The Flight From Negative Rates Has Begun

The flight from negative rates has begun... Fed official: We could 'easily see' two or three more rate hikes this year... What would another rate increase really mean?... Jeff Clark: The dollar rally isn't over yet...

So much for the benefits of negative interest rates...

The latest data show money is fleeing from European stock and bond markets at a pace not seen since the financial crisis.

According to the Wall Street Journal, investors have been dumping European stock exchange-traded funds for nearly 15 weeks, the longest streak since 2008. They've also been selling eurozone bonds at a rate of more than 500 billion euros a year.

This is a big reversal from last year, when the European Central Bank's ("ECB") stimulus measures were applauded as investors rushed into European markets.

What's going on here? Perhaps European investors are losing faith in the power of central-bank easing...

After all, despite the promises of unprecedented stimulus and negative rates, the eurozone economy remains weak. Meanwhile, these policies have made it virtually impossible for investors to earn a safe return on their savings.

The flight of capital from Europe likely explains the strong recent demand for U.S. Treasury bonds, which are still offering yields of more than 2%. Regular readers know we're not fans of long-term U.S. government debt, but even a tiny yield beats paying European governments to own their bonds.

These moves probably had something to do with the record surge in gold demand we've seen this year, as well.

Here in the U.S., Federal Reserve officials continue to talk up an interest-rate hike next month...

At a speech last night, Federal Reserve Bank of Philadelphia President Patrick Harker became the latest official to say a June rate increase is "appropriate." He also said he could "easily see the possibility of two or three rate hikes over the remainder of the year."

As we've discussed, we don't put too much stock in the statements of fickle central bankers. But the Fed is clearly trying to make a statement here.

Barring a sudden collapse in asset prices before its next meeting on June 14-15, it appears likely that the Fed will increase rates for a second time next month.

What would this mean for your money? The simple answer is "probably not much."

First, remember we're talking about another 0.25% increase in the Fed's short-term interest rate. Rates would still remain at just 0.50%.

Second, the correlations between interest rates and asset prices aren't as straightforward as you might think.

Many folks assume higher short-term interest rates would be good for the U.S. dollar and bad for gold.

In general, this argument makes sense... but it isn't always the case. Sometimes these assets can trade inversely to interest rates... and sometimes there's virtually no correlation at all.

For example, last December, the dollar peaked before the Fed raised rates, and then continued falling after the rate hike, before bottoming earlier this month.

On the other hand, the four-year bear market in gold actually bottomed when the Fed raised rates in December, and soared 18% over the following months.

In short, be prepared for some volatility if the Fed raises rates again next month, but don't base your investment decisions on this news alone.

Speaking of the U.S. dollar, regular Digest readers may recall Stansberry Short Report editor Jeff Clark warned the dollar had fallen to a critical level earlier this month. But he also noted that the dollar had become oversold, and a short-term rally was likely. As he shared in the May 4 Digest...

Take a look at this one-year chart...

The index is now about 3% below its 50-day moving average (DMA) line. That's about as far as the dollar usually strays from its 50-DMA before reversing back toward the line. So traders ought to be looking for a short-term bounce in the dollar to get started soon... If that happens, commodity prices are likely to give back some of their recent short-term gains.

Since then the dollar has quietly soared nearly 3%. It has now closed higher for three straight weeks, the longest streak since it last peaked in January.

In fact, the rally has been so strong, Jeff now believes there could be further upside for the dollar from here. He shared his latest thoughts in today's issue of our free Growth Stock Wire e-letter...

Three weeks ago, the U.S. dollar was on life support. Short-term conditions pointed to a bounce. But the longer-term picture looked bearish. So we figured any bounce in the dollar was likely to be short-lived. The buck was poised to break down.

But now, it may be time to rethink that bearish position – at least, for the next few weeks... We've gotten the short-term bounce we were looking for. The U.S. Dollar Index has rallied from 92.6 to 95.3. That's a gain of almost 3% in just three weeks. That's a remarkable move for a currency. It's a much stronger move than I was looking for. And it has changed the intermediate-term picture on the charts.

Take a look at the following chart...

As Jeff explained, the recent rally has pushed the dollar back above its 50 DMA, which is a short-term bullish sign. But it has also created a "bullish cross" – which is when the nine-day exponential moving average (EMA) crosses above the 50-DMA.

If you're not familiar with the term, don't worry... All you need to know is Jeff says this situation often leads to a stronger rally that lasts for several weeks. Here's more from Jeff...

The bullish cross last July fueled a 3% rally in the dollar in one month. The bullish cross last October was good for a 5% move higher.

A similar move this time around could push the U.S. Dollar Index back up to the 98 level over the next few weeks.

Jeff says this rally has done nothing to change the ominous "big picture" setup he shared earlier this month. He still expects the dollar to head lower over the long term.

But so long as the nine-day EMA remains above the 50-DMA, Jeff says the rally is likely to continue for a few more weeks.

While the dollar has been rallying this month, gold has been pulling back...

The precious metal fell 1.7% today, and is now down 5% since hitting new highs late last month. If the dollar rally continues, these declines may continue.

Again, this is not a reason to turn bearish... We've been expecting a pause or correction for several weeks, but we believe the new bull market in gold has much further to run.

If you don't own gold and silver yet, it's not too late.

We'll close today with a note from our colleague Steve Sjuggerud that has absolutely nothing to do with the markets...

Who would have thought these 1980s Florida surf kids would ever amount to anything?