A significant divergence has opened up overnight between assets priced in US Dollars and assets priced in other currencies.
Stock markets overseas have rallied overnight, led by gains of 0.8% for the Hang Seng and of 0.6% for the Dax. With the blockage in the Suez Canal now cleared, and vaccines continuing to roll out, investors continue to focus on the potential for more economies and industries to reopen more fully in the coming months.
On the other hand, a rally in the US dollar has put pressure on US stocks and commodities (which trade in US Dollars). While flat Dow Futures have been holding on to yesterday’s 0.3% gain and record high close, NASDAQ Futures are down 0.6%, adding to yesterday’s 0.6% loss. Meanwhile, commodities are sliding with WTI crude oil down 1.5% and copper down 1.0%. Currencies are also being impacted with gold down 1.5%, silver down 1.9%, the Japanese Yen down 0.5%, and the Canadian Dollar plus the Euro down 0.2%.
There appears to be two factors impacting US sensitive markets today. First, the US treasury note yield has been on the rise again, climbing back up into the 1.70% to 1.75% range, which has sparked a rally in the US Dollar. The prospect of higher interest rates combined with tomorrow’s expiry of an emergency liquidity program which had temporarily eased capital requirements for banks appears to be impacting rotation within equity markets. Sparked by a combination of these two factors there appears to be a scaling back of margin lending at the moment, seen most clearly in the Archegos Capital position liquidations which came to light over the weekend. This appears to be impacting valuations and appetite for momentum stocks (seen in recent NASDAQ declines) and also for small cap stocks, as shown by yesterday’s 2.8% plunge in the Russell 2000.
It’s a very quiet day so far for corporate and economic news but things are expected to pick up after today and for the rest of the week with China PMI reports due late tonight, ADP payrolls tomorrow, manufacturing PMI reports on Thursday and nonfarm payrolls Friday.