Stocks Plunge As Rates and The Dollar Surge

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4/15/24

#Stocks – $XBI

#Macro – $SPX, #Rates, #Inflation, #yen, $DXY

Mike’s Reading The Markets Macro Subscription Service on Seeking Alpha

Stocks finished the day sharply lower for a second day in a row, with the S&P 500 dropping by 1.2% and the NASDAQ dropping by 1.65%. The S&P 500 opened higher, but the selling started around 10 AM and continued all day long. It led to a 2% decline in the index from high to close.

Today’s decline followed a big beat and upward revisions in retail sales for March and February, respectively. This sent rates across the yield curve ripping higher, with the 10-year climbing by eight bps to close at 4.61% on the day, while the dollar index jumped to 106.20.

Inflation Expectations

What’s incredible now is that 1-year breakevens are trading at 4.35%, 2-years are trading at 2.95%, and 5-years are trading at 2.57%. If the market were worried and playing the flight to safety game, inflation expectations wouldn’t have risen; they would have fallen, and Treasury yields would have moved down, not up.

Yen

Additionally, things like the USDJPY typically trade lower during periods of uncertainty and fear, and that is not the case today. The yen rose to over 154 and reached its highest level in June 1990. The yen’s next significant level of resistance may not come until 158.

Spreads

Today, we also saw the spread between the US 10 and the German 10-year widen to 2.17%, its widest since October 2019, and it could still go higher from here. The technicals suggest the spread could widen to around 2.5%. Again, this is not something you would expect to see in a flight to safety.

So, with a flight to safety likely ruled out for the stock market’s decline today, it seems more logical that it fell today because financial conditions are tightening due to higher inflation expectations, with wider spreads driving the dollar to strengthen. If this sounds familiar, we have discussed this here for weeks, maybe months. That is what is happening now. So, absent a collapse in the dollar or rates, I would expect the equity market to continue to struggle, with the decline witnessed thus far only at the start.

Biotech XBI ETF

The Biotech XBI ETF has been battered recently, dropping nearly 17% over the past month. This is the ultimate long-duration growth asset class, and the declining XBI ETF tells us how the market is now pricing in higher long-term rates.

S&P 500 (SPX)

The S&P 500 closed below the 50-day moving average today and the lower Bollinger band and on support around 5,060. It seems to be a reasonable spot to see the index bounce and restest the 50-day moving average. But again, that will probably depend on rates and the dollar tomorrow. Bonds and the dollar may rely on what Jay Powell says tomorrow in a moderated discussion at 1:15 PM ET with a Q&A session, along with Tiff Macklem from the Bank of Canada. A break of 5,060 on the S&P 500 can lead to a gap fill at 4,980.

More tomorrow

-Mike

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