It has been another wild week for equity markets. Stocks were crushed following last Friday’s higher than expected US inflation report and US treasury yields soared on anticipation of a more hawkish Fed. At yesterday’s meeting, the US central bank raised its benchmark rate by 0.75% which was more than the 0.50% hike that had been widely expected. The Fed also increased its forecast for the Fed Funds rate at the end of this year to 2.35%-3.50% and indicated it expects rates to remain above 3.00% through 2024.
The Fed also cut its GDP forecast and raised its inflation forecast for this year. At the press conference, Fed Chair Powell was very hawkish, stating that the Fed is committed to getting inflation under control. Stocks were volatile through the press conference between investors looking for a light at the end of the tunnel and Powell indicating that the Fed may need to tighten more if the data demands it.
US indices rallied late yesterday and it looks like some traders took the news as an excuse to try to make a "the faster the fed raises rates the sooner it will stop” play. As with previous attempts to rally the market this year, it has already run out of gas and US index futures have fallen back down this morning, indicating that bears retain the upper hand and that distribution into rallies continues.
Rising traded interest rates in the US have sparked a rally in the US dollar, which has put pressure on gold and commodities priced in US Dollars. Natural gas has been particularly volatile around news related to US export capacity, while Crude oil has started to backslide, impacting energy stocks. Cryptocurrencies and crypto related stocks have been crushed this week, a sign that overall investor sentiment remains cautious to negative even through the occasional relief rally.
Rollercoaster conditions in the market may continue in the coming days with more central banks holding meetings including the Bank of England, Bank of Japan, Peoples Bank of China and Swiss National Bank. Inflation and retail sales reports are on the way for the UK and Canada and housing data starts to roll out for the US in the coming days. It’s relatively quiet for earnings but reports from FedEx and a couple of homebuilders could attract some attention.
In this issue of Equity Leaders Weekly, we look at the implications of a rising US Dollar across various asset classes and at the impact of rising interest rates on long-term bond prices.
This 25-year chart highlights the strength of the US Dollar Index (DX2.F) over the last year against a basket of other major world currencies. About a year ago, the greenback bottomed out near 90.00 and has been soaring since then, climbing above 100.00 and approaching 105.00. Along the way there has only been one small 3-box correction. Last month, DX2.F broke through 104.70 long-term resistance and it is currently trading at levels last seen in 2003. A breakout over 105,75 would confirm the start of a new upleg with next potential resistance tests on trend possible near 112.25, 116.80, and 124.00. initial support appears jut below the 100.00 round number near 99.60 based on a 3-box reversal. With a bullish SMAX score of 8, DX2.F is exhibiting strength against the asset classes. A rising US Dollar may continue to put a headwind in front of assets traded in US Dollars including gold and commodities. For stocks, a rising Dollar increases the value of US equities relative to Canadian and International Equities on a common currency basis. For US companies, a higher dollar favors domestically focused companies over multinationals (overseas earnings come back at a lower value in USD) and importers over exporters.
One big question that has been on our minds at the Equity Leaders Weekly lately, is if the US Dollar is soaring, which means capital is flowing into the US from other countries, where is the money going? As we have shown in recent issues of Equity Leaders weekly, US Equities have been consistently struggling through the year. Meanwhile, a comparison of how the iShares 20+ Year Treasury Bond ETF (TLT) has acted through volatile markets in 2020 and 2022 shows that traditional relationships between bonds and risk has changed along with the rise in interest rates. Back in 2020, when equity markets collapsed, capital leaving stocks in a flight to safety sought out bonds, sending TLT soaring. It then fell back down into early 2021 as investor confidence improved and capital returned to equities. Over the last year, and especially since the start of 2022 US bond prices have come under heavy pressure as a result of soaring traded US interest rates such as the 10-year treasury yield (TNX.F). TLT broke down in March and following a brief bounce, it has broken down again this month so signal the start of a new downleg. Next potential downside support for TLT appears near $103.95 of $101.90 based on previous column lows. Initial upside resistance appears near $113.70 based on a retest of a previous breakdown point. With a bearish SMAX score of 1, TLT is exhibiting weakness against the asset classes. In answer to the question we started with, if capital coming into the US isn’t going into stocks or bonds, it must be moving into cash or assets outside of the traditional markets. Overall, this action suggests investor sentiment remains cautious to fearful.
Disclaimer: SIACharts Inc. specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment whatsoever. This information has been prepared without regard to any particular investors investment objectives, financial situation, and needs. None of the information contained in this document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. As such, advisors and their clients should not act on any recommendation (express or implied) or information in this report without obtaining specific advice in relation to their accounts and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. SIACharts Inc. nor its third party content providers make any representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein and shall not be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.