Everybody Is Long Equities

The world’s equities are close to the highs, led by a buoyant market in the United States. While many experienced traders warn about corrections and elevated levels, the stock market indices move from an all-time high to an all-time high, as good news becomes excellent in the fight against the COVID-19 pandemic. 

Yesterday, the U.S. Retail Sales for the month of January rose 7.4% on an yearly basis. It was the sharpest rise in the last decade, showing that people are not afraid to spend their stimulus and that the high savings rate is ready to decline some more. This happens when consumers gain confidence and uncertainty dissipate.

Such economic data is encouraging for policymakers in the United States and the rest of the world alike. It means that aggressive fiscal stimulus ends up right where it matters the most – to the spending consumer, fueling hopes that the economic recovery will be faster than many expect.

Naturally, equities loved the number. After the classic dump at the cash opening, the market recovered toward the end of the trading session. Are we at the start of a new trend in the markets – higher equities, higher dollar?

Experts Warn About an Imminent Market Correction

Herding was the name of the game in financial markets in 2021 so far. More precisely, investors act in unison, with only a few divergences that survived.

Higher equities led to a lower dollar so far. It is estimated that hedge funds hold over $35 billion in net short dollar positions in this market. Effectively, because of herding, it means that the bet is that the stocks will continue their rally.

However, as it was often the case in the past, such extreme positioning has led to short-squeezes. Whenever a dollar short-squeeze happened, stocks corrected.

As such, it appears we are in a world where market participants wait for the market that breaks first – a dollar short squeeze that will trigger a correction in equities or a correction in equities that will lead to a higher dollar move.

Citibank, one of the world’s leading investment banks, warns that a +10% correction is very plausible. Yet, the dollar exposure is heavily on the short side. One or the other needs to break, or else we are in for more of the same in the period ahead.