Geopolitical Risks Research

Market Update – risk-unwind/profit-taking day as equities pullback across the board w/a lot of the big recent winners suffering the worst declines (the Portugal news late in the day helped us finish off the worst levels – see below for more).  The most notable development today wasn’t so much that stocks pulled back for a second consecutive session (the first time this happened for the S&P since 4/11-12) but rather the widening divergences among certain indices and assets w/higher-beta/higher-momentum stocks/sectors getting crushed while large-caps and out-of-favor areas caught a bid.  The Dow finished flat while the R2K dipped more than 120bp (and certain sub-groups were even weaker – the R2K Tech Index fell >2% and the R2K Energy index was down ~3.5%). 

The R2K has pulled back now 3% in just the last two sessions.  The action in some commodities has been even more dramatic – silver fell ~5% today (SILV on BBG) and has declined now ~20% from its recent intra-day highs.  Crude fell >2% today and is off ~3.5% from its recent intra-day highs.  Meanwhile, one of the sectors that has been shunned for the last few weeks and came for sale despite beating St ests throughout earnings season (i.e. the banks) actually saw a nice rally (the BKX rallied 80bp on the day).  There was a lot of news today, w/a bunch of earnings (some of the biggest movers were earnings-related w/PCS, AVP,AMT, MA on the upside and CSC, SHLD, CTSH, LM, ADM, EMR, PFG, and CLX on the downside) and economic data points (factor orders and auto sales both came in ahead of St expectations).  That said though, as has been the case for the last few weeks, equities (and risk assets) are heavily dependent on the direction of the dollar….

The biggest risk for this tape lately has been a reversal in the dollar.  So long as the dollar had been drifting lower, helped by the appearance of a widening monetary differential between the world's major CBs and the Fed along w/an implicit acceptance in Washington of the decline (http://on.wsj.com/iroJez), equities had a bid to them.  However, starting late Mon, we have seen the dollar find some support.  Late on Mon it was the Treasury announcement about extending the debt ceiling breach date into Aug and today it was a relatively hawkish article on CNBC (http://bit.ly/k40lLR). 

Both by themselves aren't all that notable but in an environment where the short dollar/long risk asset trade had been very stretched, any minor change at the margin would cause a reversal.  All that said, the overall environment for the dollar remains negative and any strength has been hard for it to sustain.