Stocks are dancing to the same tune as the dollar as markets enter the month of December.
But some market pros are questioning how long that trade will last, and whether the Dubai situation may ultimately be seen as a catalyst toward breaking the tight link between the falling dollar and rising risk assets, like stocks and commodities.
Emerging markets have been one of the big beneficiaries of that trade. Some of the funds moving in that direction could slow as investors reconsider the risk in some markets versus the lofty prices, so the theory goes.
"It may call some of the valuation differences into question. It's one of those points which may serve as a a wedge between the U.S. market and emerging markets," said Jack Ablin, CIO of Harris Private Bank.
Dubai World Monday said it is in talks with banks to restructure $26 billion in debt. News that the state-owned conglomerate was putting off debt payments first broke last Wednesday and rattled stock markets around the world.
On Monday, stocks shrugged off worries about Dubai's debt situation and moved in the opposite direction of the weakening dollar. The dollar though was higher in the morning before reversing in the afternoon. The Dow finished up 34 at 10,344, and the S&P 500 rose 4 to 1095. The dollar was down 0.3 percent against the euro and about 0.2 percent against the yen.
For the month of November, the Dow was up 6.5 percent, while the S&P was up 5.7 percent. On the other side of the "risk trade," the dollar slumped 2 percent against the euro in November. The dollar Monday was at $1.5017 per euro, wiping out the gains it made on fears about Dubai debt restructuring late last week.
Oil was up fractionally for the month, gaining 0.4 percent to $77.28 per barrel, while gold jumped more than 14 percent to $1181.10 per ounce. Oil edged up Monday as anxiety rose about Iran's threats to escalate its nuclear program.
Tuesday promises to be busy with economic reports. ISM manufacturing data, pending home sales and construction pending are all reported at 10 a.m. Auto sales for November will be reported throughout the day by manufacturers.
Emerging Vs. US Stocks
Emerging markets have been trading at a premium to the S&P 500. "Every time that happens, they tend to disappoint," Ablin said.
This doesn't make Ablin negative on U.S. stocks, and he says its possible they could benefit from reduced investment in emerging markets. "Valuations are full. Technicals are strong. We're still overweight," he said. "..but unless we can get some good positive surprises of growth we'll likely still kind of tread slightly higher, certainly."
Neal Soss, chief economist at CSFB, said the flow of funds out of the United States may indeed slow as a result of Dubai's debt woes. In the first quarter, U.S. investors sent $36 billion into foreign markets, and in the second quarter, the amount rose to $92 billion. In the second quarter, $36 billion of that went into foreign equities. The third quarter numbers should be sharply higher.
"The dollar could benefit. The capital flow from the U.S. could slow down. That in turn could show up on the other side of the ledger.. as in less eagerness to buy the Treasury auctions," he said.
Ablin said he has also been watching the dollar for a possible turn. "What's going on with the dollar is the opposite of what's going on with the equities market. Equities are getting fully valued, but the technicals are very strong. The dollar is getting pretty cheap, and the technicals are getting very negative," said Ablin.
"We went back and found whenever the dollar is as negatively correlated to equities as it is now, it generally moves in a positive direction over the subsequent 12 months," he said.
"It's the victim of a technical slam, but currencies can be slammed for a long time until fundamentals take over," he said. One thing in the dollar's favor, he said, is that investors are turning more bullish on the dollar. He pointed to the fact that pro dollar ETF share volume is rising. "What we're doing here is we look at growth of bullish dollar vs. bearish dollar trades and we're starting to see players on a dollar rally."
He's also following technicals on the U.S. stock market. "I'm watching technicals really closely. It was really momentum in technicals that got me in..Now that the market is getting stretched, we'll wait for the technicals to break down," he said, adding that hopefully won't happen all at once.
"I do think equities will continue to dominate, considering the Dow in particular and the S and P in general have sort of lagged the rest of the world," he said.
What to Watch
Tuesday's ISM data is perhaps the most important number of the day. Soss said he is expecting a reading of 56 on ISM, above the consensus 55. October's reading was 55.7. "Anything over 50 means growth. The growth can't accelerate without limits," said Soss. "...This is the other side of the green shoots. Things are improving but they are improving more slowly."
The big economic report of the week is Friday's November employment report. Soss has an interesting forecast for that number. He said it is possible the number could be zero, as opposed to the consensus forecast of 120,000 jobs lost.
One clue to that number could come from the ISM report. "Job losses in the manufacturing sector in the official figures look large, compared to where the ISM figures have been coming in. That suggests there could be a surprise," he said. The same is possible with service sector jobs, he said.
In after the bell corporate news, sources say General Electric and Vivendi have struck a tentative deal under which GE would buy Vivendi's 20 percent stake in NBC Universal for $5.8 billion. If finalized, the deal would clear the way for GE to forge a separate deal giving Comcast control of its entertainment unit, which is the parent of CNBC.
Also Tuesday, Philadelphia Fed President Charles Plosser speaks on the economic outlook in Rochester, N.Y. at 12:20 p.m.
President Obama speaks to the nation on Afghanistan at 8 p.m.
— Questions? Comments? marketinsider@cnbc.