Yesterday the stock market sold off sharply as the U.S. Dollar staged its largest rally since August 11th, 2010. May I remind you on August 11th, 2010 the stock market began a sharp two week sell off as the U.S. Dollar Index climbed into August 24th, 2010. As we can easily see on any chart August 24th, 2010 was the stock market bottom and the stock market has been rallying ever since.
As you may already know when the U.S. Dollar Index declines the stock markets around the world inflate and trade higher. When the U.S. Dollar Index rallies the stock markets all deflate and decline. Believe it or not it is just that simple. However, two days ago the Chinese government which holds nearly $1 trillion in U.S. debt raised their interest rates. What could this be telling the United States? Everyone knows when you raise interest rates your currency will tighten and firm up. The Chinese Yuan(currency) is mostly pegged to the U.S. Dollar and many politicians say that this is unfair and the Chinese have a large trade advantage. Can the Chinese be telling the U.S. that they are in charge here and they don’t appreciate the weak U.S. Dollar Index and the weak yield in the U.S. Treasury notes. The United States depends on China to finance their debt and the Chinese depend on the U.S. to buy their exports. How long can this agreement continue before one party stops playing this game of hot potato?
The Chinese look to have the upper hand here. The Chinese are exporting heavily to countries such as Brazil, Chile, and Australia. However, can the Chinese make it without the U.S. consumer? What would happen if the Chinese decided to call in their U.S. debt holdings? This would not be pretty since the United States can hardly afford to pay or service the interest on the current debt. What happens to the United States if they can no longer borrow money? The Federal Reserve Bank is quickly becoming the largest holder of U.S. Debt, but does this really count? This story has the makings of a disaster. While agreements and sweetheart deals can prolong the inevitable this saga will end very ugly. Right now it is the U.S. Dollar and the Chinese government that move markets not the earnings of corporations.
This morning the major stock market averages are all rebounding sharply higher from yesterday’s broad based decline. By now I’m sure you guessed it that the U.S. Dollar Index must be trading sharply lower. The U.S. Dollar Index is trading lower by 0.74 cents to $77.45 erasing most of yesterday’s gains. When the U.S. Dollar Index is down the stock markets inflate higher.
Nicholas Santiago
Chief Market Strategist
www.InTheMoneyStocks.com
