Published: March 19th, 2021
The Bank of England (BoE), US Federal Reserve, and Bank of Japan (BoJ) were all scheduled to meet this week, with each policy session's outcomes expected to set the direction in which global interest rates are likely headed.
Both European and US treasury yields were headed slightly downward ahead of the central bank gatherings. Benchmark ten-year treasury yields went as high at 1.638 per cent on Tuesday, close to the previous Friday’s 1.640 per cent; a level last reached in February of 2020.
The dollar, meanwhile, saw gains in contrast to low-yielding currencies like the pound and euro, while high-yielders such as the New Zealand Dollar (NZD) fared somewhat better.
FX strategists at Rabobank said in a research note this week that the greenback has been one of the best-performing currencies over the past two to three weeks, which broadly reflects changing market expectations about the direction of central bank interest rate policy.
‘USD could turn out to be hardier than the consensus had expected at the start of 2021,’ they said, adding that any reflation trade will hinge upon American fiscal policy and expectations for economic growth.
Gaining US treasury yields have helped push the greenback up by two per cent this year so far, due in part to expending interest-rate differentials versus those seen in other major bond markets. The dollar dipped by more than four per cent in the final quarter of 2020.
In Monday trading, the dollar index that tracks the greenback against other majors was up 0.21 per cent at 91.67. Last week it overtook a high last hit in late November 2020 of 92.49.
Dollar detractors are also in retreat. The American currency has also received support thanks to a reduction in bets that it will decline. Currency speculators slashed their net short positions for the week ending 9th March to levels last seen in mid-November.
Buoyant bond yields will continue to be on forex traders’ radar even after this week’s Fed meeting, where many analysts have said central bank policymakers will signal an optimistic outlook for the US economy.
Though there have been some concerns that the Fed might try to cool bubbling bond markets where yields have jumped by as much as 60 basis points since the previous Fed policy gathering, the majority view seems to be that America’s central bank won’t deviate much from the direction of current policy.
In an investor note this week, analysts at SEB said that the Fed isn't expected to tweak established monetary policy while pandemic uncertainty is still roiling markets. Investors and forex traders would be wise to look for signs in Fed economic forecasts that the bond market is either under control or running ahead of itself.
Stalwart US airline stocks such as Southwest Airlines, JetBlue Airways, and Delta all said this week that leisure bookings are on the up, offering some of the first firm indications that the US (and by extension, the global) airline industry may have put its worst days behind it.
On the back of that news, the S&P 1500 airlines index jumped about four per cent to hit a one-year high. Aeroplane manufacturer Boeing also saw gains to its stock price of about two per cent.
Looking at an extended list of travel-related stocks, big names including MGM Resorts, Wynn Resorts, and cruise line operator Carnival Corp, all saw gains of between three and five per cent.
Last week, Wall Street’s leading indexes posted their best week of the previous six when the Biden administration’s USD 1.9 trillion stimulus/relief package was approved by the US congress, while news of a successful American mass vaccination programme raised demand for stocks strongly correlated to economic growth; like energy companies, banks, and suppliers of raw materials. Those categories fared well while typically high-growth tech stocks faltered.
That was in contrast to results seen in previous weeks when the big US stock indices were roiled by rising long-dated bond yields, fuelled by fears that inflation might be set to rise and that the Fed might change course on monetary policy.
Strategists at FXTM pointed to a rosier outlook for the US economy, which ‘looks to be in better shape than other G10 economies’. The expectation of no significant policy changes after the Fed meeting this week also shaped sentiment.
At the end of the Fed's two-day meeting on Wednesday, policymakers said the US economy was set to grow this year, likely at the fastest rate in decades. The Fed also held onto its dovish stance on interest rates and dismissed equity market concerns about bond yields, saying this would likely abate in the next fortnight when yields are expected to stabilise.
Before the Fed chairman Jerome Powell's comments, yields on benchmark 10-year Treasuries closed in on 12-month highs of 1.6 per cent.
On the technology front, Tesla Inc. submitted a formal regulatory filing that added the title “Technoking of Tesla” to billionaire CEO Elon Musk’s list of official titles. Company chief financial officer Zachary Kirkhorn gained the title “Master of Coin”, seen as a nod to the company’s recent embrace of cryptocurrencies. Despite the theatrics, Tesla’s shares were unmoved.
On the pandemic front, pharma giant Eli Lilly saw its shares sink by more than eight per cent after publishing ambiguous results from its mid-stage trial of a new Alzheimer’s treatment, casting doubt on its chances for imminent approval.
The S&P 500 posted 60 new 52-week highs and not a single new low. Over at the tech-fixated Nasdaq, 240 new highs were recorded alongside six new lows.