The following is a summary of our recent interview with David Nicoski CMT, Director of Research at Vermillion Technical Research, LLC, which can be listened to on our site here or on iTunes here along with our weekly market wrap-up and Big Picture.
Though Brexit has put nearly everyone on a reactionary footing, David Nicoski CMT, Director of Research at Vermilion Technical Research LLC, sees a scenario unfolding where the US dollar's direction will determine capital flows in world markets. This time on Financial Sense, he gives his opinion on various asset classes and sectors and discusses what he thinks the dollar's trajectory will take us.
Currency Markets Are Setting the Tone
Broader markets are operating in a reactionary manner based on what's happened in the currency markets over last two years, Nicoski stated.
"We get these panics, and we have an attempt to break the dollar out to new highs or break it below to a new low, and it's just not happening," he said. "I think the market is just gyrating, wondering what direction the dollar is going to take."
After the Brexit vote, the general reaction was to head to safety, which saw many investors piling into US dollar and the Japanese Yen. What's interesting, Nicoski said, is that despite the signification selloff, the dollar could not move out to new highs.
"That to me is a good sign," he added. "We would like to see the dollar not break above the 96 level. We'd like it to take out the 93 level, but in a very slow, controlled fashion, not like a capitulation like we've seen more recently in the Sterling."
In fear-based markets where investors seek safety in the US dollar or the Japanese Yen, once those trades start to unwind, the rest of the world is poised to move up quickly, Nicoski said.
The Market Is Driving the Fed's Actions Going Forward
Everyone is second-guessing the Fed's next move, Nicoski said. We've seen experts go from expectations last December of multiple rate hikes in 2016, to recent expectations of possibly only a single rate hike in 2016, to the current state of affairs where a rate cut is considered more likely.
In response, Janet Yellen has said that she will wait until we see signs of inflation or an increase in jobs in the US.
"I think she's waiting for the market to decide when to raise rates," he said. "I think we're going to see that once … investors exit what I would say is a bond bubble. We can stay in a bond bubble for a lot longer than anyone thinks."
It's nonsensical for investors to put a dollar into sovereign debt and get 99 cents back, he stated. With sovereign debt around the world returning either zero or negative interest rates, Nicoski said, it tells us that central bank policies have failed.
Likely Dollar Weakness Will Determine Market Direction
Returns are very low in most sovereign debt, and Nicoski sees the lynchpin for future movement resting on the US dollar's future.
"If we start to see the dollar fall, we are going to have a rise in inflation," he noted. "And the Fed is definitely going to raise rates. I think that (scenario) has a higher likelihood of taking place."
In spite of the turmoil we've seen over the last six months, Nicoski said, the dollar has not hit a new high, which he sees as a bearish sign. Many emerging markets have been decimated, and if the dollar goes below the 93 level, he thinks we're going to see a lot of money move into those emerging markets.
Gold, Commodities, and Likely Scenarios
Nicoski sees gold entering a secular bull, and we've now broken multi-year downtrends in gold. The reason is simple: we've had zero and negative interest rates around the world.
In the current environment, currencies are making moves overnight that would usually take years to play out.
"One has to question the validity of negative interest rates or zero interest rates," Nicoski said. "We don't have a risk-free rate anymore. It's negative. You have greater risk buying government bonds than you do stuffing it in your mattress."
We are in a bull market in commodities across the board, Nicoski said. He thinks they're going to do much better than most people anticipate currently.
His overweight sectors include energy, materials, and manufacturing. He's also overweight technology, and he's underweight financials.
Overall, this is a panic market with investors being forced into the dollar and treasuries, staples and utilities. However, Nicoski thinks we'll come out fine. Sector rotation will continue to be unpredictable, and leadership will continue to shift, he said, but as in past markets, overall the trend will be up.
He sees the dollar weakening from here, and he sees opportunities in manufacturing and energy stocks, among others.
"I think there is a great deal of opportunity out there," Nicoski said. "I think we're going to wake up and realize the sun will rise another day, and we'll see the moon the following day. That's a guarantee from me. The world's not over. I think what we're seeing is an anti-establishment move around the world. And I think that's something we will get over."