COMMODITY-EXPOSED CURRENCIES LOWER AS CHINA STOCKS DROP

Commodity-dependent currencies like the Aussie and kiwi fell on Wednesday as Chinese stocks slid, while trade data from Japan hinted at a recession approaching the world's third-largest economy.

The yen dipped against the dollar and the euro after Japanese exports showed at the slowest pace of growth since mid-2014 mainly due to weakness in China. That also raised chances of more quantitative easing from the Bank of Japan.

USD/JPY was last at 119.92, up 0.05%, while EUR/JPY traded at 136.19, up 0.14%.

The Australian dollar, which is used as a more liquid proxy for Chinese investments because of Australia's strong trade links to China, dipped 0.57% to $0.7218, while the New Zealand dollar fell 0.33% to trade at $0.6730.

The drop came as the Shanghai Composite closed more than 3 percent lower. Other emerging market stocks also fell after recent data pointed to a dim growth outlook.

European stock markets got rid of initial gains in the London session, with Europe's benchmark gauge falling 0.2%.

Elsewhere in the currency trading, the euro was up 0.18% to $1.1365, adding to Tuesday's gains.

Traders believe the euro will suffer from modest volatility ahead of the ECB policy meeting on Thursday. While the ECB is not likely to ease this month, investors expect the central bank to hint at more stimulus later this year.

Data released on Tuesday showed that euro area banks had loosened their lending standards more than expected over the last few months despite volatility in the global markets. That slashed the need for the ECB to expand its 1 trillion euro asset purchase program.

Meanwhile, the Canadian dollar fell with USD/CAD last up 0.17% to 1.3005. The main focus is now on the Bank of Canada's policy decision due on Wednesday with most analysts predicting the policy to stay unchanged.

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HISTORY SUGGESTS, STOCK MARKET PERFORMANCE WILL BE POOR FOR ANOTHER 10 YEARS

Stock performance has been weak for the past 15 years. If history is any guide, the performance is likely to stay poor for at least another 10 years.

This will be so because stocks are still amazingly expensive relative to most of recorded history, says Henry Blodget of Business Insider.

In the past, when stocks have been this expensive — or close to this expensive — performance over the next decade has been crappy.

According to the long-term valuation analysis, we are still living the aftermath of the highest level of stock-market valuation in history — the peak of the tech bubble in 2000 — and that this will take at least another 5-10 years. That's the bottom line.

Bulls vs bears

Throughout the past 100 years, the market has gone through distinct "bull" and "bear" phases lasting 10-25 years each, on average:

A 29-year bull market from 1900-1929
A ~20-year bear market from 1930-1950
A  ~15-year bull market from 1951-1966
A ~15 year bear market from 1967-1982
An ~18 year bull market from 1982-2000
A ~? year bear market from 2000-?
Some analysts suggest the latest "bear" phase ended in 2009. They also think we're in the middle of a glorious "bull" phase again.

However, based on valuation — stock prices relative to the fundamentals of the underlying firms — we unfortunately appear to still be in the middle of the latest "bear" phase.

Stock prices usually surround the "fundamentals" of the underlying companies — i.e. earnings. Particularly, stocks have traded in a range of 5X cyclically adjusted earnings (at bear-market lows) to 44X earnings (at the peak of the biggest bull market in history — the one that ended in 2000). Meanwhile, the "average" P/E ratio over this period has been about 15X.

In the chart above you quickly notice a pattern:

Sustained bear-market periods have begun when the P/E is very high (~25X+).

Sustained bull-market periods, meanwhile, have begun when the P/E is very low (5X to 9X).

To put it another way, sustained bull markets emerge when investors are fed up with stocks — and so pessimistic about the future of stocks — that they'll pay only 5X to 9X earnings for them, says Blodget.

And sustained bear markets start when investors are so excited about stocks and the prospects for stocks that they'll happily pay 25X earnings or more for them.

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