Morning Note: Patient

Investor expectations in Europe are tanking (per September survey readings), covid cases in Germany are rallying at their fastest pace since April and UK's Boris Johnson says a no-deal Brexit is essentially no big deal. I.e., the euro and the pound are getting pounded this morning, therefore, the dollar's in rally mode. Therefore, while stocks are feeling it, commodities are definitely taking it in the chin.

Of the concerning headlines noted above, the last, while, ironically, the least credible, is no doubt the most impactful. I.e., potentially the making of an opportunity (in commodities [gold (although more a currency) especially] in particular).

As I suggested back in July:

"...the dollar right here is massively oversold and futures traders are multi-year net-short. Any blip higher could be met with aggressive short-covering that would see it spike and, I suspect, commodities correct; which would be the event that would have us increasing our target weighting. It could also do an immediate number on stocks, which, at this point, would not have us increasing our target weightings there."

But then, I followed with the following in September:

"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 are 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."

Asia hung in there overnight, with 10 of the 16 markets we track closing higher. Europe, however, per the above is getting trounced this morning; with 16 of the 19 markets we track trading notably lower. U.S.'s major averages, all things considered, aren't, save for the Russell, terrible: Dow down 113 points (-0.39%), S&P 500 down -0.43%, Nasdaq down -0.05%, Russell 2000 down -1.21%.

The VIX (SP500 implied volatility) says things are riskier than S&P price action might at the moment suggest, +4.15%. Ditto for VXN (Nasdaq vol), +3.62%.

Oil futures are bucking the higher dollar this morning, up 1.52%, although gold's not (-1.69%), silver's down -3.56%, copper futures are down -0.83% and the ag complex is down -0.28%.

The 10-yr treasury is appropriately rallying (yield falling), as is the dollar, up 0.45% (that's a lot for the dollar).

With all 18 components in the red this morning -- silver, banks, gold, Eurozone equities and utilities more so (the yen, staples, ag, tech and materials less so) -- our core mix is off -0.87% as I type. 

Time will tell if this week's weakness in commodities morphs into something we deem actionable. I will say that if we're one thing these days, it's patient...

Have a great day!
Marty