The USD Index is at its highest since late July, breaking out above its 200-day moving-average as Fed rate-hike odds soar. The knock-on effect of the surge is tumbling oil prices, plunging energy stocks, and subsequent drops in the major US equity indices…
Thanks to a higher dollar, lower oil, and lower energy stocks…
As RBS notes
As we have experienced for much of the past year and a half, a stronger Dollar has triggered “deflationary / disinflationary” price-action with commodities and EM, which has then bled into rates, HY credit (energy and materials heavy) and equities. This is consistent with what we are seeing overnight: base and precious metals weaker (Gold just fell off a cliff -1.3% fast), EMFX weaker, UST rates lower / curve flatter and Spooz near their session lows. Worth a mention here that both Atlanta Fed and NY Fed’s “real time” GDP trackers through yesterday’s data (specifically construction spending) are now trending even lower, with Atlanta’s GDPNow currently at 2.2% from its August highs of 3.8%…which of course intellectually runs “contra” to increasing Dec rate hike expectations.
…
So what is the view here? Without a doubt, we are entering the “performance chase” time of year, and about to hit the “peak seasonality tailwind” for higher stocks into year-end as well. As such, there is a view in the market which feels there is still a window for risk to run, as the prior period of ‘US election-induced vol’ continues to slow since the first debate. Thus, in that sense, it’s reasonable that we are seeing equity HF net exposures at / near YTD highs, as folks lean long. All of this said, a USD breakout (and today, we’re seeing DXY clearing its 200dma to upside) could reset all of that, especially as so much of the performance claw-back experienced during Q2 and Q3 has been driven by the economically-geared cyclical sectors which would be first to stress under a return of the “strong Dollar” regime.
And the USD is indeed busting out…
via http://ift.tt/2cQhzNe Tyler Durden