It was quite a festive day in the US markets. The US dollar technically broke down, sparking a commodities surge which lifted the S&P 500 above 1000 pts for the first time since last November. Any person with minimal knowledge of the alphabets can identify this recovery as a V shaped one. With the upcoming Unemployment numbers due this Friday, we will get a clearer picture of where the economy is heading. Nearly everyone I talk to doesn’t believe that we are at 1000 pts on the S&P 500. Many investors missed an approximately 50% return in this rally and more lost even more by shorting the market. The US dollar’s graph signals further deterioration which would support a further rise in commodity prices and the S&P 500. GCC anyone? Of course!
The imminent question is: Will this simply be a V shaped recovery? OR will this recovery transform into a more dramatic W shaped one?
Listed below are S&P 500, Oil, and US dollar graphs:
US Dollar graph (Source: Bloomberg)
As shown from the graph above, the US dollar broke 2 previous lows. Looking at the channel, it can decrease even further. This can cause commodities and the S&P 500 to continue its rally.
Oil graph (Source: Bloomberg)
S&P 500 graph (Source: Bloomberg)
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Loading ...Tags: Dow Jones Industrial Average, GCC, Oil, Oil breaks $70, S&P 500, S&P 500 breaks 1000, US Dollar, US Dollar breaks down, USD
I don’t know if the dollar going down causes equities and commodities to rise. So I have a problem with the causation thing here you mention.
What I do know is that lower dollar, higher equities/commodities complex, and higher anti-dollar currencies means a simultaneous move into RISK assets.
There was a post on Brad Setser’s blog I linked to a couple weeks ago discussing this ineherent consequence of the Dollar’s reserve currency status.
My point is it hard to judge if it is a flight from the dollar, or a flight to risk. They are really the same thing, so I think it is mistaken to say that BECAUSE the US Dollar is losing against all the majors (except YEN), THAT equities are going up. It’s a basic inverse correlation right now: Dollar and everything against Dollar, save JPY.
JPY is unique as welll because of it’s longstanding status as a carry currency.
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