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Oil, Dollar, Bonds and Equities. Oh My.

By - - Macro on May 26, 2015 2:23 PM Follow-Ups CCinitial

To state the obvious, we’re seeing a lot of movement across multiple asset classes today. Crude oil is down more than 3%, the U.S. dollar is up more than 1% and U.S. equities are down more than 1%. What’s driving these moves after the long weekend?

I got some quick comments from Tim, BK and Guy and I’ll combine them here. First Tim on the Dollar strength and its effects:

Tim: The USD once again is a wrecking ball for EM, Commodities and seemingly for risk if the pace of the move continues to be this brisk.  Watching for breakout signals.  Out call for the last month remains.  USD to test 98.50 before pullback.  We remain long EUO$, short Euro:  The DXY is back above the 20dma which has been the arbiter of its path trend.  Still on long term upward trajectory:

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BK wonders why oil is getting hit so hard while the dollar is strengthening:

BK: The dollar is pricing a more hawkish FED; oil is reacting to the stronger dollar and bonds are the safety trade as equities panic.  However, the strength in the US Bond market has BK a bit perplexed… I have viewed bonds as the inverse trade of oil, that is to say higher oil leads to higher bond yields as inflationary expectations increase.  With oil trading -3% lower it appears bonds may be pricing in a dis-inflationary trend… given this view, the dollar should not be strong.

It’s unclear what, if anything, markets are trying to signal… it could be simply the unwind of recent popular trades.

Guy thinks this is all Fed driven:

Guy: I would echo much of what BK is saying. It is my belief that the Fed (Yellen) derailed many of the trades that had been working with recent comments. The US$ which had been on a historic move higher since last June, was stopped in its tracks after Fed jawboning. To me, the move we are seeing today in oil, bonds, dollar, is just a continuation of the moves we saw earlier this year.

 

 

 

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This is Part 3 of a 3 part Debate on Macro