Volatility In Currencies Is Bad News For Stocks

The pain in the markets has only started. The high volatility on both the stock and currency markets will make investors reduce their risk and actually increase the odds of a serious correction. Raoul Pal from Global Macro Investor stated on CNBC that the odds of a strong correction are high in his opinion. Because of the volatility he expects that investors will (be forced to) lower their risks and he sees the S&P dropping back to 1,800 points easily.

For this year Pal foresees a lot of volatility in the markets, of which currency volatility will be the most prominent. In his opinion, the strong moves that currencies have been making around the world will hurt the US stock market without a doubt. The Swiss National Bank, for example, shocked the markets last week when it announced it was going to decouple the Swiss franc from the euro.

Correction

The biggest risk for US stocks is when the number of long positions in the dollar would start dropping. When that happens, it will possibly push people to decrease their exposure to US stocks as well, says trader Brian Kelly from Brian Kelly Capital. Pal also believes that the stronger dollar will play a role in the drop of the US stock market this year.

People underestimate what the effect is of a strong US dollar. Oil is just one thing. Oil has dropped by about 10 percent this year after a price drop of almost 45 percent in 2014. Pal is not the only one, by the way, who expects a strong correction for the US stock market. Dennis Gartman, known from The Gartman Letter, already indicated that he ultimately has more short positions on than long positions.