by Pinchas Cohen
Key Events
Yesterday, after the Fed didn't increase its forecast for the number of times it plans to lift rates next year, the dollar, Treasury yields and US stocks all fell. Of course, the US central bank had just raised the interest rate by a quarter percentage point, as expected, for the third time in 2017 as promised, to a range between 1.25% and 1.5%. It also raised its outlook for economic growth in 2018.
However, since the hike was already widely expected and therefore priced in, the news was greeted with a yawn by investors. As well, since the Fed talked the talk regarding the improved outlook for economic growth but didn't actually act on it by increasing the number of planned hikes for next year, since inflation remains persistently sluggish, disgusted investors dumped growth assets.
Global Financial Affairs
The dollar dropped 0.67 percent yesterday, decisively ending a six-out-of-seven day rally, paring more than half its gains, down 0.62 percent from the previous 1.3 percent advance, setting the price back by three and a half days. It was the biggest one-day fall since the 0.78 percent slide on November 22, which followed its longest winning streak since January 2016.
Earlier, data showed U.S. consumer inflation picked up in November, though core CPI—which excludes food and energy costs—unexpectedly slowed. On Tuesday, the U.S. Labor Department reported that the producer price index rose more than forecast in November.
Gold surged 0.9 percent from a five-month low yesterday, stopping below the prior, October 6 trough. Today gold extended its advance, toward the $1,260 price level of the prior trough, but the presumed reversal from the broken October support which turned into a resistance on the supply-demand reversal is so far proving itself. The price was unable to maintain much of the advance but had to give up half of today’s gains, forming a bearish Shooting-Star.
Treasury yields on the 10-year note dropped 2.15 percent yesterday, the biggest daily fall within its trading range since October and since the September 7, 3.00 percent plunge. This means that demand for Treasuries surged to the highest level since September 7.
Stocks, however, which appear to have become all but immune to anything pessimistic since the Brexit vote of mid last year, ended mixed. The S&P 500 swooned during the final 15 minutes of trade—but only after notching another all-time high first. It ended the session 0.05 percent lower.
The Dow Jones Industrial Average however, gained 0.33 percent, posting a fresh record and closing at the high. The NASDAQ Composite also gained, up 0.20 percent. The biggest gainer was the small cap Russell 2000 Index, which had been struggling recently. Perhaps because companies on this index tend to sell to domestic customers and thus have the most to gain from an expanding US economy, the index moved higher post FOMC, up 0.54 percent.
In an additional reversal of recent market activity, the worst performing S&P 500 sector yesterday was Financials, which fell 1.24 percent. To appreciate just how severe the drop was, Energy, with just a 0.14 percent decline was the second worst performing sector. It's obvious why financial firms were hardest hit: the market narrative considers their profits to be contingent on how high interest rates go.
On a day when investors sell off growth assets in favor of haven assets it's no surprise that the best performing sector was Consumer Staples which gained 0.57 percent. However, in another example of the unstoppable optimism of equity investors, the runner-up was a growth sector, Industrials, up 0.39 percent.
This morning Asian stocks extended the growth asset selloff. Both of China's main indices, the domestic Shanghai Composite and Hong Kong’s Hang Seng, fell, along with South Korea’s KOSPI. Japan’s TOPIX was down 0.15 percent while the Nikkei 225 closed lower by 0.30 percent, retreating yet further from its 26-year high. The safe haven yen strengthened by 0.7 percent, weighing on Japanese stock prices which are generally export-dependent. A stronger yen will hurt by causing them to lose competitiveness.
In Europe, the STOXX 600 continued to fall, with banks leading the declines, perhaps an echo of yesterday's financial sector weakness in the US session. Still, the index remains in an uptrend channel after registering a new, higher peak, which provided an upside breakout to a trading range since November. It’s natural at this point for investors to take profits, bringing about a correction. As well, even after the decline, the price is comfortably above the range since November, suggesting it found support, or demand.
The dollar initially extended its decline this morning, down an additional 0.13 percent. However it pared losses to settle flat at yesterday’s closing price, as investors try to determine its value after their Fed disappointment.
The euro fell 0.15 percent, as investors await ECB President Mario Draghi’s comments after the central bank’s policy meeting today for more clues about plans to start weaning investors off its monthly bond purchases next year.
The pound crawled higher ahead of the Bank of England’s policy decision.
Ethereum, the second most popular cryptocurrency by market cap, hit a new high early this morning, moving to $753 in Asia trade, before falling back below $700. It's one of six digital coins that have seen astounding gains by percentage year-to-date, putting Bitcoin's more storied rally to shame.
Up Ahead
- U.S. retail sales data is due out later today.
- European lawmakers continue to debate Brexit and weigh moves on the next step, while North America Free Trade Agreement negotiators meet again.
Market Moves
Stocks
- The Stoxx Europe 600 Index declined 0.2 percent as of 8:09 London (3:09 EDT), the largest drop in almost two weeks.
- The MSCI All-Country World Equity Index gained 0.1 percent, reaching the highest on record with its sixth consecutive advance.
- The U.K.’s FTSE 100 fell 0.1 percent, the largest fall in a week.
- Germany's DAX slipped 0.64 percent, extending recent losses
- S&P 500 Futures are up, barely +00.7%
Currencies
- The Dollar Spot is flat with yesterday’s close, at 93.47.
- The euro fell 0.1 percent to $1.1815.
- The British pound increased less than 0.05 percent to $1.3425, the strongest in a week.
- The Japanese yen decreased 0.2 percent to 112.77 per dollar.
Bonds
- The yield on 10-year Treasuries jumped three basis points to 2.37 percent.
- Germany’s 10-year yield dipped one basis point to 0.31 percent.
- Britain’s 10-year yield fell one basis point to 1.216 percent.
- France’s 10-year yield declined one basis point to 0.652 percent.
Commodities
- West Texas Intermediate crude rose 0.3 percent to $56.79 a barrel.
- Gold increased less than 0.05 percent to $1,255.91 an ounce, the strongest in more than a week.
- Copper declined 0.1 percent to $6,720.50 per metric ton, the biggest drop in more than a week.