Beware Foreign Entanglements

The race in Washington is settled, meaning it is time to turn our gaze back to the rest of the world.

Trouble is, the rest of the world may be growing tired of U.S. assets -- a fate that has negative implications for interest rates, the dollar, monetary policy and, by the transitive property of authority, the stock market.

The idea of China dumping dollar-denominated assets, combined with higher oil prices, overshadowed enthusiasm over strong earnings from, most notably, Cisco (CSCO) and Goodyear Tire (GT) as the major averages closed down.

The Dow Jones Industrial Average dropped 0.6% to 12,103.30 as pharmaceutical components Merck (MRK), Pfizer (PFE) and Johnson & Johnson (JNJ) continued to recoil at the thought of a Democrat-controlled Congress. The Amex Drug Index fell 2.6%.

Meanwhile, the S&P 500 ended down 0.5% to 1378.33 and the Nasdaq Composite fell 0.4% to close at 2376.01 despite Cisco's 6.4% rise and a 1% gain by fellow tech titan Microsoft (MSFT).

The People's Bank of China's Governor Zhou Xiaochuan was just the latest central banker to report that it plans to diversify its reserves out of U.S. dollar assets. The United Arab Emirates, Russia and the Swiss National Bank have all recently stated they will shift away from dollar assets, preferring gold, euros and yen.

"The question always becomes how much is talk and how much is reality," says Ashraf Laidi, chief FX analyst at CMC Markets.