Global stocks were set to post their best week of gains in six years on Friday after two consecutive weeks spent in the red, shrugging off a rise in global borrowing costs while the dollar hit its lowest level since 2014. The MSCI world index rose 0.4% after European bourses opened. .After suffering its biggest weekly drop since August 2015 last week, this week’s recovery puts the index on track for its best weekly showing since early December 2011.
As Deutsche Bank notes, “The S&P 500 (+1.21%) rose for the 5th day and is now up +2.15% YTD which on a compounded annualised basis is c18.5%!! On this basis the NASDAQ (+1.58% yesterday, +5.11% YTD) is up c49.5% on an annualised basis.“
As Reuters notes, investors remain puzzled at this week’s quick rebound in stock markets, which has also coincided with a rise in bond yields on evidence that inflation is starting to creep up globally. The most frequent argument offered by economists has been that historically, it’s not unusual for stocks and bond market borrowing costs to rise in tandem with a rapidly expanding economy.
“For me it’s really a question of maybe. Markets are taking a look at the inflationary outlook and saying OK, maybe rates are going up and maybe the economy will compensate for that,” said Michael Hewson, chief markets analyst at CMC Markets. “That might change if we move to 3 percent on the 10-year (Treasury).”
In an especially quiet and illiquid overnight session, with most of Asia on holiday celebrating the Lunar New Year, FX traders saw fireworks in the latest violent lunges of the dollar, and especially the USDJPY, which tumbled as low as 105.55, taking out perimeter stops, and sending the pair to a fresh 15 month low, as the market shrugged off the widely-expected nomination of Haruhiko Kuroda (translation: no change to the BOJ’s policy) for another term as the BOJ governor, while Japanese stocks closed 1.2% higher, ignoring the spike in the yen.
While Japan closed higher, and Australia slightly lower, most major markets across Asia Pacific shut for Lunar New Year holidays, volumes in the region were light. What markets were open, were broadly in the green this morning…
… with European stocks emerging from the shadow of a global selloff rose further on Friday, extending their biggest weekly gain in more than a year. The Stoxx Europe 600 Index rises 0.8%, with energy shares leading a broad rebound. This morning’s equity newsflow has been largely dominated by a busy slate of earnings from the likes
of Renault (+3.1%), Eni (+1.5%), Allianz (-0.7%) and Vivendi (-5.8%) which have provided a bulk of the focus for traders thus far. Elsewhere, Vopak jumped after saying it has the potential to “significantly improve” its 2019 Ebitda, while Vivendi tumbled after posting earnings and confirming trends previously reported in January.
Over in the US, U.S. stock index futures rose, although were off session highs, signaling further gains on Wall Street as global equities continue to recover and bond yields fall back from recent peaks. So far in the rebound, the S&P 500 has recouped more than 50% of the losses suffered in the latest correction, the index is back above its 50-DMA and technical breadth is rising.
Bit the biggest mover so far was the dollar came under early pressure as the Lunar New Year kept liquidity below average, as greenback sellers found limited resistance in pushing the currency lower before a long weekend in the U.S. In the process, the euro hit a fresh three-year high, while the yen seems determined to check barrier defense at 105.00. However shortly after the European open, the mood reversed completely, and the dollar saw a strong bid amid what some speculated was a broad round of dollar short covering, sending the BBG dollar index to session highs.
There is no strong consensus yet on what is driving the dollar’s persistent weakness, especially in light of rising yields. Some say it simply reflects a return of risk appetite and a shift to higher-yielding currencies, including many emerging market ones. But others cite concerns that Washington might pursue a weak dollar strategy as well as talk that foreign central banks may be reallocating their reserves out of the dollar. There are also worries President Donald Trump’s tax cuts and fiscal spending could stoke inflation and erode the value of the dollar.
“His protectionist policies could also fan inflation. Markets appear to have calmed down for now but fundamentally it is different from last year,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. “You could say that right now, rather than stocks rising around the world, it is the dollar falling against almost everything,” he added.
Benchmark Treasury yields halted their surge at around 2.9% and the dollar paused after falling to a three-year low against major peers. Failing to break above 2.90%, the yield on the 10Y Treasury has instead tested the downside, and was currently trading just north of 2.88%, which has proven a support level over the past 48 hours.
Leave A Comment