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  1. Home
  2. / Investing
  3. / Stocks

The Market's Sending Mixed Signals, but the Risk Ahead Is Clear

We should be closely watching the dollar for clues of what's to come.
By MALEEHA BENGALI
Oct 05, 2020 | 03:24 PM EDT

September was an interesting month, certainly after the vicious tech rally in August that followed the short gamma squeeze on retail and institutions buying upside calls. It all came crumbling down in last month, as the market narrative shifted to that of a growth scare -- a stalling of the U.S. recovery in the fourth quarter at a time when the Fed has done pretty much whatever it could to boost asset markets and the ball is in the fiscal courts now.

We seem to be at a very interesting juncture in markets, binary even. Either we get a fiscal stimulus deal before the election to keep this recovery going and boost asset markets further, or we wait for later. But the longer we wait, the second wave and eventual slowdown will hurt all cyclical growth proxies.

On a day like this, when all asset classes seem to be up, but with no clear theme evident and in fact sending contradictory signals, something smells awfully ominous. The market eagerly awaits the resolution of the fiscal stimulus package. It is not a matter of if, but when. Most thought it would be settled after the elections, as clearly neither side has any incentive to come to a conclusion before, as it does not work politically for them. President Donald Trump testing positive for Covid-19 seems to have changed the timing a bit. The urgency may be more, as perhaps both sides grasp the reality of how infectious this disease is. Conspiracy theories aside, it is certainly in Trump's advantage to have the deal passed soon, so that the market can rally, and he can get people to vote for him as their 401(k)s surge higher.

This excitement has caused the dollar to fall on Friday and today as the U.S. Dollar Index (DXY)
tests $93.5 once again. After it rallied all the way from $91.5 to $94.5, it has been stalling the last few weeks. If the fiscal deal is passed, no doubt the dollar will fall, and that is why speculative positioning is still so short the dollar right now. Any delay in the bill being passed, the economy is in serious trouble of rolling over as there is just not that much impetus to keep things moving. There is a genuine slowdown, despite all the money the banks have printed. Their aim was just to support asset markets, hoping to buy time, before the economy recovered. The longer we wait for vaccine to be developed and manufactured, the longer the consumer will not spend or travel. This is evident in oil demand as we see jet fuel only at 20% of pre-Covid levels.

The dollar is down, but gold, silver, oil, equities, banks, and technology are all up now. This is when real yields are rising as well, which should work in reverse. U.S. Bonds are making a serious break over 0.75%, hitting the key threshold resistance going back to their 200-day moving average. It is interesting to hear the narrative the market likes to put on a move. Most are assuming this is all to do with an economic recovery, i.e. higher yields. But no one seems to ask if this is just higher inflation? Higher inflation mixed with falling growth is known as stagflation; this is not healthy for risk assets, especially the cyclicals and "value" names everyone wants to own right now to play the 2021 rebound.

The market seems to be at a juncture here. But the moves are sending mixed signals. Something seems afoot, but we shall only know over the next few weeks and it all rests on what the dollar does from here. Pick a side, a narrative, but it all cannot work.

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At the time of publication, Bengali had no position in the securities mentioned.

TAGS: Currencies | Investing | Investing basics | Stocks

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