Stocks rise for the first time this week as Yellen assures investors just before markets close. The S&P and the Dow both add 0.2% to 2,061 and 17,712 respectively. Corporate deals led optimism in markets today on Intel’s potential acquisition of Altera. 15 minutes before markets closed, Janet Yellen said that she expects the Fed to raise rates this year, and that subsequent increases will be slow and will not follow a predictable trajectory. This assurance could give markets direction leading into next week. 4Q GDP was revised today to reflect the biggest gain in consumer spending in eight years. The VIX fell today to 15.07. This week’s losses were largely due to profit-taking at the end of the quarter, disappointing data, and instability in the Middle East. The dollar index closes 0.1% down at 97.32, as the 10 year yield falls 4 basis points to 1.95%. The euro finishes the week at $1.0884. The momentum of the euro versus the dollar finds resistance at the $1.10 mark, as the currency repeatedly failed to break the barrier this week. There is no evidence that the eurozone’s economic pickup is self sustaining without QE, and as a result analysts expect that rallies in the euro won’t last.
U.S. investors look to Europe hoping that eurozone QE will produce the a surge in equity markets. Eurozone equity funds saw $2.2B of dollar-denominated inflows this week, which brings the total to $9B this month. This is the biggest monthly total since 1996. So far, eurozone QE has produced a similar surge in equities compared to when the U.S. began their program. The Euro Stoxx 600 index has increased 16% this year. Many of the inflows are hedged against further depreciation in the euro, which suggests that investors expect the euro to depreciate further. Among eurozone equities, positions are heavily concentrated in German equities, as investors expect QE to largely benefit exporters.
Emerging markets indices are currently trading at a 35% discount to the multiple of the S&P500. Despite this attractive metric, emerging markets are prone to risks from the rise in rates and falling oil prices. In addition, many countries borrow in dollars, and struggle to repay their debt with depreciated local currencies, such as Brazil who does 90% of its borrowing in dollars. In addition, commodity producers, who are most at risk from the stronger dollar and falling commodities have raised large amounts of debt in dollars.
Banks expect that upcoming volatility in markets will support FICC (fixed income, currencies, and commodities) trading profits. FICC has struggled in recent years, but Goldman Sachs expects the groups to record the first year-on-year increase in 1Q trading revenues for the first time in six years. Banks are expected to benefit from choppy markets, as investors will likely reallocate portfolios, and companies will want to hedge interest rate and currency risks and will have to go through banks in the process. According to Lloyd Blankfein, “Conditions at this point are more conducive for our set of businesses than in recent memory.”