As interest rate expectations rise, certain higher-yielding stock market sectors may lose their attractiveness on valuation concerns. So far, however, we haven’t seen a big enough drop to validate this view, but that could only be a matter of time.
The euro continued its recent ascent thanks to the market-friendly outcome of the German regional election, and previously the French general election. When the single currency rises in a “risk on” market environment, the euro/Japanese yen (EUR/JPY) currency pair is usually the euro pair that tends to outperform as the safe haven yen takes a back seat.
The initial outcome on Sunday night had the YM gapping up but dropping lower immediately for the classic gap and fade. The ship steadied by Monday morning but it remained off the high. Elsewhere, the EUR/USD was a golden spiral 263 days off its high as of Friday’s close and the open on Sunday night was negligibly lower and by the morning drifting lower.
Falls in iPhone and U.S. car sales helped beat European stock markets back from 20-month highs on Wednesday while the dollar inched up as investors priced in a greater chance of further tightening of U.S. monetary policy next month.
The euro and equity markets have had a strong week so far, thanks mainly to a market-friendly outcome of the French first round presidential election at the weekend. The news caused the single currency to gap higher across the board and although gaps typically get filled quickly this hasn't been the case for the major euro crosses thus far, although the euro/British pound currency pair is taking another bite out of its gap as I write.
The dollar has been trending lower ever since the turn of the year. This has been because of the unwinding of the bullish positions that had been accumulated before and after the U.S. election in part as investors began to question how much of the promised fiscal spending President Trump will actually deliver and how this may impact growth and inflation, and in turn interest rates.