The next few days of trading could determine the fate of the US stock market for the rest of the year and perhaps longer. All while the US dollar is being steadily debased.
On the bullish side of the ledger sits the largely massive regulatory and government intervention to support, on a case-by-case basis, the rolling banking crisis. It is what it is.
A full-blown banking crisis being wallpapered over with previously unprecedented efforts to resolve and hide any real world implications for depositors, consumers and importantly voters too.
Such are the driving forces of the banking support interventions so far seen.
Meanwhile, the Federal Reserve alone is left to fight inflation. As the Biden Administration keeps spending with program after program. From infrastructure to saving bank depositors at especially favoured banks, the US remains gripped in a downward debt spiral that will inevitably debase the currency.
All at a time when some of the largest economies in the world are moving trade transactions away from the US dollar. Wherever possible and practical. The world’s second largest economy and the world’s largest energy exporter, have just agreed to use the Yuan.
Is the US dollar still a safe haven?
Yet, the US dollar remains the ultimate safe-haven in the minds of many investors, and not least of all with global US corporations themselves.
The desire to bring funds home has perhaps never been so active in such a sea of global uncertainty.
From the teachers strike in the UK to a total transportation strike in Germany and the on-going demonstrations in Brussels, the Netherlands and total paralysis under the weight of massive almost revolutionary demonstrations in France, the Euro is beginning to lose its shine as a possible alternative. Not to mention war, with escalation expected, right on its doorstep.
In the short term, it is a simple question really. If you were a global corporation, where would you put your enormous piles of cash right now? Most likely the US dollar is too big to fail systemic risk level banks.
The US dollar is being badly debased in the long term. However, in the short term it remains a safe-haven in a crisis torn global economy as never before. Last, but not least, the Federal Reserve has made it clear it will continue to raise rates despite collapsing banks.
This cannot go on forever, but markets pricing 100 points in rate cuts this year are likely to yet again be proven entirely wrong. The market just keeps getting it wrong.
The market did not price for either rates moving as high as they have already or for a coming recession until very late in the game. And the same is likely to be true of the future trajectory of Federal Reserve rate settings.
At the moment, the US stock market is badly exposed to the very real probability that it is mispricing the future Fed Funds Rate, the depth and sustainability of the coming slowdown/recession, as well as the full extent of the banking crisis?
Contagion risk is by no means back in the bag. It is still roaming free and dangerously hidden from sight. Just what is out there across America, and how it will travel and unfold are complete unknowns at this point.
This is why we are seeing a stalled rally in the US equity market and why the next few days could have tremendous ramifications. Over the coming few days to week, we will at first see continued swings within a broad 3900 to 4100 range. It is a wide range, but daily fluctuations have been extreme.
The bargain hunting ‘buy the dip’ players are battling with a growing trend of investors who feel it best to simply get out for the time being. Who can blame them?
During this period, we may also see further indications of whether the banking crisis is truly contained or not. If the crisis were truly over however, this would only mean the Fed was again free to maintain a very hawkish approach to still extreme inflation.
It seems an already struggling US economy is going to be further hammered by either an expanding banking crisis or a sustained aggressively hiking Federal Reserve.
The idea that all will be well eventually is a rather old and jaded one. We have been in a bear market since the start of 2022. And the background fundamental picture only continues to crumble.
The worse it gets, the higher the US dollar rallies at first. And the more exposed equity markets become.
The suggestion here remains that defensive portfolios are the most appropriate strategies amidst the current global and US upheaval.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
