Dollar sellers clutch at fewer straws
Clutching at straws
Would-be dollar sellers didn’t clutch at straws for long in the wake of the Fed’s Wednesday evening policy announcement. Rates weren’t changed but finely-honed commentary added nuances to the FOMC’s inflation thinking. In the end, the dollar barely tarried, and upticks by S&P 500 and Dow Jones indices proved fleeting, with only Nasdaq holding gains into the close and = the new session, juiced by Apple’s cash-return bonanza, and perhaps Tesla, shares of which inched up overnight despite its worst-ever loss.
Fed tweaks inflation view
Fed policy statement were few and so subtle, as to be barely there at all. The Fed remained confident that rising inflation to near its target was here to stay. It changed an assessment of “market-based inflation” that had “increased in recent months” to a view that these measures “remain low”. Some observers also latched on to the addition of the word “symmetric” to the Fed’s “medium term” inflation “objective”. Added optionality implied greater tolerance of short-lived inflation overshoots perhaps; implicitly dovish. That might have been the first hint that the Fed would stick with three hikes this year rather than four as the market fears. But the overall weight of the statement unmistakeably pointed to at least two rate rises of 25 basis points each, with the next one almost 100% baked in for the June meeting. Fed fund futures’ implied probability of more tightening next month has barely budged.
Dollar has investors on the backfoot
All major U.S. stock index futures began Thursday with a positive tone, but investors will wonder whether that’s how proceedings will close, after 8 of the last 9 Wall Street sessions opened with gains before closing lower. The ongoing dollar revival alone is one discouragement for U.S. equity investors, who are now showing strong signs of calculating how much the greenback’s grind higher could clip export revenues. Still, the dollar has begun to consolidate this week’s four-month peak, enabling the yen to catch and hold a bid for first time in days, whilst the euro also bounced from its own four-month (downside) milestone at $1.1938.
Sterling was giving back modest prior and early session gains at the time of writing, as optimism from a strong construction PMI showing the day before was dashed by a weaker-than-forecast headline outcome by the service sector gauge. The pound was heading to Wednesday’s lows, though looked supported at its 200-day moving average of $1.3536, a base since April. Still, the 10-year Treasury yield differential vs. gilt yields still favours the dollar, even with treasury yields off their recent 3% marker. That suggests no let-up in the sterling down trend after a 5.6% cable slide from its April peak of $1.4377. The flailing fortunes of Theresa May’s government are further weight for the pound, as are senior EU officials dealing with Brexit, who appear to have begun throwing speculative doubts on the putative transition deal into briefings.
What’s bad for the pound and good for the dollar is great for dollar-earning exporters listed on the FTSE 100. The UK benchmark continues its outperformance of Germanys DAX, the S&P 500, Japan’s Nikkei and Asian markets on the MSCI Asia Pacific index. Since 26th March, the FTSE is up 9.2% compared to the Nikkei’s 8.4% rise, the DAX’s 7% gain and with both S&P 500 and MSCI APAC flat. Trade matters would be one of the most obvious explanations for the divergence. Many Asian markets slipped again overnight as doubts emerged about forthcoming Sino-U.S. talks aimed at preventing an all-out trade conflict.
Smith & Nephew’s worst day for 9 years
By contrast, the FTSE held around three points lower, vs. a 28-point slide by the DAX. An even better FTSE rise would have been possible were it not for the key financial release in that market on Thursday. Smith & Nephew posted a 5% rise in Q1 revenue to $1.142bn but admitted a foreign exchange tailwind amounting to a very same 5%, leaving the underlying result flat. The group also cut revenue guidance. In the current climate of harsh shareholder reactions to even robust results, it’s little wonder S&N stock was thrashed by 7%, its worst one-day fall in 9 years. It will be a tough last few days for the CEO who leaves on Monday, with all hopes on his replacement Namal Nawana. Nawana sold his last employer to the U.S.’s Abbot for $5.3bn.
Bayer claims currency effects
The German index got little help from Bayer, which also had long-suffering shareholders and forex effects attached. Bayer’s first-quarter underlying earnings were 6% lower than the year before. The group pointed to currency effects as having held back overall business, whilst lauding progress with the long-running acquisition of Monsanto and noting pharma sales grew, driven by key development products. FX-adjusted core income was flat though. Elsewhere, only 7 of the German index’s 30 shares were higher.
Tesla cash-burn surprise
The most recent U.S. earnings highlights have also been less than inspiring. Tesla reported a deeper-than-forecast Q1 loss on Wednesday evening, its worst ever. However, it ended the quarter with a better net cash position than feared of $3.2bn. That meant no imminent need for another capital raising that could clobber the stock even more, after it fell 7% so far this year. But TSLA’s after-hours rise was a piddling 1%. Other troubles are brewing; like a lawsuit from a company called Nikola, whose founder, a former Tesla employee, claims the carmaker’s Tesla Semi, a prototype battery-powered truck, infringed on his copyright. Logically, with unprofitable Tesla cremating about $2,600 a minute, according to one Wall St bank, and planning more shut downs to hit its elusive 5,000 a week Model 3 target, a cash call, perhaps as soon as the second half of the year, can’t be ruled out. The stock is likely to keep trending lower for the time being.
Watch DowDuPont and ISM
The remaining earnings slate for Thursday turns things down a notch compared to recent days but still holds influential companies like Kellogg and DowDuPont, with Activision Blizzard in the overnight tech reporting space. Attention will then turn to the ISM’s non-manufacturing PMIs that will be released in the afternoon, the last rough guide to potential performance of the job market in April ahead of all-important non-farm payrolls on Friday.
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