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Oil is a ‘precursor’ to future of the economy: Market expert

Kathryn Kaminski, AlphaSimplex Chief Research Strategist, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss what's moving the markets around Thursday's opening bell.

Video Transcript

KATHRYN KAMINSKI: Yesterday was a wild ride, and that's what I was talking about. We had huge moves in equities, but for those of us on the multi-asset front it was even bigger. I mean, we had big moves in commodities. We also saw the dollar rallying, and this was very difficult for a cross-asset perspective. So we really think there's a lot of de-risking going on. There's also some taking profit because people are saying it looks OK, but I don't want to take that kind of risk going into the uncertainty that we have next week.

ALEXIS CHRISTOFOROUS: Kathryn, you called out commodities for a moment. We're seeing them take a big step back-- crude continuing downward, off about 6% right now. Is this election related, or what's happening there in the oil space?

KATHRYN KAMINSKI: That's a good question. There's a couple of factors going on here. First of all, Libya was not reducing production. We're seeing also that there's not a sense that production is going to decrease despite the fact that now we're seeing concerns about economic activity because of potential lockdowns.

So in general, I'm following oil because oil is often a precursor to tell us how the economy might do and what could happen. We need to be thinking about this because of what happened in Q1. If you looked at how oil behaved before the markets really realized how difficult things would be, they were already moving in that direction. So we're really watching that closely, and we think this is related to economic activity and, you know, sort of stubbornness about production.

BRIAN SOZZI: Kathryn, do you think the market understands that COVID cases are starting to rise-- not just in the US? They're rising aggressively here but also in many places overseas. Has the market priced that in yet?

KATHRYN KAMINSKI: I think they're trying to. I mean, the challenge is this wave is not the same as the first. We all know that we've learned some things. We know that the way that we manage things is different, and we have more information than before. I do think that there's a lot of concern that we could relive some of the challenges that we had before. and that's why economic-based indicators like crude and looking at how different assets might be performing, particularly in the commodities, is a sign that we're stepping back a little bit and that there is some concern, not just in equity markets but also in those things that are linked to baseline economic activity.

ALEXIS CHRISTOFOROUS: So, Kathryn, we see the US dollar making a comeback. Is that a safe haven for investors right now, even more so than, say, gold would be?

KATHRYN KAMINSKI: Yeah, the US dollar has been moving big. That's one of the bigger movers we've been watching since this summer. We anticipated it because there are three key things we see that move the dollar. One is risk-on-risk-off sentiment. One is money flow and stimulus, and finally the strength of the US economy. So since the summer, the dollar has been taking a beating based on the second, that a stimulus, money flow, and other sort of risk on sentiment that's flowing money out of the dollar. So the dollar has been under massive pressure. But now we're seeing as some of those things subside and we move into risk-off territory and we also move into a situation where stimulus is currently put on hold for the time being and it's unclear how much that's going to impact the dollar, clearly the dollar is looking like a safe haven. And it looks like people are running back to the dollar despite the longer-term trend.

BRIAN SOZZI: If you and I are sitting here at the end of December and we're having a discussion on stimulus and that discussion centers on there is no stimulus, where do you think the market would be?

KATHRYN KAMINSKI: I would think first of all the dollar would rally. It's gone-- it's been under a lot of pressure. I do think also if we don't have stimulus, we will see a little bit more pressure on equities because people are going to be concerned about how that trickles down to other parts of the economy. And I think that there's going to be a lot more concern about how much stimulus we're going to need in 2021. So that's-- that's what I would think if we had little stimulus at the end of the year.

ALEXIS CHRISTOFOROUS: Where are you seeing opportunities post-election? Without knowing who might win the White House, what are just some areas that you think investors should be exposed in after the election is behind us?

KATHRYN KAMINSKI: So this is a great question because systematic traders, we try not to prognosticate. We don't predict where the world is going. We measure where the world is going. And what we're seeing now is still sort of muted views on equities, somewhat positive. But most interesting has been these currency moves, so I think the potential for the dollar to weaken again once we deal with who is going to be in the White House. But that's going to still put pressure on the dollar, I think, later this year.

But most interesting has been for us commodities because we've really seen a reflationary move that started as early as this summer. So from my perspective, traditional assets are under management. What's moving? Things that are less in control of fiscal and monetary policy.

BRIAN SOZZI: Before I let you go, Kathryn, your last parting word for traders as they gear up for the election on Tuesday.

KATHRYN KAMINSKI: Whew. Prepare. Prepare for volatility. Anything can happen, and I think it's going to be a wild ride.

BRIAN SOZZI: It will be a long, long few days. All right, we'll leave it there. Kathryn Kaminski, Chief Research Strategist at AlphaSimplex. Good to see you.

KATHRYN KAMINSKI: Nice to see you. Thank you.