Robust
corporate earnings and bargain hunting for undervalued stocks led the pullback,
but the fundamental story hasn’t changed a lot yet. U.S. interest rates remain
on the rise, trade tensions are not over, and global economic growth still
looks weak. This will create a tricky environment for investors on whether to
focus on the macro outlook or valuations which are becoming much more
reasonable than a year ago. What investors may be certain about is for
volatility to remain elevated especially with the U.S. midterm elections is
just around the corner.
Despite
the rally in equities, the Dollar rose to its strongest level in 16 months,
reaching a high of 97.20 on Wednesday. The Greenback was supported by a larger
than expected ADP employment report showing the U.S. private sector payrolls
increased by 227,000 in October, the highest in eight months. However, the
Greenback couldn’t hold its gains today as many major currencies reached
significant support levels, particularly the Euro. For the Dollar to keep
rallying it requires Friday’s nonfarm payrolls report to beat economists’
expectations, especially on wages. If wage growth accelerates further the
Federal Reserve may have no excuse to turn less hawkish, thus providing further
push to U.S. Treasury yields.
The
Pound rallied sharply today on reports that Theresa May had struck a deal with
Brussels for British financial services companies to continue operating in
European markets after Brexit. However, with the U.K. remaining far from
striking an agreement to resolve the Irish border issue, the currency gains may
quickly evaporate. Traders’ attention will turn to the Bank of England monetary
policy decision today which is expected to keep interest rates on hold. While
Marc Caney’s speech and the Quarterly Inflation Report may move the Pound
slightly, it’s still all about the Brexit deal that will decide the fate of the
currency.
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