- Vindicated by three-week highs across global stocks and most sectors, the advance guard of returning buyers still looked to be in the sweet spot on Friday. Improving sentiment amid de-rated prices was backed by a more contained assessment of geopolitical risks—chiefly Iran-U.S.—continuing ‘goldilocks’ economic conditions and the return of policy divergence versus the Fed. This offered the chance of a global reset following a tough first quarter. The emerging market equity lag of European and U.S. indices that appeared earlier this month was also reversing. The chart below shows large stock markets are returning, or about to return to positive for the year.
- A mild pullback though, at the time of writing, across U.S. stock index futures, FTSE, DAX and STOXX, was a reminder that the easier dollar scenario taking shape was still equivocal. True, Fed funds futures stalled in the wake of softer U.S. inflation, but not before setting a new cycle peak, like dollar and U.S. benchmark yields over the last 24 hours. The greenback’s pause was pounced on by the bearish cohort of speculators that keeps showing up in CFTC data after an almost three-week advance from April lows. In the case of sterling however, a European close below its 200-day moving average for the first time in over a year is unlikely to be overlooked by momentum-focused dollar bulls. The Kiwi, teetering on the brink of a three-year rising trend line will be similarly tempting. The dollar had been or was turning marginally bid across Sweden’s krona and euro at the time of writing, enough to keep DXY almost a tenth of a percentage point aloft. As such, it’s worth watching the 110 level of the dollar against the yen, after another clear rejection of the psychological barrier overnight. It’s turning into an important inflection point.
- Oil-sensitive currencies – e.g. a somewhat higher CAD – should remain attractive under current conditions. Emerging market foreign exchange is another preeminent dollar theatre, particularly with the dam of sovereign bond yields set to stay well and truly burst for some time. The yield on JPMorgan’s EMBI Global has held on to most of its 50-basis point surge of the past few weeks.
- As such, greenback risks for U.S. shares remain in the spotlight so long as the dollar still looks like it’s embarking on a memorable uptrend. This is less applicable in Europe, where investors continue to make hay whilst ECB patience keeps the euro becalmed. The markets there even appeared more relaxed about a brewing anti-euro coalition in Italy (an announcement is due on Sunday). The same beneficial dynamic fits the FTSE vs. sterling.
- Oil remains central and it will be interesting on Friday to gauge the strength of shares during a pause for the main futures contracts, even if they were barely lower than the last of a rapid-fire set of new3 ½-year highs.
- Canada’s monthly employment report could fuel Lonnie momentum against the neighbouring currency, making the release even more worth watching amid a much quieter macroeconomic agenda.
- Likewise, for stocks, there is now a dearth of the very largest index components on the reporting agenda till next week's Wal-Mart quarterly report. This could mean more attention broad theme of a rebound, though pharma and healthcare shares could see cautious treatment with President Donald Trump set to outline his strategy on lowering prescription drug prices in the U.S.
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