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Stocks back in the black, dollar selling takes a breather


    • S&P 500 recoups all its losses for the year, Nasdaq hits new record
    • Optimism echoed in FX too, with dollar struggling as commodity currencies hit multi-month highs
    • However, we are seeing a reversal of these moves today – some profit taking?
    • Looking ahead, much will depend on what the Fed does and whether a second wave hits the US

S&P turns flat for 2020, Nasdaq cruises to new highs

Fear has given way to greed in an impressive way over the past weeks, resulting in a stunning rally for stock markets and the currencies that had been most heavily impacted by the pandemic, as investors increasingly side with the view that this crisis will be short lived. The much better than feared US employment report for May emphasized exactly that point and even suggested the recovery has already begun, forcing many skeptics to join the ‘risk on’ party as well.

The mounting signs that the global economy is healing, coupled with the massive stimulus injections and a growing belief in market circles that fiscal discipline is dead for good, helped the S&P 500 (+1.2%) to recover all its losses for the year. Meanwhile, the Nasdaq Composite (+1.1%) closed at a new record high.

As per usual, the FX market took its cue from equities, with the dollar staying under pressure while the likes of the aussie, kiwi, and loonie, all climbed to pre-crisis multi-month highs. Even though we are seeing most of these moves reverse early on Tuesday, with the dollar recovering some ground and commodity currencies pulling back, this looks mainly like some profit taking after a powerful rally as there haven’t been any negative news.

Can the euphoria persist?

What has been most striking about the recent melt-up in stocks is the mountain of evidence that the rally has been driven mainly by retail investors, and that a lot of the ‘smart money’ has been sitting on the sidelines. The encouraging US jobs report probably changed that tendency, giving institutional players the green light to move out of cash and back into equities, which implies that the broader rally may still have some room to go.

However, the next few days will be a giant test. The first challenge is the Fed decision tomorrow. While the world’s most important central bank is not expected to act, investors will be watching closely for any signals that the Fed is considering more unorthodox tools to support the recovery, like introducing yield curve control. If Chairman Powell puts that prospect on the table, the recent trends of stronger equities and a softer dollar might be recharged– otherwise, today's retracement may continue.

Perhaps even more importantly, the coming days will reveal whether the US protests have ignited a second wave of virus infections, as we approach the 14-day mark of when the unrest spread nationwide. The risk of a second wave has been high on investors' radar, and if these massive protests weren’t enough to generate one, that could add even more fuel to the euphoria that has gripped global markets.

In euro land, the single currency will also be driven by the outcome of Thursday’s Eurogroup meeting, where investors are hoping for an agreement on the specifics of the recovery fund. A lot of good news has been priced into the euro, and for the currency to sustain its gains it might need clear signals that an agreement is imminent.

XM.COM Review

Source: https://www.xm.com/daily-market-comment-stocks-back-in-the-black-dollar-selling-takes-a-breather-123125
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