Equities rally as Central Banks take dovish tone

Equity Markets

US markets had a broad rally last night with the Dow Jones again hitting all-time highs and the NASDAQ breaking its 5 day losing streak, with strong employment data and rising commodity prices giving investors optimism in the global recovery.

Source: CNBC.com

US reporting continued this week, with a mixed bag of results.

Paypal (PYPL), General Motors (GM) and Square (SQ) all reported solid earnings, beating analysts’ expectations rising their stock prices. Beyond Meat (BYND) and Uber (UBER) both had a miss and seeing steep drops in their respective stock prices.

The Biden administration also announced this week that it backs waiving IP Protections For COVID-19 Vaccines, a proposal from the  World Trade Organization and backed by the WHO. Stocks in Pfizer (PFE), Moderna (MRNA) and to a lesser extent Johnson and Johnson (JNJ) unsurprisingly reacted badly to this news.

This week we had comments from Fed Governor Lael Brainard, the head of the Board’s financial stability committee warning of “Vulnerabilities associated with elevated risk appetite are rising” while referring to the stock market, along with comments from Janet Yellen during the week in regard to interest rates has capped some gains in the equity rally this week.

World equity indices resumed their rally this week with good performance across all regions as signs of economic recovery from the COVID-inspired downturn continued along with accommodative Central Banks.

Source: Bloomberg

Central Banks

This week has we saw major releases from the Central Banks of Australia and the UK and a Financial Stability Report out of NZ.

Reserve Bank of Australia

The RBA held its monthly rate meeting on Tuesday where it struck a cautious but optimistic tone. Board members decided to leave the official cash rate on hold at a record low of 0.10% and maintaining its target of 10 basis points for yield on a 3-year Australian government bond.

While the RBA took note of a faster than expected economic recovery they are committed to achieving their goals on employment, wage growth and inflation before considering any change in the current accommodative policies.

Bank of England

With world leading vaccination rates, receding Covid-19 transmission and an end to lockdowns imminent, the Bank of England upgraded its economic assessment for the coming months. The BoE now expects the economy to meet its pre-virus level later this year and upgraded its unemployment forecasts from February.

The BoE also announced a tapering of its bond purchase program to £3.4bn/week from the previous £4.4bn/week pace.

Royal Bank of New Zealand

The RBNZ released its bi annual Financial Stability Report on Tuesday. The RBNZ showed optimism in the NZ economic recovery but did warn of inflated asset prices and potential weaknesses in the financial sector. The Kiwi dollar mostly shrugged this off as a strong NZ jobs report superseded the  RBNZ’s cautious optimism.

Forex Markets

The US dollar weakened this week with the Dollar Index dropping around 0.4%. All major currencies outperformed the greenback as treasury yields continued to modestly fall with the 10 year bond now yielding around 1.56%, down from 1.63% a week before.

Source: Bloomberg

The Canadian dollar was the best performing currency this week. The effects of the Bank of Canada’s surprise tapering of asset purchases and strong commodity prices have bolstered the Loonie.

With Prices in Iron Ore and Copper hitting all-time highs this week the Aussie dollar also performed strongly, with equity markets rallying the AUD and NZD both also benefitted from their status as “risk-on” currencies.

AUDUSD is approaching its 78c USD level where heavy selling has stopped it from advancing in the recent past.

Source: GO MT4

Tonight sees the closely watched Non-Farm employment figures out of the US, almost one million jobs are forecast to have been created in April, any surprise on this figure will see high volatility in the FX market.