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Opening Bell: Dollar, Yields Fall; Euro Rallies; Oil Hits 2-Year High

Published 11/22/2017, 06:30 AM
Updated 09/02/2020, 02:05 AM

by Pinchas Cohen

Key Events

Stocks in Asian trading today are set for a record close, led by double records from all four major US indices yesterday—both record highs as well as record closes—as investors, encouraged by stellar profits and the outlook for more of the same, as well as the prospect of US tax reform, seem to have come back in force.

After the US unemployment reached 4.1 percent, Goldman Sachs forecast the rate would continue to plummet, reaching 3.5 percent by the end of 2019, the lowest level since December 1969. This metric boosted the bank’s own bullish outlook for stocks, which they released yesterday. They foresee US equities continuing to climb through 2018. Tax reform, the investment bank claims, will take the S&P 500 to 2,850 next year. That’s more than 10 percent above the current level.

Goldman then warned, however, that should Congress not pass the bill, the benchmark index would fall 5 percent from its current position. Their outlook is most favorable for the prospects of Industrials and Financials, while Information Technology—the biggest driver of the current bull market—looks, by Goldman's estimation, set to underperform.


Ironically, yesterday the information technology heavy NASDAQ Composite outperformed, with a 1.06 percent gain. The small-cap Russell 2000 Index followed close behind, gaining 1.03 percent. The 'laggared' Dow Jones Industrial Average added just 0.69 percent, with the S&P 500 Index trailing behind, advancing 0.65 percent.

As well, though all ten S&P 500 sectors were in the green, Technology boosted the average, with a 1.05 percent advance. Not only was the NASDAQ Composite the winner on absolute gains, it was also the most actively bullish of all the US indices since it was the only index with a full session of price action above its previous peak. In addition, it also closed at its highest point of the session.

Global Financial Affairs

Hang Seng Monthly 2008-2017

Hong Kong’s Hang Seng Index climbed through the 30,000 milestone this morning, its highest point in a decade. The MSCI Asia Pacific Index breached its 2007 peak, and stocks across the board—from Tokyo to Sydney—gained. Even South Korea's KOSPI, which has been falling while other Asian markets rallied, advanced this morning.

Not wanting to be left out, the Stoxx Europe 600 Index cranked out a 0.06 gain.


The euro put together a more meaningful advance, gaining 0.20 percent after Chancellor Angela Merkel’s Christian Democratic party postured confidence they'd be able to put together a ruling coalition on a revived alliance with the Social Democrats. This would avoid new elections, a destabilizing agent for the EU which is now undergoing nationalist pressures and strengthen the Union's Brexit negotiating position.

Global sovereign bonds advanced, pushing yields lower still, causing Treasury yields to flatten yet further, pulling the dollar lower for a second day.

When investors buy bonds on current yields, they are generally less likely to expect rates to go higher. The more they buy at current yields the lower the chances rates will in fact go higher, which makes the dollar less attractive, causing it to be sold off. Adding insult to injury, the dollar weakened even further, after still-acting Federal Reserve Chair Janet Yellen warned against rapid rate increases.

Putting aside the positive correlation between bonds and currencies, there is an even bigger correlation to consider, signaling a glaring negative divergence. While stock rallies are a vote of confidence for continued economic growth, bond rallies are a vote of no-confidence for continued expansion. Stock investors buy if they believe corporate earnings will grow, driving a company's equities up in value. Bond investors, on the other hand, buy when they think the economy will not grow and bonds will not go up in value, making the current bond more valuable.

Of course, there are also investors who buy bonds as a safe haven asset, another type of no-confidence vote about growth. How to reconcile this divergence of outlook between equity and bond investors? One reasonable explanation is that equity investors tend to focus on company profits, whereas bond investors focus on economic growth. Company profits in the US have been grossly disproportionate to the country's economic growth. While Goldman Sachs) predicts that equities will continue to rise on “rational exuberance,” bond investors seem to think markets are dealing with irrational exuberance.

UST 10-Y vs 2-Y 60 Minute Chart

Having said that, a spike in the 10-year yield started at 2:00 EDT, even while the 2-year remained flat, might be a sign of a sudden shift in outlook. Or it could be short-term trading, which would ultimately reflect nothing. The settlement price for the day may cast some light on the question.

Oil Weekly 2016-2017

Oil is currently above its former, November 8 peak, putting it at a two-year high on news of a Canadian pipeline disruption to the United States.

Up Ahead

  • Minutes from the European Central Bank’s October meeting, due out on Thursday, could show dissent in the discussion about tapering.
  • In Asia, Singapore's 3Q GDP is will be released on Thursday. New Zealand's October trade and South Korea's November consumer confidence figures are due later in the week.
  • US Durable Goods Orders for October will be released later today in the US.
  • The minutes from the Fed’s latest policy meeting are out later today as well.
  • The U.K. announced its budget this morning.

Market Moves


  • Australia’s S&P/ASX 200 Index rose 0.4 percent.
  • South Korea’s KOSPI added 0.4 percent.
  • The Hang Seng jumped 0.8 percent as Chinese financial shares climbed. The Shanghai Composite Index gained 0.6 percent.
  • The MSCI Asia Pacific Index advanced 0.6 percent. The MSCI Emerging Markets Index extended its rally, taking it to its highest position in more than six years.
  • The Stoxx Europe 600 Index increased 0.1 percent as of 8:41 London time (3:41 EDT), the highest in more than a week.
  • The U.K.’s FTSE 100 advanced 0.1 percent to the highest in more than a week.
  • Germany’s DAX Index climbed 0.1 percent to the highest in more than a week.
  • S&P 500 Futures gained 0.1 percent to the highest on record.


  • The Dollar Index fell 0.23 percent to 93.76.
  • The euro advanced 0.2 percent to $1.1758, the largest gain in a week.
  • The British pound gained 0.1 percent to $1.3246, reaching the strongest in three weeks on its seventh consecutive advance.
  • The Japanese yen increased 0.4 percent to 111.99 per dollar, the strongest in more than five weeks.


  • The yield on 10-year Treasuries declined less than one basis point to 2.35 percent.
  • Germany’s 10-year yield fell one basis point to 0.35 percent, the lowest in almost two weeks.
  • Britain’s 10-year yield decreased one basis point to 1.292 percent, the lowest in almost two weeks.


  • West Texas Intermediate crude increased 1.9 percent to $57.91 a barrel, the highest in more than two years.
  • Gold advanced 0.3 percent to $1,284.84 an ounce.
  • Copper gained 0.3 percent to $3.16 a pound, the highest in more than two weeks.

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