TD Securities Warns of Potential "Liz Truss Moment" for U.S. Market

Mark McCormick, the head of foreign exchange strategy at TD Securities, has warned that the recent sell-off in U.S. Treasuries and the dollar could be a precursor to what he terms an "Liz Truss moment" for the U.S. market. This scenario, he suggests, could lead to a significant downturn in the value of the dollar and U.S. assets.

McCormick likened the current situation to that of an emerging market, where rising yields, currency depreciation, and a falling stock market are common. He noted that the traditional support for the U.S.'s twin deficits, which has long been underpinned by the "kindness of strangers," is now being questioned. Issues of trust, uncertainty, growth, and valuation are all coming to the forefront.

McCormick pointed out that other regions now have more investment opportunities. These regions are stimulating their own economies, and their stock markets are largely undervalued. In contrast, the U.S. has long been a consumption-driven economy, while Europe and Asia are savings-driven. Savers are bringing their funds back home, leading to higher local interest rates, increased consumption, stronger currencies, and rising stock markets. This, he believes, is the current trend.

McCormick highlighted that the U.S. market experienced its first "Liz Truss moment" in early April when Trump announced aggressive tariff policies. The recent downgrade of the U.S. credit rating by Moody's is seen as a mini version of this moment. The Bloomberg Dollar Spot Index fell 0.6% following the rating announcement, reaching its lowest level in over a week.

McCormick emphasized that the U.S. is currently in a precarious position, with the reserve currency status of the dollar being eroded at a time when the country desperately needs foreign investment. He warned that if the U.S. signals to the world that it does not need foreign capital, it could lead to a situation where investors bring their money back home to stimulate their own economies.