Risk Off and The Dollar

U.S equities took a large step in the wrong direction on Wednesday, the Dow closing at 19,833.68 with any hopes of a late Christmas present for the bulls dashed, 20,000 seemingly elusive during the holiday period.

While the Dow slipped, the Dollar recovered from early losses through the Asian session on Wednesday to close out the day with solid gains, with the EUR sliding to a new 2016 low of $1.03719 before closing out the day down at 1.04110.

The slide in U.S equities on Wednesday left the markets jittery through this morning’s Asian session, the Yen pulling back to ¥116 levels, with Asian equities spending the day in the red, as Dollar gains reversed through the morning session, the Dollar Spot Index easing 0.42% from Wednesday’s 103.3 close to 102.87 at the time of the report.

While some may consider Wednesday night’s fall in the Dow a holiday blip, concerns are building over the weakness in the Yuan, which closed out CNY6.9613 on Wednesday, down 1.04% for December, together with the continued sell-off in China equities, as the PBoC looks to tighten credit conditions in support of the Yuan, while also looking to ease credit appetite, which ballooned through 2016 at an unsustainable rate.

We saw similar issues at the start of the year, market turmoil stemming from concerns over China and one does wonder whether we are in for another rough patch going into the New Year.

If the Yen and gold are any guide for the markets, the 3^rd consecutive day of gains in gold, which could end in a 4^th, gold up 0.63% at the time of the report, with the Yen up 0.69% at ¥116.46, we could well see the Asian sell-off flow through to European and U.S equities, with some further easing in the Dollar.

The Dollar may not fall as far as it did in the 1^st quarter, should market turbulence prevail, with market expectations of a Trump fiscal stimulus package providing some degree of support, but ultimately, a shift in market sentiment towards the timing of the first rate hike by the FED will hand a heavy blow to the Dollar rally, the FED having shown reluctance in the past to make any moves during periods of market stress.

While the lack of macroeconomic data and the low trading volumes have certainly not helped the Dollar or the Dow’s cause, one does need to question how much of the U.S economy can be isolated from China’s woes.

The upside from any credit crunch in China will be that Trump may need to do less on the trade war front, but the downside will be the immediate impact to the U.S economy, China being a key export market for the U.S, not to mention the impact of China woes on other economies, the U.S yet clear of globalization, the protectionism mandate likely to take some time to feed into the U.S economy.

Economic data out of the U.S is somewhat more relevant this evening, including the weekly jobless claims figures, though any risk-off sentiment will likely lead to further easing in the Dollar through the European and U.S sessions.