The first half of the last week of March seems to bring an interesting mix on financial markets. We may simultaneously observe rising stock prices, a strengthening US dollar and rising yields on Treasury bonds.
Futures on the Dow Jones index or the German Dax seem to be setting all-time records, mainly thanks to increases in the automotive and hotel sectors, as investors seem continuously to focus on the prospect of a strong economic recovery. Meanwhile, bank stocks rebounded on hopes that the Archegos Capital crisis will be contained. The other major U.S. indices, the S&P 500 or Nasdaq 100, are below historical highs as the rotation of capital from growth to value companies may continue.
It is also impossible not to notice that investors have already stopped paying attention to the rapid pace of growth of US bond yields. The yield on the 10-year U.S. Treasury note rose to a new 14-month high of 1.759 percent on Tuesday on expectations of a rapid economic recovery and faster vaccine introduction in the U.S. New York state announced that people 30 and older can get the vaccine starting March 30, and President Joe Biden outlined a plan to further expand vaccination.
Yields appear to have been rising since August, but have accelerated since mid-January as coronavirus vaccination and further fiscal stimulus support the prospects for a strong economic recovery, but could lead to higher inflation and debt levels. Still, Fed Chair Jerome Powell reiterates that any jump in inflation is likely to be temporary and has shown no concern about the recent rise in bond yields. Fed officials also do not intend to adjust central bank policy to meet the government's borrowing needs, and thus will not forcefully lower debt interest rates.
Meanwhile, in the currency market, the Dollar Index extended its gains to a new 4-month high of 93.2 on Tuesday, as the market estimates a rapid pace of recovery in the U.S., faster than in other regions of the world. President Joe Biden will unveil details of his proposed federal infrastructure investment this week. There is talk of a 3 trillion dollar package.
Dollar buying activity was most visible against the yen, where the USD/JPY exchange rate crossed the 110.00 level. The euro, on the other hand, seems to be falling towards $1.17, as in Europe the outlook for the rate of vaccination or for economic growth is not as good as in the US. It is also not insignificant that the European Central Bank is more actively concerned about weaker yield growth in the Eurozone than the Fed is in the US.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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