The U.S. dollar has been rallying aggressively over the past week. The Bloomberg Dollar Spot Index is trading at 1208, up sharply from 1195 just last week. Even though that points to a mere 1% increase on average, it is not the amount but how fast it is moving that is concerning.
The Emerging Market Currency Index also has fallen sharply in the past week with Turkish lira, Argentinian peso, and Brazilian real falling versus the U.S. dollar. Perhaps what is more concerning is that even the Chinese yuan has started showing signs of life after staying relatively calm around the 6.70 level.
That's interesting, considering that everyone and their mother is short the dollar and especially given the Fed's "pause" and dovish wait-and-see stance.
Equity markets are at all-time highs with the S&P 500 touching its old September 2018 high of 293.58 and making a new high this week. Who would have thought this would be the case after the carnage witnessed in the fourth quarter?
Most of this rally has come from FAANG stocks due to earnings surprise and beats across the board. But how long can these stocks hold the weight of the entire market before the baton falls?
Microsoft Corp. (MSFT) and Facebook Inc. (FB) surprised the market with better-than-expected numbers, especially the former as its cloud business is growing at an impressive rate, allowing it to catch up to Amazon.com Inc.'s (AMZN) AWS business and close the gap over time. However, these are stock-specific examples of companies that are growing earnings on a micro level. Companies such as 3M Corp. (MMM) , with disappointing earnings and revenue guidance, paint the true picture of the economy due to their exposure as they suffer a global slowdown in their businesses.
It seems that President Trump has the trend of the S&P 500 as his screensaver as he realizes how important algorithms are to the upward market trend. Hence, we hear "talks are going well" on trade as soon as the market dips at any given time.
Hate to say it, but he is doing a very good job of fooling investors and playing the machines. Trade talks are scheduled for next week, with an agreement to be finalized by end of May, supposedly. It seems Trade Wars are a thing of the past; does it even matter?
The thing that catches my attention is the following: Soybean prices and grains in general have been weakening since March. Soybeans have been a good indicator of the state of the trade talks considering what's at stake. With Trump announcing an end to extending the Iran sanctions waivers that allowed for oil exports, the stakes just got raised.
Why? China is the majority importer of Iranian oil -- about 700,000 barrels per day. Do you really think China will give in to Trump's end of waivers?
Now that their market has outperformed the U.S. market, Chinese officials have much more leverage. They just announced here on Thursday morning that they will continue to import oil from Iran. Oil market pricing based on a complete halt to Iranian exports of 1 million barrels per day is getting a bit ahead of itself. And with trade talks to continue next week, could China surprise the market and U.S. by letting the yuan devalue? Stocks are priced to perfection with no hiccup expected.
U.S. bonds are rallying, implying lower yields, yet the U.S. dollar is rallying. So, what gives?
Something is amiss. It seems that macro asset classes are pricing a slower-growth, risk-averse environment ahead. Someone needs to pass the memo to the equity markets, as always, because they are the last ones standing before the music stops.
We are about to break a longer-term downtrend of U.S. dollar, and if it squeezes higher from here all emerging markets and their respective currencies, including commodities such as copper and base metals, will get hit very hard.
With the market trading at all-time highs, are you really willing to bet your 15% year-to-date performance to see if there is more ahead?