So far in August, the SPX.I has had 8 down days out of 13 trading days but is still positive on the month after the first signs of softening in US Consumer price inflation. Seasonality may start coming into play over the next few months heading into the US midterm elections.
Swaps tied to Fed policy meeting dates indicated lower odds of a 75 basis points hike next month as opposed to a half-point move. Expectations of a slower policy tightening and a pivot to cuts later next year have contributed to a move up in global equities from its June lows, but news out of China has put a damper on global stocks for the moment. Tensions between the US and China over Taiwan talks, and a dim Chinese economic outlook have seen the Asian markets fall a bit as market uncertainty continues to be impacted by new global issues and tensions.
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 22-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 has continued to move higher breaking out to new multi-decade highs.
DX2.F has now broken through prior resistance at 105.75 and has moved up 3 boxes already above this level. It has now broken to levels which we haven’t seen since 2002, 20 years ago. The next level to watch is the resistance level at 112.26. Above this, further resistance is found at 116.82.
Initial support is now found at a 3-box reversal level at 103.67, and below this around the 100.00 round number. With a bullish SMAX score of 9, 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.
Money has flowed out of bonds for most of 2022 as interest rates have risen in the US and around the world as Federal governments are dealing with high inflation and other factors. The US Fed raised rates to help with the 6% gap between inflation and the Fed Rate as of this writing. But the S&P 500 Index did have a strong July and the Bond markets also have had a stronger summer in June and July with a reversal on a 2% point and figure chart for the first time in 2022.
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. It has moved up through prior resistance at $118.84, but it is still in a Spread Triple Bottom negative chart pattern and is down around -21.7% YTD in 2022. If this current trend does continue, resistance above can be found at $131.21 and at $142 above this.
Next potential downside support for TLT appears near $107.63 based on previous column lows. Further support can be found at $103.45 which also brings in the long-term trend line into play as support which it has stayed above over the last 20 years. TLT is currently trading around $114.7 and with a bearish SMAX score of 3, TLT is exhibiting weakness against the asset classes.
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