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Market Commentary

Bad News is Good News: Stocks well Up after Yellen admitts World Economy is Not Good

All about the dollar:  Starting March 18, the Bloomberg Dollar Spot had risen as much as 1.9% as Fed officials  noted upside risks on rate-hike projection and suggested a rate hike may be imminent as soon as April.

And then Yellen unleashed the latest round of dovishness, when she made it very clear that the Fed is no longer just the U.S. central bank, but that of the world.

The result of Yellen’s much discussed speech, was an immediate plunge in the Dollar spot index of 1.2% to 8 month lows, its worst month in 5 years, a drop which has continued this morning

For now, however, the die has been cast, and the result is a surge in risk assets around the globe: stocks jumped in Asia (except in Japan where the Yen strength pushed the Nikkei lower by 1.3%, however the Shanghai’s 2.3% jump just over 3000 should more than make up for that) and Europe, with US equity futures 0.6% higher at this moment. Commodities climbed as the dollar extended its worst month in more than five years.

The reason for this stock surge, is absurdly delightful: Yellen signaled “weakening world growth” and “less confidence in the renormalization process.” In other words, the “bad news is good news” mantra is back front and center. As such, calls for a slow approach to tightening policy ignited gains for shares from Shanghai to Frankfurt after U.S. equities erased their losses for the year. Diminishing prospects for a first-half Fed rate increase sent the Bloomberg Dollar Spot Index toward the lowest since June and drove emerging-market currencies toward their best month since 1998. Credit markets rallied and U.S. oil gained for the first time in five days.

“We have seen European markets broadly head higher on Yellen’s dovish
note last night,
” said Michael Hewson, the London-based market analyst
at CMC Markets Plc. “It’s the only factor driving them up today.”

Bourses buoyed by dovish Yellen

US and European stocks are rallying alongside oil, while the dollar is weaker, as hopes that US borrowing costs will stay low for longer unleash a fresh burst of risk appetite across global markets.

The latest leg up for US stocks comes after Federal Reserve chair Janet Yellen gave a speech from which investors infer that the monetary guardian is not looking to tighten policy further any time soon.

Owing to weaker-than-expected growth overseas and a cloudy US inflation outlook, Ms Yellen reiterated a need to “proceed cautiously” in lifting interest rates.

Her commentary struck a more dovish tone than that of other policymakers last week, who had sought to alert markets that an April rate rise was not off the table, while June was also a possibility.

Fed funds futures now predict a zero chance that Ms Yellen and colleagues will increase official borrowing costs at their April meeting. The probability of a 25 basis point increase in November has fallen from 65.2 per at the start of the week to 53.6 per cent.

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