"Looks like the divergence began right around Davos when everyone (me included) had concluded Europe was hopeless and America was unstoppable."
What was the message? Tariffs.
At the time, the threats were mostly brushed off and US stocks hit a record that day. But after declining the next day and then bouncing around those levels for a month, they turned sharply lower.
In a way, you could see all the elements for this coming together in early January (it's always easy in hindsight). Here is what I wrote about the euro then, as the euro sank to the lows of the year in a 10-cent swan dive over a couple months:
The best thing you can say about the euro is that it's so hated that sentiment can hardly get worse.Then again, you could have said that on New Years Eve and it's down 100 pips to start the year. As they say, it's always darkest...before it goes completely black.There isn't much support on this chart and right now the US dollar is so strong. US capital markets are utterly dominating and there is a network effect that's snowballing, drawing more and more money into US dollars. The US stock market is now around 75% of the MSCI World Index and multiples on anything US-listed are higher than almost anywhere else.The world of free capital is looking at the performance of things like the Mag7 compared to their domestic markets and feeling jealous. That money is flowing into the US today as we start a new year and new money goes to work.At some point, there will be a bear market in the US or underperformance of the US economy but right now the market just doesn't see it. Like the euro, that points to a one-sided trade and the potential for a huge reversion but until the music stops playing, you need to dance. Right now, the dollar is continuing to party like it's 2024.It's funny how things can change quickly. So far it's mostly speculative but if the US continues down the 'tariff war' and fiscal consolidation rout and Germany starts stimulating, the reversal will have legs.
This article was written by Adam Button at www.forexlive.com. Read More Details
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