DXY remained strong Friday night:
The Australian dollar fell to new lows, bouncing off the 70 cents line:
EMs were even weaker:
Gold is on hiding to nothing in the short term:
Oil too:
And metals:
Miners were OK:
EM stocks bounced:
But the junk siren is still sounding:
Us bonds were bid:
Which aided some stock buying:
But it’s still only technical in my view. The downside cases spiraling out of the US election are intensifying. This week is the last opportunity to pass the $1-2tr CARES ACT fiscal stimulus before Washington breaks up for the election. Beyond that, the scenarios are not promising:
- Biden wins in clean sweep then things are OK but that also means tax hikes for earnings and capital gains hitting stocks;
- Biden wins in contested election and Trump fights outcome meaning all policy is stalled by crisis;
- Biden loses but Dems win senate, blocking fiscal again;
- Biden wins but does not get senate meaning fiscal may get stalled but so will the tax hikes;
- Trump wins narrowly but postal votes delay result stalling all policy and/or leading to civil strife.
A stalled CARES ACT will have a dire impact on the US economy:
All of this as Winter brings on another round of virus.
The stock market is WAY overvalued for this schema of risks and forex markets completely unprepared for it as well. DXY falls have outstripped policy risks to the downside:
So much so that the market is massively short DXY:
The only question is how far below is the Fed put to short-circuit the selling of stocks and buying of DXY is we get the election worst cases? I’d guess another 10% down at least for the S&P but even then we need to ask what impact the worse case election results will have if the $1-2tr CARES ACT does not get up. The last time we saw a fiscal stimulus failure of that magnitude was TARP in 2009, precipitating a near halving of the S&P500:
This is a brutal set-up for a surging DXY and crashing Australian dollar and the probability is unsettlingly high.
