- Risk aversion enters full gear as Yellen’s tax hike signals and European lockdowns sap sentiment
- Dollar climbs to 4-month high, yen surges too, bond yields slip further amid flight to safety
- Stocks slide deeper into the red but Wall Street futures point to a brighter start today
Mood sours further on lockdown and tax hike fears
Traders continued to rush into safe havens while dumping risk assets on Wednesday as a synchronized global recovery looked increasingly doubtful, prompting many investors to pare back some of their over-optimistic growth expectations. European nations are seeing the highly contagious UK variant of the coronavirus run rampant, forcing the continent’s biggest economies to extend or tighten their lockdown measures.
This latest setback in the fight against the virus has dashed hopes that Europe will be able to follow the United States and Britain in substantially lifting their virus curbs by the summer. But it’s not just the Eurozone recovery that’s at risk as the EU’s plan to restrict vaccine exports threatens to impede the UK’s impressive vaccination drive, as well as disrupt vaccine supply chains globally.
With only the US recovery now on a sure path, it’s no wonder the dollar is shining the brightest at the moment. The greenback has soared to the highest in four months against a basket of currencies today, as the dollar index climbed above 92.60. The dollar’s gains have come even as Treasury yields slipped for the third straight session today. Uncertainty about the global recovery has led some investors back into the safety of government bonds, pushing prices up and yields lower.
Dovish remarks from several Fed policymakers, as well as from Chair Powell himself, over the past 24 hours are also weighing on Treasury yields. Powell sought to further dampen inflation expectations during his Congressional hearing yesterday.
Yellen’s tax hike talk unnerves equity markets
However, while Powell mostly stuck to the script, it was his former boss, Treasury Secretary Janet Yellen, that appeared to rattle markets as she made the case for tax increases in her testimony. Yellen signalled a hike in the corporate tax rate is on the cards to partially pay for the big splurge on infrastructure in the Biden administration’s next spending plan.
Her comments managed to spook Wall Street even though markets have largely been anticipating US tax rises for some time now. The major US indices all closed lower on Tuesday, with the Nasdaq Composite falling the most (-1.1%). However, e-mini futures rebounded on Wednesday, indicating modest gains for the Dow Jones and S&P 500 and a 1% jump for the Nasdaq at the open.
European shares cut their losses as US futures headed higher, though they remained mostly in negative territory.
Strong PMIs lift euro and pound off lows
An upbeat set of PMI numbers out of the Eurozone contributed to the improving tone in European markets. The flash prints for March showed a strong rebound in services and accelerated growth in the manufacturing sector in both the euro area and the UK, confounding expectations of only a marginal improvement.
The euro and pound perked up after the data, edging up to $1.1838 and $1.3722, respectively. However, they were still down on the day and not far from fresh multi-week lows brushed against both the dollar and the yen.
The pound has been somewhat more under pressure than the euro lately as the UK-EU vaccine row has exposed vulnerabilities to Britain’s successful vaccination campaign. As for the Australian and New Zealand dollars, which have taken even more of a beating in recent days, their bullish outlook has been undermined by the risks a slower rebound in Europe could pose on commodity prices.
Oil has tumbled sharply over the past week but managed to bounce back by 3% today. Nevertheless, the oil-linked Canadian dollar has performed relatively better than its aussie and kiwi cousins during the latest selloff as expectations that the Bank of Canada will begin to taper its asset purchases soon are shoring up the currency.
Coming up later in the day, both Powell and Yellen will remain under the spotlight when they testify before the Senate Banking Committee at 14:00 GMT, while the US flash PMIs will be watched too.
