I’ve written a lot about about the “tale of two trades” and how anti-dollar sentiment has been driving both the stock and commodities markets, but it appears as though this may be changing. Both the stock market and the US dollar Index are on pace to finish the last two months in positive territory, the first time this has happened since before the financial crisis of 2008.
This is due in part to the risk taking/ risk aversion correlation trades that have been taking place since that time. So it used to be US dollar (USD) down, everything else up; or dollar up everything else down. But this correlation seems to be unraveling, and today is a perfect example of this.
The stock market and oil are trading higher today, as is the US dollar index. Gold is lower today.
So what is all of this telling us? Its telling us that we can have an economic environment where both stocks and the dollar can go up in tandem. Since the aggressive measures the Fed took to stave off the Great Depression 2.0, companies have had an opportunity to get back into decent financial shape and now are able to produce “real” earnings if the economy is growing.
There is a good possibility that the Fed will raise interest rates some time next year, but I see this as more of a problem for gold and the housing market. Because the stock market has not been trading based on the fundamentals, I don’t expect to see a major sell-off if the Fed begins to raise rates. Part of this is because the rates right now are absurdly low, so even a few hikes would bring them back to historically “normal” levels. The other part is that if rates need to move higher, that means that we are growing the economy, which is the goal.
This Wednesday, the consumer confidence survey will come out which will be a good gauge of where people think the economy is. That’s the only real news for the US market in this shortened, holiday week.
We’re also going to be getting both the UK and New Zealand’s GDP figures. If these numbers come in less than expected, then we should see dollar strength on the flight to safety trade.
Also remember that volume is usually decreased during the holidays so we can see some increased volatility.
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