The U.S. markets ended last week strong following the announcement that the U.S. debt rating could be cut. However, the forces that are pushing investors into international stocks persist. U.S. debt is still out of control, growth rates are still higher abroad and the U.S. dollar continues to make investing in stocks priced in non-dollar currencies the better choice.
Uncertainty Sends Investors Into Global Stocks
The U.S. dollar is now approaching its lowest level in 30 months thanks in part to S&P’s decision last week to lower its outlook on U.S. debt. S&P effectively gave the United States two years to get its fiscal house in order and enact meaningful change or be downgraded.
Naturally, President Obama was not too happy about this decision and quickly dispatched Treasury Secretary Tim Geithner to CNBC in an attempt to do damage control. Interestingly, Geithner said that there was “no risk” that the United States’ AAA credit rating would be downgraded.
Others argued that S&P actually understated the extent of the problem in its statement on the downgrade. We will have to see what comes of the announcement and if Congress and the president are able to enact meaningful budget cuts, but in the meantime, the uncertainty is keeping the dollar weak, and this is good for our global stocks.
The third-largest holder of Treasury securities, Japan, said that U.S. Treasury securities remain “attractive,” but since Japan’s budget deficit is even larger as a percent of GDP than the U.nited States’, its opinion may be suspect.
The second-largest holder of Treasury debt, China, appeared to disagree with Geithner and said, “We hope the U.S. government will take responsible polices and measures to safeguard investors’ interests.” Additionally, Chinese government officials have stepped up rhetoric hinting that they might diversify their massive $3 trillion of currency reserves away from U.S. dollars.
The best oasis during a weak U.S. dollar environment remains commodities, which are priced in U.S. dollars, and multinational stocks, which reap windfall profits from currency exchanges. Since the average technology company is a multinational, they benefit immensely from the weak U.S. dollar environment. Commodity-related stocks and companies operating in commodity-driven economies, like those in Latin America, should continue to see a boost.
I mentioned on CNBC’s “Fast Money” last week (check out the video here) that the euro posted its largest daily gain relative to the U.S. dollar since January. This came despite the fact that within the euro zone chaos reigns as the yields on 2-year to 10-year note and bond yields for Greece, Ireland and Portugal all rose to record levels last week. With Greece’s long-term bonds now yielding approximately 15%, a restructuring of Greece’s debt is now widely anticipated.
Further insulting to the United States is the fact that S&P upgraded its outlook on Estonia’s debt to “positive” and said that as a new euro zone member, the country’s transfer and convertibility assessment remains at AAA.
Just in case you missed that, according to S&P, the United States has a “negative” outlook, while Estonia has a “positive” one. If anything, this shows that global stocks are where you want to be right now.