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The US dollar index (DX-Y.NYB) rose to its highest level since November on Tuesday, as the US 10-year Treasury note yield (^TNX) also reached its highest level since 2007.
Shares fell, sending the Nasdaq Composite (^IXIC) down 1.6%, or about 9% from its July high. The S&P 500 (^GSPC) followed suit and ended the day down 1.5%.
Meanwhile, the CBOE Volatility Index (^VIX), known as the “fear gauge,” hit its highest level since May and the Ice BofA MOVE Index (^MOVE) jumped – all due to risk aversion. There is a signal.
It was all because of the Fed. While the bullish trend in the dollar and government bond yields has been going on for months, last week’s release and press conference pushed the rise in rates to new multi-year highs. Investors were once again confused and forced to price even higher rates for even longer,
Higher sovereign yields and lower bond prices attract new investors to the US from abroad, who must first buy dollars to buy said bonds – which is similar to a virtuous cycle of higher rates and a stronger dollar.
Unfortunately, the speed of movement in the highly leveraged world of bonds and currencies is disturbing the substantial inertia in global markets – which has a knock-on effect on risk markets like stocks.
The US dollar index is set to close its 11th consecutive week of gains. And barring an unusual and substantial decline, the dollar will be technically overbought on the Relative Strength Index this week – the first such sign in nearly a year.
Meanwhile, the 10-year yield is also about to display its own overbought signal on the weekly time frame – also for the first time in almost a year. In fact, the rally in US equities that began last October came as both the dollar and the 10-year pared down their overbought positions by going sideways-to-down for a period.
the story continues
The overbought dollar and yields – and especially the surge in both – are related to tough times for stocks.
The chart above shows that the last time yields and the dollar were overbought coincided with a 2022 bear market, and these challenges are rearing their heads again in the form of lone purple dot signals. Often, but not always, market turmoil coincides with these overbought signals – the global financial crisis and the COVID crash being two big exceptions. (Of course, that unrest was for other reasons.)
If those current moves are made, the stock will already be priced enough to continue its rise after this “healthy” pullback. But history suggests we are at least a few weeks away from that point.
All this should give stock bulls hope that once the current revaluation turmoil in bonds and currencies ends, stocks can regain their footing. Ultimately, rates and the dollar will settle into a new equilibrium, and risk markets may start becoming a little riskier (i.e. higher stock prices) again.
Until then, the stock may have to endure another round of tailwinds.
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Source: finance.yahoo.com
