Asian equities were mixed overnight, 10 markets we track closed up, 6 down. Europe's suffering so far this morning, with only 3 of the 19 markets we track trading higher. U.S. stocks are starting the day in the red as well: Dow down 100 points (-0.37%), S&P 500 down -0.38%, Nasdaq down -0.19%, Russell 2000 down -0.52%.
The VIX (SP500 implied volatility) is up 1.61%. VXN (Nasdaq vol) is up 1.22%. Both remain at markedly dangerous levels.
Oil futures are down -0.89%, gold's down -0.33%, silver's down -0.86%, copper futures are down 0.36% and the ag complex is off -0.07%.
The 10-year treasury is up (yield down) and the dollar, alas (if you're an equity or commodity bull [these days]) is up 0.28% as I type.
Our core mix -- being (at the moment, and of course by design) dollar sensitive -- is drifting a bit lower this morning, -0.36%.
Speaking of being, by design, dollar sensitive, as we've expressed herein of late (per the snippets from past commentary below) we're looking for an opportunity to add a bit to our commodities exposure:
7/31/2020
"While our core target mix does indeed have us in stocks (54%) -- but we're hedging against a major decline using put options -- we're definitely looking for good entry points to increase our commodities exposure (presently 23%) right here. The commodities data we track for our macro index have been confirming our suspicions of late:"
8/5/2020 On the setup for a dollar bounce (which we're now experiencing):
"Now, if that's not an actionable trade setup we don't know what is, right? Well, yeah, and it does have us playing a little wait and see before we increase our overall commodities exposure. But, here's the thing, as I've expressed herein the Fed is absolutely desperate to keep the dollar under wraps, which no doubt largely explains the current crowdedness of the short-dollar trade. But, then again, the Fed -- contrary to popular belief -- is not all-powerful, and the foreign exchange market trades to the tune of $5 trillion every single day! That's a lot, even for the all-mighty Fed to control..."
So, sure, the market is presently offering up a cheaper entry vs when I penned the above, but the thing is -- while the recent commodities correction may indeed bottom right here -- markets are dynamic, and, therefore, so is our analysis.
Yes, the dollar is in rally mode, something that the charts clued us into ahead of time (see yesterday's note), and commodities are responding accordingly. But of course if we're more than simply chart junkies and endeavor to understand what in real world conditions might be moving, in this instance, the dollar, we have to pause and consider probabilities with regard to the sustainability of the present condition.
So, then, what fundamentally explains the dollar rally, and what's the likelihood that it'll continue? Well, of course it can be, and no doubt is, a number of things, but one thing that's easy to finger has, ironically, little to do with the U.S., and a lot to do with Europe. You see, the Euro is far and away the largest currency DXY (US dollar index) is weighted against. I.e., when the Euro goes down the dollar goes up, and vice versa.
In a nutshell: Brexit's a worry that's become a bit more worrisome of late, Eurozone data is sketchy, France and Spain are reentering to some extent Covid lockdown mode (UK's threatening), and a strong Euro (as it's been till recently) is the definition of problematic for the block's export-driven economy. I.e., the European Central Bank has the incentive to tweak policy as necessary to weaken the Euro, and markets know it.
Throw in the fact that we're also seeing the dollar rally on weak U.S. data, suggesting that the market for the moment sees it as a port in the storm, and we find ourselves in wait and see mode when it comes to adding to our exposures right here.
So we'll keep you posted...
Next up our weekly macro update.
Have a great day!
Marty
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