Market Topples as Dollar Reverses Gains

In keeping with warnings we issued here, here, and here, global stock markets had one of their worst days since mid-October, with the SPY falling 1.6% today. Leading the decline was the US Dollar, which has been losing ground against the Euro and the Yen. This has put pressure on a dangerous group of hot money known as carry traders, who have dumped risk assets including US stocks with a vengeance:

S&P 500 ETF SPY got crushed late in the day

S&P 500 ETF SPY got crushed late in the day

The value of the Dollar and the stock market have become positively correlated, as we showed yesterday the Yen has a near 1-1 correspondence with the S&P 500. Today was no different and we saw gains in both the Yen and Euro that corresponded with declines in US stocks:

Euro FX ETF

Euro FX ETF

Yen FX ETF

Yen FX ETF

While traders dumped risk assets like equities and high yield debt, the markets flocked toward high quality assets like US Treasuries, with TLT reaching levels above the October 15th flash crash:

Long End US Treasury ETF

Long End US Treasury ETF

The price of oil continued to weigh on markets today, with benchmark Brent crude oil dropping below $65 a barrel. Saudi Arabian oil ministers said that there was no reason to cut output and that the market would work itself out, dashing hopes some traders had for a production cut from the largest member of OPEC.

US Oil ETF

US Oil ETF

While small decreases in the price of energy are usually positive for the world economy, the large decline we are experiencing is usually associated with periods of economic contraction. Many fear it will put an end to the shale oil boom in America which has provided a welcome tail-wind for the world’s largest economy. Eyes now turn ahead to the year’s last FOMC meeting next week. The Fed faces a delicate challenge of how to raise rates without causing prices to collapse.

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