A strong dollar can neutralize the effect of reflationJohannes Röll 25 / June / 21 Visitors: 354
The growth in government bond yields convinced investors of the accelerating economic recovery, which had apositive effect on the stock market. Nevertheless, some regions of Europe are returning to strict quarantine, andcentral banks around the world are adhering to super-soft monetary policies, and against this background, the USdollar is strengthening, seriously threatening reflation and commodity markets.
The fall has already begun. Oil and copper prices were the first to drop. Other energies and materials followed. Further sell-off could lead to a collapse in multinationals and emerging market assets. Even the financial sector isnot immune to capital rotation given the recent rally in banks.
Rise of the dollar
The dollar is growing amid a sharp jump in US government bond yields. The reason for this dynamic lies in thedifference in economic growth prospects for the United States and the eurozone, which is suffering from a newwave of the pandemic. As a result, commodities came under attack from two fronts. On the one hand, a strongdollar makes the goods denominated in it expensive, and on the other hand, the prospects for a slowdown in growthundermine demand.
The stock market has also felt the impact, including the energy industry, industrial companies and materialsuppliers. If the dollar continues to strengthen, and fears about the outlook for the global economy persist, this couldsignal the end of the period of "reflationary growth".
In recent trading sessions, the weight of the rising dollar has hit the emerging markets as well. An uptrend in the UScurrency will exacerbate the situation by crashing ETFs such as the iShares MSCI Emerging Markets ETF (NYSE: EEM). On the EEM chart, you can see an developing head and shoulders pattern, which is bearish. A break of the $ 51.50 mark will complete the pattern and confirm the negative picture, foreshadowing further sell-off.
The threat looms over the banking sector
Banks' shares also came under pressure (despite the stabilization of yields and widening spreads). The recent rallyhas left the sector clearly overbought.
Just last week, the number of puts on the Financial Select Sector SPDR Fund (NYSE: XLF) rose sharply with astrike price of $ 33 and expiration date April 16. Open interest grew by about 25,000 contracts, with a premium of $ 0.60. Thus, investors are betting on the fall of XLF by mid-April to about $ 32.40.
Since October 30, shares of such giants as Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) have rallied almost without a break. Currently, their uptrend is still in force, however, the reversal will lead to a significantdrawdown. In addition, their RSI indicators are showing bearish divergence, indicating a downward momentum.
Is reflation no longer pushing the markets up?
Further strengthening of the dollar will further undermine investor optimism based on reflation, having an indirectimpact on various sectors of the stock market. With rising yields, which have also negatively impacted the techsector, the stock market could find itself in a tight spot.
Falling yields and the dollar will allow reflationary trading to resume, pushing stocks to new highs. Otherwise, theoutlook for the stock market cannot be called bright.
Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer