- Stocks bounce back as recovery hopes supersede virus and inflation jitters
- Dollar slumps on easing Fed taper worries but inflation bets lift gold
- Euro and pound surge as Europe reopens, loonie hits highest in 6 years
Markets buoyed as optimism takes over
Fears about rising virus cases in Asia receded on Tuesday as signs that infections in India are on the decline and as more European nations slowly lift their restrictions boosted hopes that the global recovery remains on track. Fresh pledges by the Fed and the RBA that easy policy is here to stay further cheered markets even as inflationary pressures continue to brew in key sectors.
Equities gained across the board, with shares in Europe opening sharply higher after a solid session in Asia. US stock futures were also up, led by the Nasdaq, but the Dow Jones trailed somewhat. After a decent rally at the end of last week, Wall Street started the week on the wrong foot and although there still seems to be an absence of fresh drivers, buy-the-dip mentality is propping up US shares for now.
The stimulus and vaccine story is still a valid theme in global markets, but not so much on Wall Street where most of the good news is already baked in and many big names are plagued by bloated valuations.
That probably explains why the tech sector has been reacting more adversely to the inflation threat. However, with the Fed so far standing firm on tapering even after the latest inflation scares, investors have been able to contain their panic for now.
The Empire State manufacturing survey for May was the latest to point to higher prices for businesses. But Fed Vice Chair Richard Clarida reaffirmed the central bank’s stance, saying “we have not made substantial further progress” in remarks on Monday.
Dollar falls of a cliff, euro and pound shine
The minutes of the April policy meeting due tomorrow are expected to further reinforce the Fed’s position on its current policy path. The Fed’s insistence that the inflation surge will be transitory despite some worrying trends suggesting otherwise is keeping a lid on Treasury yields, pressuring the US dollar.
The greenback has plunged to a near three-month low today against a basket of currencies, falling significantly against the likes of the euro, pound and Canadian dollar.
The euro has shot above $1.22 today, while sterling is testing the $1.42 level. A pick-up in Europe’s vaccination pace along with the gradual easing of virus restrictions in several Eurozone countries have revived the euro’s fortunes, rallying more than 4% since the beginning of April.
However, rising Eurozone government bond yields on the back of speculation that the European Central Bank might start planning its exit strategy from the emergency stimulus as early as June are also fuelling the single currency’s rebound. Unlike the Fed, the ECB has not put up a united front when it comes to policymakers' views on how soon bond purchases should be dialled back and this is exacerbating the dollar's weakness against the euro.
In the UK, the Bank of England has already taken its first step towards tapering and the pound is fast approaching the February peak of $1.4235. Virus curbs were loosened further in Britain this week, allowing holidays abroad and for pubs and restaurants to serve indoors. Investors do not seem too worried at this stage about the accelerating spread of the Indian variant of the virus in some parts of the UK, being reassured by the government’s efforts to boost testing and vaccinations in those regions. Meanwhile, jobs data released earlier today suggest employment had already started to recover in March when the lockdown was only partially relaxed.
Loonie and aussie extend gains, gold up too
In other currencies, the Canadian dollar proved unstoppable, scaling fresh 6-year highs versus the greenback as investors became more certain that Fed rate hikes will lag well behind those by the Bank of Canada. The Australian dollar was also bullish, climbing back above $0.78 even as the RBA hinted that rates will not rise until wage growth is “sustainable above 3%”.
In the meantime, the combination of subdued Treasury yields and rising inflation expectations have been a boon for the non-yielding bullion. Gold prices were headed for a fourth straight day of gains today, advancing towards $1,870/oz to brush 3½-month highs.