Winter is coming and if last year is any indicator, a rise in Covid cases due to seasonal susceptibility is likely to be expected. The number of cases is indeed ticking up this month.
Don’t expect financial markets to care too much. Perhaps because we saw the effect of vaccinations in keeping Delta-wave deaths low, or because international borders have already begun the reopening process. Or maybe the virus has just lost its ability to surprise investors at this point. Regardless the reason, financial markets are formally signaling that the economic dynamics associated with investing in the Covid regime are ending.
This is most clearly seen in the chart of the U.S. currency, the dollar. The Greenback. Laser-eyes Washington, for those who follow me on Twitter and noticed my profile picture changed the past three months. On Aug. 18 I said if the dollar gets above its March high of 93.57, I would change my photo to the dollar bill with laser eyes (hi, coiners) until it hit 95. We’re past that target now, and that’s a very big deal. The dollar’s recent rally puts it at the highest since spring 2020, and marks a full technical reversal into an uptrend from its Covid-era downtrend.
The decline in the dollar was the defining asset trend during the Covid era. Its reversal marks the end of that era.
But wait — inflation is the hottest in thirty years, shouldn’t that erode the value of the dollar? The dollar’s reversal higher tells us that the inflation impact of Covid-era policy on the currency has been priced in. More specifically, inflation has gotten to the point now that markets are pricing in a response to inflation by way of interest-rate hikes that are strengthening the dollar.
It’s not just the future of the Fed being priced in, though. Every time the White House announced additional stimulus last year, the dollar immediately dropped. President Biden just signed a $1 trillion spending bill and the greenback’s run right through it. This tells us that fiscal spending going forward is very different than the helicopter cash that propelled the Covid bull market. The rate of incoming fiscal stimulus is slowing, and that has a tightening effect in addition to monetary policy.
Covid might make a winter wave, but its effect on markets is sunsetting. Take a minute to embrace that, because it’s a big step toward moving on. Don’t get too comfy though, this means a lot could change quite quickly.