Aussie leads recovery as hopes for accommodative Fed knock the dollar
The Australian dollar hit a two-week high and led a recovery against the U.S. currency on Monday as caution about the U.S. economy and expectations for an accommodative Federal Reserve meeting this week kept the greenback on the back foot.
The euro was also a beneficiary from the weaker dollar, adding 0.2 percent to $1.1352 as broader markets started the week in a bullish mood, with investors bidding equities higher.
Markets are expecting the Fed to strike a dovish tone when it meets this week, and bets for an interest rate cut have risen after weaker-than-expected manufacturing data on Friday. U.S. bond yields fell to 10-week lows.
The U.S. currency, measured against a basket of rivals, fell 0.1 percent to 96.440 , hovering just above a two-week low.
The Aussie was the biggest gainer from the greenback’s pullback. The Australian currency added as much as 0.5 percent to $0.7119, a two-week high, before settling at $0.7104.
The New Zealand and Canadian dollar also gained.
“The market is probably expecting some down-shift in the ‘dot plots’ (which currently see two hikes in 2019 and one in 2020), plus some more discussion on the end of quantitative tightening – i.e. stopping its balance sheet reduction. This should maintain a positive environment for risk,” ING analysts said in a note to clients.
“While we do think the dollar can hold its own against the low-yielders … the current low volatility environment plus decreasing headwinds should be positive for high yield and EM FX in general.”
The Japanese yen was little moved at 111.52 yen per dollar.
Third Brexit Vote PM May’s Last Roll of the Dice
- PM May needs the backing of the DUP to help her deal get across the line
- Likely that March 29 Brexit day will be pushed back
Talk over the weekend that PM Theresa May was trying to win over the DUP and get them to vote for her withdrawal agreement will drive Sterling in the short-term. Over the weekend, Chancellor of the Exchequer Philip Hammond said that there would not be a third vote unless ‘enough of our colleagues and the DUP are prepared to support it’ and added that even if PM May got enough support that it was now ‘physically impossible’ to leave by the end of March. Speculation swirled that the government were preparing to offer Northern Ireland a financial settlement if the DUP voted for the withdrawal agreement, something denied but not categorially. As we write, the DUP have said that they will not be bounced into a deal and that for them it remains all about the integrity of the agreement.
If PM May’s third attempt at passing her withdrawal agreement is rejected once again, then it is very likely that the UK will ask the EU for an extension to Article 50, and this may be lengthy. The PM will use the threat of this delay to warn MPs that Brexit may never happen. If they refuse to vote for her deal, it makes a second referendum more likely. PM May however may well not be around by then, with talk growing daily of dissatisfaction with her leadership and with fresh leadership bids lining up in the background.
The EU 27 leaders will meet on Thursday (March 21) to discuss the latest developments following the UK’s notification to leave the European Union.
Stock Market News
Goldman Sees These U.S. Stocks Faring Better If Inflation Rises
- Firms with high pricing power likely to outperform: Snider
- Snap-on, Weatherford among companies favored by strategists
If the Federal Reserve is indeed able to boost inflation, stocks with high pricing power should benefit, according to Goldman Sachs Group Inc.
Fed officials have talked about the potential for adopting an average inflation targeting approach. If they did so and tried to let price pressures mount, the odds of near-term rate hikes will probably decrease. That’s assuming it even works, as economists and central bankers have been overestimating inflation potential for years.
Such an outcome would be favorable to U.S. equities because of the more-dovish rate scenario, but likely less favorable for their earnings, Goldman strategists led by Ben Snider wrote in a note Friday.
“With input cost pressures high and likely to keep rising, companies will need to be more aggressive in raising prices or accept lower profit margins,” the strategists said. “Stocks with low labor costs should also outperform as inflation expectations rise.”
Snap-on Inc., Weatherford International Plc and National Oilwell Varco Inc. are among stocks with high pricing power that could fare well amid the Fed pivot, Goldman’s report said. Stocks that could fare worse include Alaska Air Group Inc., ICU Medical Inc. and GoDaddy Inc., the firm said.
“Since at least 1985, high pricing power stocks have typically outperformed when the market perceived an imminent decline in corporate profit margins,” the strategists wrote. “In addition to companies with the pricing power to pass through rising input costs, firms insulated from those cost pressures should also outperform.”
U.S. Futures Mixed as Trade Summit Reportedly Postponed to June
U.S. futures were subdued on Monday as news that a proposed summit between U.S. President Donald Trump and Chinese President Xi Jinping could be pushed back to June cast further doubt over the fate of talks to end the trade war between the two countries.
The proposed meeting was originally scheduled for March, then pushed to April, and has now been pushed back to June, the South China Morning News reported on Saturday.
The delay indicates the two sides are far from an agreement on trade disputes, despite comments from both sides last week claiming that they had made progress.
Dow futures fell 83 points to 0.32% by 6:41 AM ET (10:41 GMT), while S&P 500 futures slipped half a point or 0.01% and tech-heavy Nasdaq 100 futures was up 2 points or 0.04%.
Chinese stocks closed overnight on a high note, likely moved by U.S. data on Friday that encourage hopes that the Federal Reserve’s next move on interest rates will be down rather than up.
Boeing (NYSE:BA) fell 3.5% to a seven-week low in premarket trading on news that data from the Ethiopian Air jet that crashed earlier this month suggests similarities with an earlier crash off Indonesia. The U.S. Department of Transportation is investigating the Federal Aviation Administration’s approval of Boeing’s 737 Max 8 in the wake of the deadly crashes that both involved the best-selling model. Walt Disney (NYSE:DIS) slipped 1% while Kraft Heinz (NASDAQ:KHC) dipped 0.3%.
Payment processor Worldpay (NYSE:WP) jumped 10.9% on news that it’s being bought by Fidelity National Information Services for $35 billion in cash and shares, plus debt. Tesla (NASDAQ:TSLA) rose 0.9% after it dropped its mid-range battery option from its Model 3, while Intel (NASDAQ:INTC) gained 0.2% and Microsoft (NASDAQ:MSFT) inched up 0.5%.
In commodities, gold futures recovered 0.1% to $1,304.75 a troy ounce, while crude oil inched down 0.4% to $58.59 but was still near 2019 highs. The U.S. dollar index, which measures the greenback against a basket of six major currencies, fell 0.2% to a two-and-a-half-week low of 95.917.
Bitcoin Breaks $4,000; Crypto Rises
Bitcoin rallied to a three-week high, rising above the $4,000 level over the weekend and investors remained bullish as the week opened in Asia. Other major cryptocurrencies also traded in the green.
On Monday morning, Bitcoin added 0.81% to trade at $4,019.6 by 11:05 PM ET (03:05 AM GMT). After hovering below $4,000 since Feb. 24, the digital coin gained on Saturday with trading volume surpassing $11 billion for the first time in months.
Ethereum gained 1.43% to $140.86, XRP was up 0.29% to $0.3178, and Litecoin rose 1.53% to $61.687 on Monday morning.
The bullish sentiment sent the crypto market cap higher to $140.9 billion.
Price-stable cryptocurrencies were in the limelight over the weekend. Senior advisor for digital assets at the U.S. Securities and Exchanges Commission (SEC) Valerie Szczepanik said stablecoins “could raise issues under securities laws”. Stablecoins are cryptocurrencies specifically designed to minimize price volatility.
In Szczepanik’s words, the digital token is deemed a security when buyers expect somebody else is going to be holding or guaranteeing a profit, or holding the price at a certain level.
Stablecoins hold stable values, with market prices pegged to another stable asset such as the U.S. dollar to counter high volatility in valuations. Examples are the U.S. dollar-backed Tether and TrueUSD.
“I’ve seen stablecoins that purport to control price through some kind of pricing mechanism, whether it’s tied to the issuance, creation or redemption of another type of digital asset tied to it, or whether it is controlled through supply and demand in some way to keep the price within a certain band,” Szczepanik said on Friday.
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