A serious move to the upside right from the open has caught a few people off guard this morning. The move has been opposed most of the way up by clients who continue to sell into the strength displayed by the FTSE. The move has been complimented by other European indices and US futures but with little explanation as to why for now.
Interestingly, the rise has not been met with the usual dollar weakness that in the past has seemed to move in line with equity rallies ever since March. You would expect the dollar to weaken across the board if indices were on the up but so far this morning the Aussie dollar and Yen are both weaker.
The dollar broadly seems to have found a platform of support and there is already talk of a decoupling of the relationship between strengthening equities and a weakening dollar. The US greenback has received such a significant pounding this year that anyone who joins the selling frenzy will have been way to late to the party which is showing signs that it’s wrapping up.
The economic data has been gradually improving throughout the year and in the last couple of weeks there seems to have been a crescendo into the year end after the stellar NFP number, strong retail sales and industrial production to boot. This data has been propping up equities, but at the same time it has lent support to the dollar as well, so are we starting to see the shift in interest rate expectations? Inflation too is due to rebound in 2010 and whilst it should be capped by unemployment which is expected to continue rising, the central banks will want to keep a close eye. Rising interest rates could easily destabilise the equity rally and we have been teetering around the highs for some time now as investors are starting to think of the possibility of higher borrowing costs earlier than expected. We’re yet to see any signs that rates will move soon, but this sentiment could help to underpin the dollar in 2010.
Just this morning the UK labour market showed signs of stabilising as unemployment rose at its slowest pace for 18 months. The data has lead to a small rise in cable and seems to have halted the FTSE’s rally for now, a move echoing what was commented in the previous couple of paragraphs.
Tonight sees the Federal Reserve releasing their meeting minutes and this is where investors will be listening closely to see if there are any clues as to when the Fed is likely to start hiking. We will most likely see the Fed stick to their guns and keep the phrase “extended period”, but no doubt there will be some more hawkish comments about the outlook for growth.
So this evening might provide some fireworks, particularly in the currency markets. Until then there’s a trickle of other US data in the form of CPI and housing starts.
As already mentioned the dollar is broadly stronger this morning and overall currency markets are flat, except for the Aussie dollar which is suffering further after the dovish comments from their central bank.
Gold is making a bit of ground and crude is also on the bid, but later could provide big swings not only from the FOMC minutes, but oil inventories this afternoon, so things could continue to remain heated throughout the day.