Sunday February 28, 2016 - 23:51:01 GMT
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Can U.S. Stocks Ignore a Stronger Dollar?
I get a lot of information and promotional emails, many I ignore but one highlighting a video/article by Saxo's chief economist Steen Jakobsen caught my attention. It was entitled, “I’m shorting everything” going into nasty March.
The premise was that a firming dollar would weigh on emerging markets, pressure commodities and hit stocks. This comes in a market that is currently trying to find a footing both in commodities and equities.
This follows what appeared to be a watershed session on Friday with markets taking a view that the U.S., economy might have turned. This would give the Fed the go ahead to start to tighten monetary policy again sometime this year. For such to occur the Fed will need strong confirmation from economic data, the next key being the U.S. February employment data this Friday.
It has also revived the monetary policy divergence theme where the ECB is widely expect to ease at its March 10 meeting. The G20 meeting, which just concluded in Shanghai, produced only rhetoric without any concrete steps to boost global growth. For me, it is not a surprise as countries have ceded responsibility to central banks to boost economic growth and further easing at this stage may do more harm than good (e.g. recent Bank of Japan cut in interest rates to negative has not boosted stocks or weakened the yen).
As for the FOMC, it is not expected to change policy in March, the mood shift has increased the odds of a rate hike this year.
As John Bland pointed out on the Global-View.com Forex Forum,
Re Fed policy (closing Fed Fund Futures implied Rate implications at Fridays close current target level 0.375%.
Average levels (prev close) for
March 16= 0.39% (0.385%)
June 16= 0.45% (0..430%)
Sep 16= 0.49% (0.445%)
Dec 16= 0.545% (0.475%)
So you can see how the outlook for a Fed tightening increased on Friday. The odds on a March rate hike remain negligible
This sets the stage for a test for equities given the way they sold-off after the Fed hiked rates in December. In this regard watch the fx-equity correlations to see if it gives a clue whether a stronger dollar, should such occur, is taken as a positive (e.g stronger economy) or a negative (e.g. risk if a Fed rate hike) for stocks.
Given the way stocks sold-off to start the year amid global growth concerns, the Fed is likely to err on the side of caution but it will be market expectations of future monetary policy that drive sentiment. This will be driven not only by events abroad (e.g. China, European growth, Brexit) but by U.S. economic releases in what should remain a data dependent global market. In this regard watch the reaction to news as well as the trend in the dollar to see if Mr. Jakobsen’s view of a difficult March proves true.
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Jay Meisler, founder
Global Traders Association
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