Interest Rate Hike Could Lead to Rally in U.S. Dollar
Bloomberg News
Despite the tragedies that occurred in Paris on Friday, U.S. stocks found a way to rally on Monday, with the S&P 500 ETF (SPY) - Get Report climbing 1.5%.
Although the events that unfolded overseas were terrible, it's as if global investors have simply gotten used to them happening, Karen Finerman, president of Metropolitan Capital Advisors, said on CNBC's "Fast Money" show. U.S. markets didn't even trade lower on the news, as investors just seem to take it all in stride nowadays.
Stock-wise, she says luxury retailers could have a little more downside if the Federal Reserve raises rates, but they look attractive on the long side.
Guy Adami, managing director of stockmonster.com, pinned last week's selloff on the notion that the Fed may hike interest rates in December. Fears over a rate hike really amplified when the October non-farm payrolls report came in vastly ahead of economists' expectations.
There is a lot of concern though, because if the Fed raises rates at a time when the European Central Bank eases its monetary stimulus, it will only add to the rally in the U.S. dollar. A stronger dollar will further hurt commodity prices and emerging markets, and could ultimately spur deflation, Adami said.
Brian Kelly, founder of Brian Kelly Capital, said the market was due for a bounce regardless of any other events, simply because it was down so much last week.
"I really liked the action," Pete Najarian, co-founder of optionmonster.com and trademonster.com, said of the stock market Monday. Financials, Apple (AAPL) - Get Report and Microsoft (MSFT) - Get Report all traded well on the day.
Najarian also pointed out the very large, bearish options trade in Freeport-McMoRan (FCX) - Get Report , which could suggest a very large investor isn't too optimistic about commodities going forward.
Adami said the oil volatility index remains elevated and he believes the energy market will head lower as a result. Kelly said the recent geopolitical risks in the Middle East will likely drive up the prices of oil in the short-term. But there is so much supply in the market, it's hard to see an oil rally lasting very long.
Dennis Gartman agreed with Kelly's assessment. Gartman, the editor and publisher of the Gartman Letter, said it was inevitable that crude oil prices rallied, given the significant decline over the past 10 trading sessions. However, with WTI crude near $42 per barrel, upside seems limited. Near $43 to $45 per barrel, it's likely that investors will become sellers, he explained.
As for the U.S. dollar, he expects the rally to continue, putting further downside pressure on the euro. Because of the dollar's strength, he does not recommend owning gold at this time, unless investors are using euros or yen to purchase the yellow metal.
Adami said it's imperative for gold prices to find support at $1,044. That price is significant, as it's where the metal last found major support. It's also important because that's the price that India bought 200 tons worth of gold from the International Monetary Fund in 2009.
Speaking of currencies, Carter Worth, a technical analyst at Cornerstone Macro, said it looks likely that the dollar and euro will trade at parity, meaning $1 is equal to 1 euro.
As for the broader market, he pointed out that almost 70% of stocks in the S&P 500 are more than 10% off their highs. The internals of the market are terrible, as only a handful of stocks are holding up the index, he said. Ultimately the S&P 500 seems likely to decline to 1,800.
Kelly agreed that that if the euro breaks below current support, it could be headed significantly lower, which would likely drive an even larger rally in the U.S. dollar.
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