Three key macro factors — the dollar (DXY), bond yields (US10Y) and oil (USOIL) — have a significant impact on global markets.
They help determine whether the market is in the “risk-on" or “risk-off” mode.
Current situation
High inflation (CPI) and producer price (PPI) figures were released this week, which triggered a sharp rise in US 10-year bond yields.
However, this is hardly the beginning of a new long-term growth in profitability, rather a temporary market reaction.
The Big Three and market dynamics
Usually, DXY, US10Y and oil move in the same direction on medium-term timeframes.
• If the indicators are falling— this is a risk-on signal, which contributes to the growth of risky assets.
• If they grow, the markets go into risk—off, and investors go into protective assets.
However, this correlation is not always accurate. Sometimes one of the indicators “breaks out” of the trend, but in the end the market “pulls” it back.
So, for example:
• In December, oil “went out of line”, but then synchronized with the market.
• In February, the DXY deviated from the general dynamics, but then adjusted.
• Bond yields (US10Y) are currently breaking away from the general trend.
💡 The key hypothesis
It is believed that the dollar index peaked in mid-January, and this fundamentally affects the rest of the market dynamics.
• The US10Y could “overreact” in response to the CPI, but its growth may be short-term.
• DXY and oil continue to decline, which puts pressure on bond yields.
• Positions in the dollar remain extremely high, which is caused by fears around tariffs and the difference in interest rates in the world.
A critical moment for the dollar
If the DXY breaks through the previous low, it can cause a massive closure of long positions in the dollar and launch a wave of liquidity into the market.
An additional driver is the fiscal mechanisms of the United States:
• In the period from February to April, it is expected the inflow of hundreds of billions of dollars of liquidity through Treasury operations (TGA).
Historically, this has correlated with the decline of the dollar and supported the growth of risky assets.
🚀 Conclusion
The situation points to the early phase of the medium-term decline of the “big three”, which began in January.
• The dollar and oil are already going down.
• Bond yields have been delayed so far, but may follow them.
• If the dollar “breaks", liquidity will flow into the market, supporting risky assets.
If the market really moves according to this scenario, then in the coming months we can expect a redistribution of liquidity towards assets with higher yields and stock market growth.