Dollar Posts a Tentative Bounce from Larger Decline as the S&P 500 Threatens Collapse
The economic docket for the opening trading day of the new week was light for the US dollar; but there aren’t many specific indicators that can meaningfully shift the currency’s bearing anyway. Far more important are the larger fundamental themes; and that is exactly what was nudging the greenback Monday. Looking to the Dow Jones FXCM Dollar Index, the currency put in for a modest advance after more progressive declines on the previous Thursday and Friday. The nature of this move is corrective – as was the ‘positive’ performance through the first half of last week following the 2 percent drop that preceded it. What this tells us is the market is not yet ready to get behind the dollar’s recovery whether its counterpart be core currencies (which are still advancing against the dollar), fellow safe havens (also still gaining ground on the greenback) or commodity bloc members (who have weakened recently). Yet, there is reason to believe a bigger shift for the dollar is just beginning.
If we had to identify the most influential, potential fundamental driver for the dollar (for immediate impact as well as durability); it would undoubtedly be a shift in US rates. However, even the interest in the withdrawal of austerity and a slow return to rate hikes for the US traces back to risk appetite trends. A rise in rates moves the dollar up the yield spectrum – not necessarily putting it amongst the high yield group; but certainly removing it from the ideal funding currency category. Perhaps the earliest speculation of what market impact a stimulus withdrawal will have is hitting the capital markets first. Considering the US equities market is most dependent on stimulus at its precarious heights, it is reasonable to assume that investors will look to secure gains and avoid a deep correction in this particular area of the markets first. That said, the S&P 500 put in for a meaningful follow up to this past Friday’s close below an advancing trendline that had defined the market’s advance since QE2 speculation started to carry the market back in September. Now below 1,300, there is a distinct possibility that risk aversion itself is catalyzed and provides an immediate boost to the dollar’s fading safe haven appeal. If that is indeed the case, it would be reasonable to expect the Nikkei 225 to drop below 9,320 and the German DAX Index to drop through 7,000.
If there is a risk aversion move; the impact on the greenback will be quick but ultimately limited. Though the currency is still the world’s largest reserve currency; it does represent the same safe haven currency it was five years ago, one year ago or even six months ago. To sustain an advance, the foundation for a sentiment shift has to trace back to the impact the Fed’s eventual unwinding of stimulus will have global investor sentiment. Dallas Fed President Fisher reminded the market that there was still a hawkish voice amongst the policy ranks; but yields (Treasury and Libor) have yet to reflect a similar belief from the market. As we move closer to the QE2 expiry, this concern will gain more traction.
NEW YORK (MarketWatch) — U.S. stocks extended losses into a fourth straight session Monday, with shares of banks, energy and airline stocks among those hardest hit, as Wall Street fretted about the economy.
The Dow Jones Industrial Average DJI -0.50% ended down 61.3 points, or 0.5%, to 12,089.96, with 23 of its 30 components losing ground. Decliners were led by Bank of America Corp. BAC -3.99% , off 4%, and J.P. Morgan Chase & Co. JPM -2.50% , down 2.5%.
The Standard & Poor’s 500 Index SPX -1.08% declined 13.99 points, or 1.1%, to 1,286.17, its first close below 1,300 since March 23, and break through some key support levels. It’s now more than 5% below its bull-market high reached on April 29, and also has fallen through some other low points.
“The intraday support was really at the February and April intraday lows around 1,293. Traders will be looking for a violation of this support to perhaps trigger some stop-loss selling,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald.
After 1,293, the next target is 1,275, Pado said.
Elliot Spar, market strategist at Stifel Nicolaus & Co., cautioned that “when a well-advertised number is breached on the upside or downside, you always have to be on alert for a potential reversal.
“The market finds a way of humbling the most participants,” he said.
The S&P 500’s energy subsector fell 2.02%, following a drop in oil prices ahead of an OPEC meeting later this week, with crude futures off $1.21 to end at $99.01 a barrel on the New York Mercantile Exchange. Read more about oil prices.
Financial stocks fell 2%, hit by worries about rising capital requirements as the economic outlook dims. Read more on energy stocks and read more on financial stocks.
The Nasdaq Composite Index COMP -1.11% closed down 30.22 points, or 1.1%, at 2,702.56.
Apple Inc. AAPL -0.34% , which accounts for about 7% of the index, slid 1.6%. Chief Executive Steve Jobs made a public appearance in San Francisco during the session to tout a music-streaming service Apple is counting on for growth. But the consumer computing company did not reveal any new hardware products, disappointing some observers. Read more about Apple, Steve Jobs.
For every stock that advanced, four fell on the New York Stock Exchange, where 959.2 million shares traded hands.
Airline stocks also weighed on the market, with shares of AMR Corp. AMR -3.69% and Delta Air Lines DAL -0.43% tumbling more than 3% after an industry group sharply trimmed its profit outlook for 2011, citing disasters in Japan, uncertainty in the Middle East and North Africa and the cost of fuel. Read more about airline sector.
Equities have declined for five consecutive weeks, the longest such slide for the Dow industrials since July 2004.
Kate Gibson is a reporter for MarketWatch, based in New York.
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