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Weekly Memorandum 10/12/2020

Stocks just closed out at their second-highest weekly level in history, at least in the Nasdaq and S&P. The Dow lags slightly behind, but it still went out at weekly highs, which is bullish. A couple weeks back, we highlighted the significant odds of a pre-election bottom being complete, and how very few analysts were calling for markets to rip higher through the election. Yet here we are now, nearly 10% higher off those lows.

Another big mover was Treasuries. Yields rose, and prices dropped, which could mean a few things: One possibility is that the market is discounting higher inflation on the long-end of the yield curve going forward. Another possibility is that the risk-premium to lend to the US government is increasing due to election uncertainty. One notable observation is that credit spreads actually narrowed last week, which is a positive. Plus, the yield curve is the steepest it's been in months. None of these are hallmarks of imminent economic doom on the horizon.

We also saw major recoveries in precious metal prices, crypto, Crude Oil, and even a major surge in agricultural commodities, which are now at their highest levels in years. Basically, everything was up last week with the exception of the US Dollar and Treasuries. Quite frequently, rates will rise in response to a falling dollar, so as to try and attract foreign capital back into American assets. This is happening now.

The falling dollar (since many lockdowns began in mid-March) has taken place in conjunction with rising stocks. This suggests that the rise in equities is the result of currency depreciation, versus an actual net-demand for stocks. Therefore, we can deduce that capital has been leaving the United States for nearly 7 months now. On the contrary, we're seeing foreign stocks perform at their best levels in years, especially in Japan and the Eurozone, which is witnessing rising equities together with rising currency values. For those wanting to learn more about the understanding of currency risk with foreign investments, check out our article from a while back.

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