US Dollar Index Continuous Contract (DX2.F) & Crude Oil Continuous Contract (CL.F)

On the surface, it has been a better week for equity markets, particularly in the US and Europe, which finished January and started February off with strong rebound rallies. It remains unclear at this point, whether this upswing is the start of a significant turnaround for stocks or if it is a relief rally within an emerging downtrend.

Market signals have been mixed and breadth remains questionable with much of the recent bounce attributable to a few big cap stocks. For example, the mega-cap dominated S&P 100 Index jumped 6.0% in the last week, the broader, small-cap Russell 2000 is up only 1.0%. In Europe, the Dax and FTSE have bounced a more moderate 1.0%-1.5%. Several Asia Pacific markets have been closed for the Lunar New Year holidays.

Resource sensitive indices in Canada and Australia, have posted gains of 3.7% and 1.5% respectively. Commodity price action has been mixed. Cold, stormy weather has lit a fire under natural gas which has soared 36.5% in the last week. Gasoline and WTI crude oil are up a more modest 3.3% and 1.0% respectively, and copper is down 0.4%.

The response to earnings reports remains mixed. While Alphabet popping 7.5% captured much of the attention and headlines, Paypal plunged 24.6% after releasing guidance that suggested slowing consumer spending and high inflation could have a negative impact of forward results. In the coming days, the focus of earnings season shifts away from US big cap stocks toward Canadian big caps and down the ladder to mid and small caps stateside.

Stagflation remains a big concern for investors and this week’s economic and monetary announcements haven’t helped the situation. Headline Manufacturing and Service PMI reports have been mixed US construction spending was disappointing and the ADP private sector payrolls report was terrible showing a surprise contraction. US Non-Manufacturing PMI is due later this morning followed by US nonfarm payrolls and Canadian jobs tomorrow. In all cases, both the headline number and the wage/price components could attract significant scrutiny from the street. Next week economic news slows with US inflation and North American trade numbers being the main events.

The impact of high inflation on interest rates remains clear, today the Bank of England tightened for the second meeting in a row, raising its benchmark rate by 0.25% to 0.50%.

This move paves the way for North American central banks to start raising rates in March and potentially announce several more rate hikes this year.

In this issue of Equity Leaders Weekly, we look at the implications across asset classes of a rising US Dollar, and at recent activity in energy markets.

As the world’s premiere paper currency, swings in the US Dollar can have a significant impact on varying asset classes. The US Dollar tends to rise either as a reflection of a stronger US economy relative to other countries or regions, expectations of higher US interest rates, or as a haven for capital in times of turmoil. All else being equal, a moderately rising US Dollar tends to put a tailwind behind US equities relative to Canadian and International Equities, and a headwind in front of gold, the Dollar’s natural adversary, other paper currencies, and commodities.Since its last big rally ended in 2015, the US Dollar Index (DX2.F) has been range bound, trending sideways in a wide range between 89.30 and 103.60. Early last year, DX2.F successfully tested support at the lower boundary. Since the summer, the US Dollar as been on an upswing with gains accelerating recently as rising traded US interest rates, like the 10-year treasury note yield mentioned in the January 27th issue of Equity Leaders Weekly, have stoked speculation of multiple interest rate hikes from the Fed this year.

Currently, the US Dollar Index finds itself in the middle of its 5-year range and extending an upswing that started with a recent bullish Double Top breakout. Next resistance appears toward the top of the trading range between the 100.00 round number and previous highs near 103.65. Should the index approach the top of this range, the potential impact of a higher US Dollar on US corporate earnings could influence sector rotation within US equity markets, favoring importers and domestically focused companies over US exporters and multinationals.

With high inflation pressuring central banks to raise interest rates and high natural gas and gasoline prices attracting the attention of consumers and investors, Crude Oil remains a key contract to watch.While the rising US Dollar appears to have impacted pricing in other commodity groups like metals and grains, energy prices have continued to soar. While the storm driven screaming rally of natural gas has hogged the spotlight this week, crude oil has been on the move as well.

With political tensions between Russia and Ukraine still swirling, OPEC+ continuing to show disciplined supply management maintaining the pace of its supply restoration program and some OPEC+ countries having trouble meeting their rising quotas, the price of oil broke out this week to its highest level since 2014, completing another bullish Double Top pattern, and Brent Crude touched $90.00/bbl.

Previous column highs and lows suggest next potential upside resistance for CL.F may appear near $92.50 then the $100.00 round number. Initial support appears near the $80.00 round number then the

$73.00 to $76.00 area between a previous column high and a 3-box reversal.