The key development in the capital markets last week was the dramatic equity market losses, and as we will discuss below, the strong recovery in the US markets ahead of the weekend, which is the kind of climactic price action that marks an extreme. Most major markets are off more than 10% from recent and often multi-year/record peaks. A little more than 10% of the S&P 500 components were off more than 20%. At the same time, the meltdown in equities did not fuel demand for the traditional safe haven–US Treasuries. The US two-year yield rose 9 bp and the 10-year yield rose 14 bp. 

Fed officials were clear, the drop in stocks will not distract from the path of gradual normalization of US monetary policy. Some observers question whether what had been dubbed as the Greenspan put, then Bernanke, then Yellen, is still operative under Powell. Calling it a put is cute, but the real issue is that if there is a shock sufficiently to push the US economy off its course, the Federal Reserve, like any central bank, would take it into account when setting policy. 

We share the assessment of Fed officials that the selloff in US stocks has not yet reached a point that it would derail the economy, or jeopardize the Fed’s mandates. With a high degree of confidence (71% chance by the CME calculation and nearly 87% by Bloomberg’s assessment), the market anticipates a March Fed hike. 

The US dollar rose against all the major currencies last week except the Japanese yen. The yen and dollar’s strength is consistent with our understanding that both currencies were used to fund the purchases of other assets, including equities. As equities, and other financial assets, were liquidated, the funding currencies had to be re-purchased.  A key test awaits for this new found dollar strength if the equity markets stabilize after the recent shellacking.

The Dollar Index rose 1.4% last week, its second weekly advance. The momentum eased in the second half of the week as an important resistance (90.55-90.65 band) was approached. The technical tone is constructive, and the five-day moving average has crossed above the 20-day average for the first time since a few days before last Christmas. The next immediate target is seen in the 91.00-91.30 area.