The financial markets are today in the red zone. China’s indexes are losing more than 3% on the intensifying trade discussion between the U.S. and China. The Nasdaq Index along with its largest companies are suffering much more than the overall market.
Overnight, Apple and Microsoft shares lost more than 4.5%, Alphabet and Amazon – more than 3%. This indicates the start of the problems for the recent market leaders.
It’s not the dispute between the USA and China we consider as a trigger for large-scale profit-taking: The world has already been living with that situation in one way or another for over two years. It is worth paying attention to something else that the words of the U.S. Treasury Sec. may well have started the sell-off.
In his speech on Thursday, Stephen Mnuchin drew attention to the weakening dollar. He noted: “The U.S. will protect the stability of the dollar”. In light of this, the dollar temporarily received resistance to the pressure and consequently added about 0.5% against most major currencies.
The U.S. Treasury Secretary, the former employee of Goldman Sachs and the head of several hedge funds, clearly understands the importance of psychology in the markets. During the last days and even weeks, the pressure on the dollar has been gaining momentum. The worry is that this could turn into a self-sustaining spiral as the dollar is sold in response to its downfall.
The USA currently find themselves in a hazardous situation. Growth records in the country for new COVID-19 cases are updating previous records almost every day, which requires more and more new support measures. Besides, Mnuchin announced that in addition to the fourth stimulus package that is currently under discussion, there is also likely to be a fifth. This means that the Ministry of Finance will borrow even more, so the cornerstone will be the demand for issues of new bonds. Investors’ fears about the fate of the dollar may rather quickly develop into a sale of American government debt, which will increase the cost of servicing it.
With his words about the stability of the dollar, the U.S. Treasurer is trying to regain the interest of buyers to ‘safe’ UST Bills and Bonds, rather than ‘risky’ stocks and other countries currencies.
We should not miss the technical picture as well. The dollar index in the course of a three-month decline came close to the long-term upward trend support line in place since 2011. Previously in March, the DXY has reproduced the multi-year highs of 2017. A fall under the support line can be a signal of this multi-year trend breaking and could significantly worsen the demand at a time when it is needed the most.
Despite much alarming news coming lately from the U.S., it is worth remembering that the U.S. Treasury is paying attention to the sentiment around the dollar. It is quite capable of returning it to the upward trend in the markets, as it did the previous times when the support line was touched. Previously, this process took weeks, but still, the faith in the USD was restored either due to the assurances of the Minister of Finance or due to a wave of elimination of risk positions in the markets.
