© Reuters. The Wall Street Rally goes global when weak dollars lift all boats
(Bloomberg) – For investors who are wondering how markets can continue to compete amid the economic disaster, just look at the weakening dollar.
Its decline to a three-month low adds a pillar of support to the bullish funds that drive risk values across the globe this week. Emerging markets, commodities and equities have risen as money managers look beyond the unemployment headlines and focus on central bank stimulation and business reopening.
While the decline of greenbacks is a sign that risk appetite is increasing, it is also adding extra fuel to the fire. A lower U.S. currency makes US goods cheaper overseas, which helps companies increase earnings.
It also eases the financial strain among emerging market countries by facilitating them to repay dollars in debt and increase hard commodities such as gold and oil priced in the currency. In addition, there is an extra boost to inflation expectations, which benefits stocks that are most likely to benefit from a stronger economy.
In the last month, the dollar weakened against all but two major currencies. The Bloomberg Dollar Spot Index slipped 0.2% Thursday, extending an almost 7% retreat from a recent high on March 23. The jump by 30% and copper rose 19% at the time.
The dollar is in a funk, and that’s a good sign for the economy
“The falling dollar is a big deal as it facilitates financial conditions,” said Mark Nash, head of fixed income at Merian Global Investors in London. “Fiscal stimulus, growth in bank balances and the Fed are a good part of solving the problems we had before, which was not enough lending and dollar strength globally.”
The decisive dollar withdrawal signals that the global liquidation routine for history books in the depths of the March madness is now over. It is a risk signal for Wall Street banks recommending international trades to customers, including high returns and debt on the world market. Premium investors’ demand to hold 10-year Italian bonds relative to the German debt benchmark has fallen by 88 points from this year’s peak in March.
Carry traders who thrive on a weak dollar to buy higher yielding currencies are also on a high. A Bloomberg currency index, which measures the return on the carry trade from eight developing countries, financed by short positions in the greenback, announced its first positive month this year in May.
“It is usually the case that when the dollar does not absorb liquidity, i.e. increases, there is room for credit to execute,” said Luke Hickmore, who oversees about $ 3 billion as investment director at Aberdeen Standard Investments in Edinburgh.
Hickmore is addressing riskier assets such as credit, though he acknowledges that the rally largely runs on central bank stimulation. There is a good chance that concerns for the corporate environment will come back into the picture later this year and bring a wave of rating write-downs.
“I have been very skeptical to say the least about a broad risk-on movement. However, high-frequency financial data is improving and we are still getting massive financial and central bank purchases, ”Hickmore said. “It’s on balance time to risk, but maybe not up to the maximum budget.”
Tug-of-War between bulls and bears muddy risk signals
There is also skepticism that the dollar weakness will last, especially in the midst of a recession. Bank of America (NYSE 🙂 Merrill Lynch’s Athanasios Vamvakidis, the leader of G-10 FX strategy, says the team expects a 4.3% decline in global economic growth, deeper than the consensus view of a 3% contraction.
“Investors expect the global economy to recover after the shutdown,” he said. “The recovery will be very weak as the economies can’t really go back to normal.”
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, is more optimistic. He buys higher-risk assets and currencies to take advantage of the Federal Reserve “backstop” and pointed to the violent U.S. protests as part of the reason for the dollar’s poor performance.
“When I looked at the insurgency and the way the U.S. dealing with the coronavirus pandemic, I thought, “Oh my goodness, we’re coming apart at the seams,” McIntyre said in an interview. Maybe U.S. loses some of its unusualness. The dollar has been overvalued for a long time and this can finally be a catalyst for the dollar weakening. “
(Updates with dollar movement in the fifth paragraph.)
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