EUR/USD, S&P 500 Stock Index May Fall on Fed Balance Sheet Contraction

It is widely understood that the US government has its hands full in the current financial crisis and the possibility of a stock market crash is taking shape. Indeed, the political wrangling and recriminations have already begun as to who will be held responsible for the ensuing turmoil.

The US economy is at risk of suffering a full-blown economic meltdown; there is no escaping it. However, don’t expect that the Fed will take action to lessen the negative impact of its quantitative easing. In fact, the lack of action and non-action on their part is creating conditions that will undoubtedly result in further trouble for the economy.

Don’t forget that the monetary policy and “QE” (quantitative easing) measures haven’t produced results to reassure investors about the resilience of the US economy in the event of an economic collapse. As one can see, the measures are clearly geared towards prolonging the economic cycle. So what happens if the market falls again after the Fed initiates a negative interest rate policy?

The EUR/USD, S&P 500 Stock Index May Fall on Fed Balance Sheet Contraction Despite all the talk about quantitative easing, the Fed does not intend to relinquish any control over the issuance of US debt. This could spell trouble for investors who are hoping for the Federal Reserve to take on the responsibility of servicing the debt of the major creditors.

Many investors have been looking for an exit strategy to the EUR/USD and S&P 500. Well, they’re still waiting… well, except for the Chinese. The economic situation in China has created a significant psychological effect on the Chinese stock market and the government has done nothing to move the situation forward.

Investors, especially those involved in currency trading, are no longer willing to put their faith in the EUR/USD. One should understand that investors always favor riskier investment instruments and don’t have a problem betting against the US dollar.

The USD might come under pressure if the world’s second largest economy, China, begins to experience economic problems and the economic indicators do not improve. If the Chinese stock market fails to lift the Chinese economy in the coming months, it would be difficult for the US economy to gain from the support provided by the Chinese stock market.

What is particularly interesting about the Chinese stock market is that it can offer protection to the US economy from the ongoing political controversy. The Yen seems to be paying off and the yuan has been getting stronger against the US dollar over the past few months.

The S&P 500 is one of the highest-yielding assets in the world and is currently priced higher than the EUR/USD at the time of this writing. This should give a positive assessment of the performance potential of the S&P 500.

Any good investor would try to avoid the S&P 500 at present because of the possibility of a decline in the price level and an upward spiral in the EUR/USD. However, the market psychology seems to be one sided and the trend has proven itself to be resilient during the last few years.

Many people believe that the decline in the dollar is primarily caused by the Euro falling in value in relation to the US dollar. We should be careful not to jump to conclusions and have faith in the Euro as a hedge against a US economic collapse.

With all the uncertainty in the US and China it’s understandable that many investors will opt for safe-haven currencies like the USD/JPY and the S&P 500. There is a certain amount of caution that investors will be willing to extend in these cases.