Stocks rise for the biggest weekly advance in six weeks as it appears the Fed will push back tightening expectations. The S&P and the Dow both gain 0.9% to 2,108 and 18,217 respectively. On a worldwide scale, global stocks have the best weekly rally in two years as various central banks are in the midst of monetary easing. The head of global currency strategy at HSBC forecasts that the bulk of the dollar run is over, as expectations for rate hikes have been fairly priced into markets. The 10 year treasury falls four basis points to 1.93%, down 16 bps on the week for the biggest drop since the first week in January. Consequently, the dollar index fell 1.5% and euro gains 1.6% to $1.0833. The head of strategy at Standard Bank believes that the volatility in currency markets is due to a difference between perceived liquidity and actual liquidity on markets. WTI oil increases 4% while Brent adds 1.6%.
Expectations reflected in yields in the bond market are now being recognized by the Fed. For months, it seems that fixed income traders have kept yields low, seemingly hoping that monetary tightening will begin later than expected. However recent economic data has failed to impress policy makers, and now expectations for rate hikes have been pushed back, reflecting the expectations in fixed income markets. Interest rate futures now reflect that the Fed funds rate will rise to .5% by the end of 2015. Analysts note that bond markets and the market for Fed funds futures have been surprisingly accurate so far while the Fed’s official forecasts have been too optimistic.
Wednesday’s FOMC meeting results in a depreciation of the dollar, sending the euro on track for its biggest weekly rise versus the dollar since 2011. Following the Fed’s relatively dovish statements and reference to weak export growth, the dollar weakened as investors speculate that the Fed may wait longer before raising interest rates. In addition to adverse effects on earnings from multinational companies, the dollar strength may also restrain inflation as import costs stay low. After falling 2.5% against the euro on Wednesday, the dollar recovered those losses 24 hours later. This volatility will be present in currency markets for the foreseeable future as the Fed comes closer to raising interest rates.
Nike and Tiffany both report that the dollar’s appreciation has had a negative impact on earnings. Nike generates more than half its revenue overseas, and the strength of the dollar against almost all international currencies has and will continue to make a dent in earnings. Tiffany & Co. also has been negatively affected by the appreciation, predicting a 30% decline in net income. The strength of the dollar lowers the value of sales made in foreign countries once revenues are repatriated into dollars, and it also makes it more expensive for foreign tourists to shop at sores in the U.S.