US Dollar Aims Higher As Liquidation Sweeps Global Stock Markets

US Dollar marched higher in Asia-Pacific trade, buoyed by haven-seeking capital flows as regional stock exchanges followed Wall Street lower. Not surprisingly, the sentiment-linked Australian and New Zealand Dollars suffered outsized losses, sinking alongside Japan’s Nikkei 225, China’s Shanghai Composite, and Hong Kong’s Hang Seng Index equity benchmarks.

The bellwether S&P 500 stock index suffered the largest daily drop since October, shedding 2.6 percent. An average of Asia-Pacific shares is not far from pacing this dismal performance: regional names are on pace to give back 2 percent. Futures tracking top European equities are pointing aggressively lower ahead of the opening bell in London and on the Continent, hinting at more of the same in the coming hours.

US Dollar Aims Higher as Global Stock Markets Sink

Chart created with TradingView


A plethora of explanations for the rout have emerged. Seemingly the most popular narrative blames forced liquidations of short positions in names heavily sold by opportunistic ‘professional’ investors (such as hedge funds) amid a wave of retail buying cheered on by social media outlets such as the WallStreetBets subreddit. Eye-popping performance by the likes of Gamestop is often flagged as evidence.

The tale is an exciting one to ponder but ultimately seems too fanciful to be a credible catalyst on its own. Consider that the average market capitalization of S&P 500 member companies is about US$65.7 billion, while Gamestop is close to US$24 billion after the latest near-vertical ascent. How many such companies’ shares would need to pop to force liquidation on the scale seen yesterday? Perhaps more than is realistic.

Rather, extreme price moves in pockets of the markets probably speak to a larger macro-level issue: the rally from March 2020 lows in the wake of the initial Covid-inspired collapse and Fed-driven rebound may be out of steam as investors run out of things to look forward to. The US election and surrounding narratives are spent, a Brexit deal is in, and several Covid vaccines have emerged.

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