Article / 24 August 2015 at 12:00 GMT

Macro Digest: USD your main catalyst

Chief Economist & CIO / Saxo Bank
Denmark
  • Correction still ready to head lower
  • S&P 500 likely to decline a further 5-6%
  • USD at the root of current downtrend

Manhattan
Look for the S&P 500 to head lower as the correction continues. Photo: iStock

By Steen Jakobsen

We are now 75% of the way in terms of the ongoing correction and the value-at-risk explosion is driving both momentum and marginal selling.

Some key levels

I have taken back (in system overrule) shorts in the S&P 500 and DAX indices and remain long EURUSD and gold.

S&P: Target 1,875/1,825 (another 5-6%)

Dax: 9,310 (9,400 )

These levels fit the correction depth and magnitude seen in prior moves. I will be providing a full suite of charts this afternoon.

Looking across sectors, the banking sector should hurt the most due to a much flatter yield curve.

And the Federal Reserve will be watching the correction closely:
Data-dependence
 
















Source: Charlie Billello (@MktOutperform)

Historical data give a clue as to the S&P 500's likely trend:
S&P 500
Source: Downtown John Brown (@ReformedBroker

What's the timeline?

We are still looking at an interest rate hike from the Fed. September is now priced at a 30% probability and December is at 56%. In other words, unlike with other "BTFD" (buy the failed dip) scenarios we don't have "guaranteed" support from US monetary policy.

I still see the Fed hiking as markets and the price of money needs to clear at a higher interest rate price, i.e. 100-200 basis points higher. The September Fed event will keep markets nervous and highly volatile into the actual meeting.

A look at the macro drivers

The USD is everything; the DXY now leads the stock market with R2 of 80%, hence the "selloff" in USD over last three trading session is a net positive for markets/support.

Overall, this correction was not borne of China's yuan devaluation but by having a fiat economy driven by debt in USD. The strong greenback hurt commodities, lower commodities hurt fiscal and FX rates in high volume growth countries (emerging markets and China) and now have gone full cycle to export-driven markets like Germany and Europe overall.

Watch the USD to take the lead in giving support (or a lack of it!) to markets.

If my weaker dollar gets further confirmation I will be looking to add emerging markets to my portfolio.

World markets
The volatility in world markets is not primarily a function of the yuan 
but the greenback. Photo: iStock

— Edited by Michael McKenna

Steen Jakobsen is chief economist and CIO at Saxo Bank
Check back here this evening for a full edition of Steen's Chronicle.

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