Opening Bell: USD Keeps Sliding; Global Stocks Rally; Oil Losses Extend

This morning STOXX Europe 600 followed Asian stocks higher, jumping on a gap and challenging the highs it had posted on Monday and Tuesday, triggered by back-to-back bearish shooting stars. Hong Kong’s Hang Seng outperformed with a 0.8 percent gain, but formed a bearish high wave candle by swinging between highs and lows and closing near the open. This demonstrates a lack of direction, as investors seem to act on whim rather than on well-defined plans.

Chinese shares on the Shanghai Composite underperformed, closing 0.2 percent lower after giving up a 0.4 percent gain.

Yesterday, US stock indices were boosted by an ongoing slide in the dollar. The S&P 500 edged higher for a fourth straight day (+0.86 percent), led by gains in Basic Materials (+1.85) and Financials (+1.82 percent)—while defensive sector Utilities (-2.38 percent) was the only sector in the red.

The Dow Jones Industrial Average made its biggest leap in nearly two months (1.38 percent) and peaked above the preceding, May high, thereby extending the uptrend since April 2.

The NASDAQ Composite hit a new all-time-high—after its mid-March record high—as well as its third consecutive record close on Wednesday. Finally, the Russell 2000 further strengthened its recent record performance to close very near the high of the day.

Meanwhile, David Stockman, director of the Office of Management and Budget for former US President Ronald Reagan, dubbed the current environment a "daredevil market” in which assets are "way overpriced for reality." Shares on the S&P 500 are at 25 times P/E Ratio, Stockman pointed out, marking this perhaps as “the end tippy top of the business cycle, with recession ahead." The Russell 2000 is also trading at 90 times reported earnings, he added, warning against the implications of these unsustainable levels.

The veteran politician, who is also a high-profile investor, said that the SPX could easily drop to 1,600 because earnings could drop to $75 a share during the next recession. He then went on to cite the governor of Bank of India, Urjit Patel, who warned on Wednesday that the Fed's tightening path threatens to rile the global apple cart by causing a dollar shortage. After eight years of monetary expansion—which marked unprecedented levels of accommodative policy—the implications of unwinding the central bank balance sheet both in the US and in Europe is not even remotely priced in, Patel said.

While Stockman refrained from listing the possible catalysts of a bear market, we've been warning of multiple headwinds that could push traders to press the sell button:

1. 10-year Treasury yields crossing above the key 3.00 mark, sparking fears of higher rates
2. An extended global trade war that pitches the US against China on one side andG7 allies on the other—with EU member countries dealing a fresh blow on Wednesday as they outlined plans to retaliate against US tariffs by imposing $3.3 billion levies on American goods, effective next month
3. A populistic, euroskeptic government coalition in Italy threatening to lead a second key EU player out of the 28-nation bloc
4. An emerging stock market crisis that could spill over across global markets. For a bull market that has stretched over nine years—the second-longest winning run in equity market history—anything could trigger a reversal

In other news, WTI extended losses to a second day, after crude oil inventories surged by 2.072 million barrels last week, against expectations of 2 millions. Domestic production also climbed to 10.8 million over the same timeframe, from 10.77 million barrels a day in the prior week.

Technically, the WTI price has been trading within a five-day consolidation in what appears to be a second consecutive continuation pattern within a falling trend. What could trigger a downside breakout? Most likely, any positive confirmation that the US government asked Saudi Arabia and other OPEC members to increase oil production by 1 million barrels per day, which equals the expected supply gap from potential output glitches in Iran.

A Reuters poll showed that almost 60 percent, or 35 of 60 analysts, believe the recent climb of the USD could end within 3 months. Ten analysts forecast the greenback will end its rally a lot sooner—within a month. According to the poll, the single headwind that FX traders and investors have failed to fully price in is the potential for other global central banks to step up their hawkish stance.

Currently, what should have been a bullish falling flag in the dollar chart seems to be breaking down—which would support the view that a USD decline is already taking place.