Follow the Money… Out of the U.S. Dollar?

Recently, stock markets appear to have experienced an almost euphoric phase, seemingly shrugging off most negative news flow day after day. Whether or not you believe in the so-called “green shoots” of economic recovery, a significant economic rebound, or a continued decline in economic activity, one thing seems abundantly clear: investors have been becoming less risk averse. The most commonly followed “fear indicator”, the VIX index, has retracted (likewise, other commonly followed indicators such as the TED spread has tightened and OIS spreads have reverted to levels not seen since the Lehman Brothers collapse), three month T-bill yields have recently risen and equity markets around the world have rebounded from March lows.

Let’s not get ahead of ourselves just yet though. We consider the impetus for the recent stock market rally has been news flow and data pointing to economic stabilization in the U.S., not an economic rebound. Negative news flow and data still seems to predominate, though it appears to be dissipating. As such, we may well be nearing an economic trough, as the rate of decline of economic growth (also referred to as the second derivative of economic growth), appears to be slowing. That said, positive news flow continues to be conspicuous in its absence. Hence, we would caution against misinterpreting current data as a precursor to a looming economic recovery. Indeed, significant economic overhang and headwinds remain, while an economic stabilization, in and of itself, does not portend an imminent economic rebound.  Read more about the U.S. Dollar…