Sachs Commodity Index chart. Notice how the index has moved essentially sideways since the beginning of 2011, even as many commentators have spoken of rising commodity prices.

The same sideways nature holds true for each of the following charts. So I'll just show them for your viewing.

U.K.'s Pound Sterling:

Euro currency:

Canadian Dollar:

Here's the U.S. Dollar Index. You know; it's the one you're told is wildly unstable and is losing tremendous value:

Australian stock indices chart:

Dow Jones Canada Index of stocks:

Dow Jones Shanghai Index:

Let's next examine the yield charts for risk-off, safe-haven Treasuries. Treasuries were bid tremendously at the onset of the crisis, meaning yields plunged lower as Treasuries were purchased in an effort to seek safety. But now as the crisis has given way to improvement, the yields have risen as money has flowed back out of bonds, right? I'm obviously being facetious. Below are charts that confirm relatively stable U.S. Treasury yields during recent times:

30-year U.S. Treasury yields:

10-year U.S. Treasury yields:

Please allow me to pause for a moment. I'm not guaranteeing these markets remain docile and sideways; many think they will soon explode. Instead, I'm merely reporting the current rends as shown by these charts. After witnessing them, perhaps you too are surprised by their steady nature. Maybe some global equity markets are rallying in part because of this market stability. After all, low inflation, accommodative central banks, commodity price stability, low currency volatility, and a stable Treasury market aren't all that bad.

Speaking of global equity markets, let's view some that are enjoying this current economic environment, including our S&P 500 Index. It's certainly curious that all of these, as opposed to the Australian, Canadian and Shanghai indices above, have benefitted from what I call "super accommodation." That is, their central banks have gone above and beyond the call of interest rate accommodation-quantitative easing-back stopping- duty. Notice their easily observed uptrends during this same period in which other risk-asset markets have consolidated sideways.

Here's our S&P 500 Index:

The German DAX Index:

The Japanese Nikkei Index (N.B. The market really takes off when the new Prime Minister announces unlimited money creation if needed):

U.K.'s FTSE 100 Index:

Charts certainly allude to the possibility that some stock markets are being directed higher by central bank policies, which include money creation. There is currently a debate on this subject, with others suggesting there is bona fide economic improvement, and that central banks are playing only a small role. When confronted with contentious debate, my dad always told me, "It's probably somewhere in the middle." If so, then maybe there's economic improvement, but mostly because central bank policy has given the marketplace confidence and added liquidity. However, in light of the fact that other stock markets which haven't benefitted from the herculean efforts of central banks appear stagnated, one might infer the global economy is not yet on independent sound footing. If it were, wouldn't these other markets be rallying in tandem with ones that apparently have benefitted?

On the other hand, in spite of massive interventions which are still being tested, it appears global central banks have coordinated efforts in such a way that until now, commodity, currency, and Treasury price stability have been reasonable; and this perhaps has contributed to a stock friendly environment for some nations.

Finally, if you're wondering if all of this has some greater meaning, I can only speculate. Three possible explanations for these observances come to mind. Unfortunately, the future for the global economy is far different for each scenario, and in my opinion, each remains possible:

  1. Maybe market divergences are in place and markets that have benefitted from massive central bank aid are the last survivors, until yet another bubble is burst and markets retreat once again.
  2. Perhaps central banks have orchestrated the miracle of our lifetime, and independent growth finally resumes, surprising most analysts and investors as central bank measures are gradually reined in with little negative consequence.
  3. Maybe rallying stock markets are front-running inflation that may become problematic for each corresponding nation, and for the world as a whole since these countries represent a sizable portion of the global economy.

Dominic Cimino

Chief Investment Strategist

Financial Advisor

Preferred Planning Concepts, LLC

2800 South River Road #240

Des Plaines, IL 60018

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.

© 2013, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.

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