Investing.com | Jan 29, 2018 07:01AM ET
Last week, all four major US indices—the S&P 500, Dow, NASDAQ Composite and Russell 2000—each extended their rallies, resulting in the best equity market performance for a new year in 31 years. At the same time, record closes were also posted on Friday. The usual suspects responsible for these gains were the high percentage of corporate results that beat expectations and forward guidance boosted by optimism on newly enacted US tax cuts which buoyed the across-the-board growth outlook.
Europe’s economy, however, has been far outpacing that of the US, yet the Stoxx Europe 600 Index was flat for the week. It's possible, therefore, that the real culprit might be the weakest dollar in 3 years. For a more thorough analysis of last week's market developments, see yesterday's Week Ahead post.
h2 Global Financial Affairs/h2The trading week started this morning in Asia with mixed markets. Chinese equities fell both on the mainland Shanghai Composite and Hong Kong’s Hang Seng, but mainland small-cap companies listed on the Shenzhen Composite took the brunt of the selling following comments from a government regulator about clamping down on high priced stocks.
Japanese stocks listed on the TOPIX followed Chinese markets lower, paring earlier gains.
On the other hand, stocks on Australia’s S&P/ASX 200 rallied, led by Financials and Healthcare, which were also the top performing sectors in the US both on Friday and on a weekly basis.
South Korea’s KOSPI jumped over a gap, rising to its third consecutive record and temporarily trading above 2,600 for the first time.
India's Nifty 50 reached a record high as well, extending last week’s 1.6 percent advance, ahead of the country's crucial budget week, a signal most analysts consider bullish.
Chinese declines offset gains in Australia, South Korea and India, leaving the MSCI Asia Pacific Index little changed.
The dollar rebounded after capping a seventh week of losses on Friday and trading lower during Asian trading. While it recouped most of Friday’s losses, it's still firmly below the 90.00 key level.
Fundamentally, a dollar selloff that’s taken yields to the highest since early 2014 is attractive to foreign investors, who buy dollars to pay for US bonds. This has happened before and should not be seen as a sign that the greenback’s days as the world’s safest currency are numbered .
Technically, since December, USD traders have developed two flags, a technical term for a small continuation pattern, which includes a sharp move followed by a range, when profit-taking occurs, allowing new blood to extend the trend. On Friday, the Dollar Index declined almost 2 percent from the second flag, the mid-to-late January range. Is this rebound the development of a third flag, in a bear market, in which gains are nothing more than shorting opportunities within the downtrend?
Last week the dollar was plagued by contentious, protectionist rhetoric and mixed messages regarding the Trump administration’s position on the currency's weakness. Steven Mnuchin, the US Treasury Secretary said he wasn’t concerned about the dollar weakness in the short term, while President Donald Trump later said he wants the dollar to get stronger. Adding to the confusion, a senior administration official on Friday in Davos said “I don’t think there’s any daylight between the President and Secretary Mnuchin.”
As we have been reporting since mid-2017, a growing number of policy makers have been struggling to effectively communicate with traders and investors. Another current example of how difficult this appears to be comes from the BoJ last week. The Japanese central bank needed to downplay Governor Hauhiko Kuroda’s comments regarding improving inflation, which inadvertently caused a minor rebound for the yen.
Yet despite all this, US stocks managed to clock a fourth week of gains. The challenge for investors going forward is to determine just much of that was due to dollar weakness and how much should be credited to the economy and earnings.
For now, it looks as if investor focus this week will remain on earnings and economic data, including the final Federal Reserve meeting presided over by Chair Janet Yellen. While investors may not be overly concerned with what she has to say, since many will consider her a lame duck, that might only free her from any inhibitions. Thus she might speak her mind, potentially saying something that could wallop markets, especially the dollar.
Overall, the value of global equities has surpassed $60 trillion this year and government bond yields have rallied as investors assess the outlook for inflation alongside a tempered improvement in global economic growth.
The British pound slipped this morning as pressure on Prime Minister Theresa May increased over Brexit.
The weak dollar, compounded by falling stockpiles, spurred the price of WTI crude oil to its highest point since December 5, 2014.
Bitcoin pared back yesterday’s gains, after a theft in Japan of approximately $500 million in different digital tokens spurred calls for greater cryptocurrency regulation. BTC fell from $12,000 levels, back toward the $11,000 mark.
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