Investors on Thursday were impatiently expecting that the head of the Federal Reserve J. Powell, speaking at the Wall Street Journal summit, where the main topic was a discussion of the prospects for the labor market in America, would be able to calm down the government debt market, and through this, all world markets. But that did not happen. He either did not set such a task, give out empty promises, as his predecessors did in fact, pouring optimism in situations where it simply could not exist, or thought that there was no need to mislead interested parties, especially investors.
In fact, we can say that Powell’s speech was neutral and there was nothing new in his rhetoric, recall that there was nothing unusually optimistic. On this wave, American stock indices began to decline sharply, pulling down futures for European and Asian stock indices.
At the same time, the US dollar received noticeable support against the background of a sharp rise in the yield of US Treasury government bonds. Recall that the yield on the benchmark 10-year Treasuries soared at the moment by more than 5%, reaching a local maximum of 1.569%. Today, at the time of this writing, the yield continues to rise to the level of 1.573%, adding 1.49%.
This is an important signal for market participants, which has a negative impact on the demand for shares in the stock market and at the same time supports the dollar rate. Today, we state that the bond market is demonstrating leaps and bounds of interest in government bonds, as investors understand that the huge volumes of liquidity pumped up earlier by the Fed, and also expected from new assistance measures in the amount of $ 1.9 trillion, will cause a sharp rise in inflation in the wake of the expected strong economic growth this year, which in any case will force the regulator to revise its monetary policy.
The question arises, how will the dollar behave in the near future in relation to the main currencies?
In our opinion, the strengthening of the position of the US currency rate will definitely be promoted by both the increase in inflation and the continued growth of Treasury yields. Despite the strong pressure on the dollar from various stimulus measures, which led to its “depreciation”, the influence of the above factors will inevitably support its rate. The strengthening of the dollar will also lead to a decrease in the cost of gold, which, in our opinion, will return to the mark of the beginning of summer 2019 at $ 1370.00 per ounce already this year.
As for today’s events, the leading role here will be played by the publication of data on employment in the United States. We believe that if they turn out to be worse than expected, as, for example, it was with the values from ADP this Wednesday, then the American stock indices may continue their decline while supporting the dollar rate.