• Investing & Markets

Markets Rejoice After Dovish Fed Comments

March 20, 2015 | Brendan Erne, CFA

Market Digest – Week Ending 3/20

Over the last three weeks domestic stocks, international stocks, and commodities all fell as the dollar strengthened against the euro. But dovish comments from the Fed drove a sudden reversal of these trends, and markets rejoiced. Fed Chairwoman Yellen’s cautious tone led many to believe rate hikes could be further away than expected. The euro strengthened, and almost all major asset classes rallied.

Weekly Returns:

S&P 500: 2,108 (+2.7%)
FTSE All-World ex-US: (+3.9%)
US 10 Year Treasury Yield: 1.92% (-0.20%)
Gold: $1,183 (+2.3%)
USD/EUR: $1.081 (+3.1%)

Major Events:

  • Tuesday – Rumors surfaced that Apple will release a TV service in the fall with 25 channels featuring networks and the soon to be released HBO Now.
  • Wednesday – The Fed issued cautious statements regarding the US economy, implying rate hikes could be further down the road than expected. Stocks rallied.
  • Wednesday – Gunmen attacked a museum in Tunisia, killing 20. Responsibility was later claimed by ISIS.
  • Wednesday – Benjamin Netanyahu won his fourth term as Israeli Prime Minister.
  • Friday – ISIS claimed responsibility for another attack, this time in Yemen. The suicide bombings of two different mosques were estimated to have killed hundreds.

Our take:

Wednesday’s Fed commentary seemed to take the market by surprise. Despite removing assurance that it would remain “patient” before raising rates, Yellen was surprisingly cautious on the state of the US economy. Specifically, she acknowledged the dampening impact a strong dollar would have on exports, as well as stubbornly low inflation. This seemed to reduce the risk of a June rate hike, which many were expecting.

Stocks surged on the news. But perhaps more interesting was the violent reversal in the dollar/euro exchange rate. Over the last year the euro experienced a significant fall relative to the greenback. This was mainly due to stronger economic conditions and a higher likelihood of rising rates in the US. Before the Fed’s comments on Wednesday the dollar was trading at $1.06/euro. It then sharply reversed, hitting $1.10 intraday and closing at almost $1.09.

But the euro’s brief rally doesn’t necessarily suggest a trend. The same fundamental drivers of the dollar’s strength are in place. This isn’t to say economic conditions in Europe can’t and won’t improve. We’ve already seen some encouraging data points. But given the current state of the two economies, it’s more probable US rates will rise in the near term. This has all the hallmarks of a kneejerk reaction.

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