The dollar is moving up this spring. Oil is moving down. And the combination is taking a toll on commodity stocks, gold, and exporters that do better with a weaker dollar (DuPont, DD, and Kennametal, KMT). Is there any clear pattern of capital flows in the market that shows you what to expect for the summer?
First, the dollar is the key to much of what will happen. For one, the dollar is a barometer for confidence. With the U.S. economy growing faster than Europe’s and Japan’s, neither of which are growing much at all, the stronger dollar may be a harbinger of increased capital flows to U.S. assets.
It also gives comfort to foreign investors who already own U.S. stocks and bonds but have been worried about a currency loss.
It’s clear today that the dollar “breaking out” from a downtrend – whether it’s a decisive break-out remains to be seen. The long-term moving average may be turning up, too. And this brings me to the second important point about the dollar’s effect on stocks — especially commodity stocks. A stronger dollar over the summer means lower inflation in commodity prices. With China taking its foot off the growth accelerator just a bit, too, commodity prices may continue to ease, as I suggested they would last month. Commodity stocks, looking ahead (as the stock market is supposed to do), seem to have already discounted this.
If the dollar strengthens more, will commodity stocks like BHP Billiton (BHP), Newmont (NEM), and Companhia Vale do Rio Doce (RIO) fall even more? While I can’t guarantee anything, I wouldn’t be at all surprised if these stocks have now put in their lows for the year. That doesn’t mean they’ll rocket back up, though. A steady dollar rally means our commodity, energy, and gold stocks will consolidate their gains of the last year and prepare for the next big “UP” leg in the commodities supercycle bull market. If you own them, hold them. If you don’t, buying the dips is a good way to establish a position
By Dan Denning in Strategic Investment
Category: Economics