Good morning and happy Friday. Here’s what you need to know to start your day.
To the scoreboard (8:15am AEDT):
Dow: 20,935 -15 (-0.07%)
S&P 500: 2,380 -5 (-0.21%)
SPI 200 Futures – March (20 minute delay): 5,796 +10 (+0.17%)
AUDUSD: 0.7676 -0.0028 (-0.36%)
1. US Fed conundrum: Although the US Federal Reserve raised interest rates yesterday, strong financial conditions in the US mean that markets are acting like rates are going down. Treasuries rose yesterday as bond traders unwound bets on a more hawkish statement from the Fed, stocks responded positively (although they traded flat today and finished slightly lower) and the US dollar fell. The Fed is hoping that a positive flow-on effect from a buoyant share market will aid consumer spending, a key factor in reaching its 2% inflation target. New York Fed president Bill Dudley said back in 2015 that if financial conditions remain strong, it would likely force the Fed to raise rates more quickly. Goldman Sachs has moved its 2017 forecast forward to two rate hikes in June and September (previously September and December).
2. Commodities wrap: Gold jumped more than 2% to $1,227 an ounce following the US Fed’s interest rate decision. Speculators who went long on the dollar and short gold had to unwind their positions as the Fed’s forecast turned out to be on the dovish side, which drove the US dollar lower causing gold prices to rise. Iron ore benchmark 62% fines increased again to $92.61, but there are signs the recent rally over $90 may be starting to wane.
3. Trump swings the budget axe: Donald Trump has presented his first budget to congress, and it’s heavy on firepower but light on environmental concerns. Trump has proposed steep cuts of 30% to the state department and the Environmental Protection Agency, with a plan to boost defence spending by US$52.3 billion. The budget proposal is unlikely to pass through Congress in its current form. The budget comes as G20 finance ministers meet in Germany this weekend, with trade talks on the agenda centered around the Trump administration’s more protectionist stance. The US stock market was dragged slightly lower by healthcare stocks. Traders locked in gains from the strongly performing sector, which retreated by 1.1% after Trump’s budget proposal outlined higher regulatory costs and reduced funding for medical research.
4. Pound rises again: After falling below US$1.22 earlier in the week, the pound gained another 0.5% overnight to US$1.235, as minutes from the latest Bank of England meeting revealed a bias towards rate rises sooner rather than later. The swaps market is now pricing in a 56% that the UK will tighten rates within the next 12 months. In a sign of continuing strength in the eurozone, the euro gained 0.34% to US$1.076, its highest level since early February. After breaking through US77c, the AUD is expected to trade in the US76c range today after yesterday’s poor jobs data and the stabilisation of US bond yields.
5. Big investment houses say stocks are still a buy for the rich: Analysts from UBS and Credit Suisse are advising clients that it’s not too late to get into the stock market. Wealthy clients are keeping their money on the sidelines largely due to the political risks, but the underlying strength of the global economy is steadily improving despite shock events such as Donald Trump’s election win and the Brexit vote. The European STOXX 600 Index gained 0.7% overnight to its highest level since December 2015 following the Dutch election result, which reduced political uncertainty in the region centred around far-right populism ahead of the French elections in May.
6. Bitcoin stands on the precipice: Bitcoin dropped by more than 5% overnight and could be in for further losses if these charts are anything to go by. The currency has stayed resilient in the face of multiple headwinds lately, with new transaction fees in China (where almost all Bitcoin is traded) and regulatory restrictions in the US. The price of the crypto-currency has surged this year but on low volumes, and after testing a peak of over $1,300 it may well be due for a correction.