The dollar is playing its part to upset the post-Mid Term applecart.
Investors home in on the Fed
Headlines are an input to the volatility bounce. True, the latest high-profile White House exit is essentially neutral, barely registering. And at least the day began with more promising news as China’s exports were resilient; for transparently artefactual reasons. And a meeting between Presidents Trump and Xi is expected to be of “great significance”. But evaporating stock market momentum also looks like an event-risk driven retreat. This is where the dollar comes in. Partly on weak sterling, euro and yen fundamentals but for the most part due to a supposedly non-event Federal Reserve statement. It’s the Fed that inevitably, looms largest in investors’ consciousness.
U.S. yield curve flattening in the wake of Wednesday’s vote has thereby been short-lived. Benchmark yield weakening found a floor at 3.2133% on Wednesday afternoon in Washington. It did so again, an hour ahead of Wall Street trading. Both times echo the launch point of a late ramp on Tuesday, reinstating feedback-loop support for the greenback. The idea is that Treasury cratering may be about to resume in earnest, again strengthening yields that are problematic for equities. Behind tightening dollar market rates is the suspicion that the Fed may still have further tweaks of the rate path in store.
Fed watch point: hike three in 2019
To be sure, the housing market is a weak outlier in the robust U.S. economy, and largely due to natural economic effects. Demand shows signs of weakening as house prices reach cycle highs. But aside from that, the latest GDP assessment and job market readings have beaten estimates. It’s there unlikely that FOMC and chair Powell will telegraph any changes to the view that the economy has strengthened enough to take what boils down to one 25 basis point hike per quarter. With every third in the future having been treated provisional, markets are on the lookout for a third in 2019. Further out, we still the find the logic of a gridlock fuelled bond revival compelling. As next year’s Washington business gets under way—or more accurately, not—we expect Treasurys to begin to react to a more obstacle strewn path for the dollar. As the yield temperature cools further (probably creating an easier time for shares) the Fed will eventually have to decide if the wider temperature is neutral enough, but such a climate remains many months away.
Why Italian sentiment cools
Thursday also brought a stronger patch of earnings from European heavyweights, including Astra, principal lenders like SocGen and even sector canaries, like Burberry. This may be masking a material relapse in sentiment on Italian. In themselves the European Commission comments that was the apparent trigger, were largely uncontroversial for investors. Markets evidently priced in deeper economic consequences than official forecasts implied several months ago. The 10-year BTP yield has climbed, though is some 42 basis points from 19th October’s 3.783% high. The spread to bunds is similarly easier. But Thursday brings the tally of yield advances this week to three, keeping the first weekly rise since mid-October on track. The slope of the trend is also clear enough. That’s enough motivation to reduce exposure ahead of a Fed statement.
Figure 1 – Technical analysis study: Italy 10-year BTP
Source: Refinitiv/City Index
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.