Friday March 18

US stocks rise for the fifth consecutive week. The S&P500 rose 0.4% to 2,049 and the Dow Jones added 0.7% to 17,602. The S&P500 advanced 1.3% this week and finished the week in positive territory for the year. Similarly the VIX declined below 14 which is the lowest since August. The gains in equities this week were made along with a fall in yields, a lower dollar, and higher oil prices. These movements were driven by a dovish Fed statement on Wednesday. Outside of the Fed, central bank meetings in Japan, England, Switzerland, Norway, and the Eurozone all came across as supporting lower rates for longer. Yields in the US continued to fall on Friday. The two year yield fell 3 basis points to 0.84% and the ten year yield fell 3 basis points to 1.87%. The German bund yield also fell 2 basis points to 0.21%. WTI fell 2% to $39.38 and Brent fell 0.8% to $41.20.

The euro falls slightly after an ECB official indicates that further rate cuts are still a possibility in the Eurozone. At the ECB’s meeting last week Mario Draghi made comments suggesting that further rate cuts would not be warranted, which many analysts took as a sign that the ECB was seeking to reduce pressure on the banking sector. As a result of these comments the euro appreciated 4.6% in the following week, which goes against the intention of the ECB’s easing program. However today the chief economist of the ECB Peter Praet made comments suggesting that further rate cuts are still an option the ECB is considering. the euro fell 0.4% as a result of the possibility. These comments come after the euro appreciated in the aftermath of the FOMC statement and a rate cut from the Norges Bank in Norway. Praet’s comments contradict those of Mario Draghi, and they were likely intended to put downward pressure on the euro given the reaction from Draghi’s statement last week.

The rally in US stocks over the last week has been led by transportation stocks which entered bull market territory. The Dow Jones Transportation Average has risen 22% since January 20th. The outperformance in shipping, rail, and trucking companies may be indicative of investor expectations regarding the health and outlook of the US economy. Investors may seek to increase their exposure to shipping companies as they expect domestic economic activity in the US to increase. Companies such as freight carriers and shippers are seen as indicators of economic growth and activity. Early in the year these companies were hardest hit amid talk of a US recession, however they have roared back as investors expect shipping activity to pick up.

In spite of the unprecedented efforts by central banks around the world, many currencies continue to rise. The Japanese yen has risen 8% year to date to Y111 against the dollar even after the BoJ surprised the global economy by imposing negative interest rates. The euro has gained 4% against the dollar in spite of extensive monetary easing from the ECB. Central bankers have been unable to use forward guidance to talk down their respective currencies, and policy tools have proved to be ineffective as competitive devaluations have offset each other. The fact that rate cuts have been so far ineffective may open the door for further rate cuts, or other unconventional forms of monetary policy.

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Friday March 18

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