Rising dollar raises eyebrows

Often coincides with equity market weakness

Chart of the Day

Although equity markets rebounded yesterday, plenty of people pointed to the rise in the USD as a worrying sign that the improvement might not be sustained. As the march madness last year showed, the dollar often rises when investors are starting to get concerned about the global outlook and often depreciates when they are getting more confident. Of course, it doesn’t have to be that way. For instance, it is easy to imagine a scenario in which a big fiscal stimulus caused both US equities and bond yields to rise due to higher GDP growth. However, that wasn’t the signal yesterday, as US yields declined relative to those elsewhere in the world. So something to watch…

Macro

The US ISM manufacturing index declined in January but still indicates that the sector should continue to recover.

Residential and non-residential construction spending continues to diverge.

The UK credit data is representative of many economies, with consumer credit declining as people spend less while mortgage credit is unusually strong.

The German retail sales data for December were extremely weak compared to recent strong growth rates, due to lower holiday spending.

Markets

Trends in Chinese credit growth are a huge driver of global markets and suggest the USD could continue to rise (DXY change inverse here).

The rebound in equities still left them some way below their recent highs.

The decline in US yields was modest, and it is worth bearing in mind that they counterintuitively rose during the sell-off on Friday, so the fall yesterday could just be a reversal of that effect rather than a harbinger of doom.

The VIX index declined alongside the market rebound but remains elevated.

The clear winner yesterday was once again silver, now up by over 60% since the start of 2020.

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