"Yay, more cheap money"
Strong dollar hammered Emerging Markets via commodities. Weak dollar hammers them via currency. The long forgotten charade known as the "global recovery" was just discarded in the U.S. as well, generating a short-covering rally while Goldman & Friends made epic short bets...
What happened over the past few weeks culminating late this week, was the binary consensus that the strong dollar trade is now off. The overnight impact was a flow of capital back into Emerging Markets. The longer term impact is a lack of export competitiveness across those same economies...
A weakening dollar is a de facto Yuan devaluation via the currency peg. Dollar unwind could cause a bigger Yuan depreciation than the one that monkey hammered global markets in August.
Is that why option skew was so high this week? The Yen carry trade was unwinding all week. And Chinese outflows will very likely accelerate, see below...
Short-term interest rates aka. "Recovery is postponed until never"
$USD (black) with Rydex asset allocation (red):
USD (red) with Shanghai Composite (black)
All of which comes at a bad time given that Banana Republic level liquidity points to a dire shortage of muppets with dumb money left to throw away...
Etraders have been thoroughly bilked via Chinese internet stocks, Biotechs, IPOs and every other piece of garbage they could trade.
Stock buybacks in hiatus due to earnings.
Fed liquidity tightening
Single stock put options bets highest since Lehman
Profits and revenue missing already lowered expectations
Small caps underperforming. Risk aversion growing