At the end of the day, it was all about the dollar.
Starting March 18, the Bloomberg Dollar Spot had risen as much as 1.9% as Fed officials including Lacker, Williams and Bullard 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 (but mostly China) and as such its prerogative is to not only keep stocks high, but to also assure there is no currency crisis in Beijing (where a month ago she met other G-20 central bankers to decide precisely this).
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, and is on par to equal the dollar’s tumble from the first week of March when Bill Dudley likewise came out very dovish, and when the index dropped 1.7% within a week.
What is notable about these two crying doves is that both have roundly ignored the simmering “mutiny” by the Fed’s hawks (remember Hilsenrath’s humorous “The Decline of Dissent at the Fed” last week) advice of central banker incubator Goldman Sachs, that it is in the US interest to push the dollar higher (it had a report just last week titled “Inflation Finally Begins to Firm”). It will be very interesting to see how this particular conflict is resolved.
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, as we noted last night, 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.”
Indeed, the worse the global economy gets from this point on, the better for risk assets, even if it means that the S&P’s GAAP P/E is north of 23x as of this morning.
As Bloomberg adds, futures show traders now see no chance of Yellen changing policy next month, a roughly 20% chance of a June hike as of this moment, and only a 54% likelihood of an increase by November after she dialed back some of the commentary made by other officials the past two weeks. The Fed chair emphasized during her appearance at the Economic Club of New York that the central bank remains wary of raising rates amid threats to American growth from a slowing global economy.
The MSCI All-Country World Index added 0.8 percent as of 10:29 a.m. London time for a fourth-straight advance. The Shanghai Composite Index gained 2.8 percent and Germany’s DAX Index added 1.6 percent. The Bloomberg Dollar Spot Index fell 0.2 percent.
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