Short-term USD strength is possible as stocks vs. The bond ratio remains under pressure


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There’s a hint of 2008 in the air to start 2022. US equities had a dismal month as inflation soared and global oil prices surged above $90. Remember the rough start to the stock market in 2008 amid the crude oil boom. Of course, there are a host of differences between now and then, but after nearly two years of impressive gains, stocks may continue to be on shaky ground given valuations as the year progresses.

For January, the S&P 500 lost more than 5% while small and mid caps lost more than 7%. Markets outside the United States held up better. Developed overseas stocks were down 4% and emerging market stocks were down just 2%. Global small caps also suffered the biggest losses with a decline of nearly 6%. This is the worst start to the year since 2009 for US equities. Meanwhile, the value has beaten growth the most since February 2001.

The performance of the S&P 500 sector was led by energy – it rose 19%. Financials was the only other sector in the black, but only marginally (although global banks were particularly strong). Discretionary securities, despite a massive rebound at the end of the month, were the worst with a drop of 9.5%.

It was also a soft month for the bond market. The aggregate US fixed income index was down 2%, while high yield corporate bonds and Treasuries were down a bit more. International obligations have likewise diminished.

So, what awaits you for the rest of the year? “As January goes, so goes the year,” they say. Indeed, we have a bearish view of equities versus bonds over the interim period. This asset allocation theme is based on weak leading indicators, a persistent “growth scare” narrative and deteriorating technical data and sentiment.

Something we have noticed in our Global Cross Asset Market Monitor report released to clients every Monday is the weakness in risky bonds over the past few weeks. Additionally, CDS spreads have increased. These are signs that liquidity is drying up a bit and that large institutions are less willing to take risks. We will be keeping an eye on the evolution of these market indicators over the next few weeks to see if the trend continues. If so, expect risky assets to give way to safe havens such as DXY and Treasuries. Commodities could continue to benefit from a favorable wind given their momentum since the end of last year.

The dollar is also showing price strength over the past few months. Our featured chart illustrates increased speculative positioning in the greenback. Sentiment is also becoming very bullish. The USD price chart still has some work to do to confirm a bullish breakout. After jumping above 97 in late January, it gave back some gains in early February. While we see short-term upside risks for the DXY, the longer-term trends are bearish.

Featured chart: USD moves higher amid bullish sentiment and high speculative futures positioning trends

Speculative USD positioning is bullish as price action nears a breakout

Top-down charts, Refinitiv data streams

Conclusion: The US stock market had its worst start to the year since 2009. Tech stocks were crushed, losing nearly 10% – their worst monthly performance since November 2008. Bonds, however, were not in demand. Where we find strength is in the US Dollar as investors seek safety and positioning on sentiment and futures demonstrate the strong momentum underway. Currency trends will be important to watch in the coming months as a hawkish Fed could support the greenback.


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