MBS LUNCH: Just How Connected Are Stocks To The Dollar?

By: Matthew Graham

You may already be aware of the notion that stocks tend to be weaker when the currency in which they're denominated is stronger.  You may even already have seen CNBC or Bloomberg put up a chart like the one we're about to show you.  But for anyone else, here's a visual representation of just how strong the negative correlation is between stock prices and the value of the dollar.

These two curves might look like a mirror image of the same security, but the green line is in fact the dollar index, and the red line, the S&P.  So as one goes up, the other tends to go down.  We're visiting this topic as strength or even exhaustion of weakness in the dollar is stoking fears among investors that stocks are due for a correction. 

Whether the dollar buzz is partially or even mostly at fault, the S&P is not in good shape, nor are other indexes.  Day before last, we bounced off a long term trend in the S&P and were looking for support to come into play yesterday.  It did (unfortunately for MBS, and stocks rallied all the way back to the trend that was broken the previous day.  Now today, back down not only to the previously supportive trend, but THROUGH IT, as can be seen in the chart...

All of the stock weakness is benefiting bonds, especially tsy's.  The 10yr is up 22ticks at 3.411.  4.5 MBS are up 9 ticks (underperforming it's wings with 4.0 up 12 and 5.0 up 11) to 101-02.  I don't know any cool jargon terms for 101-02, but you may have seen or continue to see reprices for the better...