Opening Bell: Dovish Fed Sparks Stock, Gold Rally; Dollar, Yields Tumble

Key Events

Global stocks and futures on the S&P 500, Dow and NASDAQ 100 rallied this morning after the Fed signaled it will “act as appropriate to sustain expansion” and removed the word “patience” from its language—fulfilling market expectations for lower rates. The greenback dived against all major currencies, boosting gold to a 5-year high, while Treasury yields temporarily tumbled below the key 2.00% threshold as current bond rates suddenly looked more attractive.

Europe's STOXX 600 opened higher, hitting a six-week high after U.S. policymakers lived up to hopes they would echo ECB President Mario Draghi’s ultra dovish statements from earlier this week. Leading the rally were miners and energy stocks—the latter tracking oil prices higher. Financials underperformed on the outlook that lower rates will translate into lower profits for banks.

In the earlier session, Asian benchmarks flashed green across the board after the Fed opened the door for a rate cut.

Shanghai Composite Daily Chart

China’s Shanghai Composite surged 2.38%, outperforming regional peers. From a technical perspective, the Chinese benchmark may be completing a rounding bottom reversal.

Hong Kong’s Hang Seng leaped 1.23% despite fears of an upcoming capital flight—should the country government's recent, highly controversial political moves help China tighten its grip on the Special Administrative Region.

Japan’s Nikkei 225 and Topix gained 0.60% and 0.30% respectively after the Bank of Japan kept rates unchanged and offered no further signal of easing—thereby flipping global monetary policy dynamics and uncharacteristically making the BoJ more hawkish than the Fed. Japan’s 10-year bond futures rose to an all-time high on the announcement, and the yen climbed along.

Australia’s S&P/ASX 200 gained 0.59%, while South Korea’s KOSPI lagged, closing 0.31% higher.

Global Financial Affairs

On Wednesday, U.S. stocks rallied for the third day on the outlook of cheaper borrowing costs for both companies and investors. Fed board members struck a more dovish tone than expected yesterday, as eight of seventeen deemed it would be appropriate to lower the benchmark overnight rate by up to a half-percentage point this year. Traders are now pricing in a virtual certainty the U.S. central bank will cut rates by July, Fed fund futures show.

The S&P 500 gained 0.3% to just 0.66% away from its April 30th record close. Healthcare (0.93%) outperformed, adding to its monthly climb—the sector is now 5.46% up for the month after lagging behind this year.

It should be noted that health care stocks may have gained ground thanks to their safe-haven status: it was mainly defensive sectors that led the charge, with Utilities (+0.79%) ranking second-best performer and Real Estate (+0.71%) and Consumer Staples (+0.44%) following suit. Conversely, cyclical stocks including those in the Materials sector (-0.50%) underperformed.

The NASDAQ Composite (+0.42%) outperformed the other U.S. majors, confirming the current tech stock rally.

On the opposite side of the spectrum, the Dow Jones Industrial Average (+0.15%) underperformed on the protracted uncertainty of U.S.-China trade negotiations, mirroring miners' lag among the SPX sectors.

Overall, equity investors may be exuberant now, but we expect that growing pessimism about the global economic outlook will eventually catch up with them. Companies cannot profit during a contraction.

UST 10-Year Daily Chart

Meanwhile, 10-year Treasury yields rebounded above the psychological 2% level after taking a plunge on the Fed announcement, but remain at the lowest levels since 2016. Technically, rates completed a rising flag, bearish in a downtrend, suggesting demand for Treasurys will increase, pushing yields further lower.

DXY Daily Chart

The Dollar Index fell below its uptrend line since September 2018 but remains above the 200 DMA.

XAU/USD Monthly Chart

The outlook for a lower-yielding USD helped gold prices complete a massive six-year bottom and suggesting a secular trend shift.

Oil rallied to above $55 a barrel, hitting a five-week high after a report revealed dropping U.S. crude supplies and record gasoline consumption. Meanwhile, reports that Iran shot down a U.S. drone added to Middle East geopolitical tensions, re-ignited by the Gulf of Oman oil tankers attack last week. However, analysts are pointing to the fact that ongoing fears of dwindling global demand are vastly offsetting these geopolitical headwinds, keeping prices under pressure.

In other commodities markets, silver, platinum, copper and iron ore joined the global rally.

Up Ahead

• The Bank of England's interest rate decision, MPC meeting minutes and Governor Mark Carney's speech are on tap today.
• The Philadelphia Fed Manufacturing Index, out today, is expected to fall to 10.6 from 16.6 a month ago.

Market Moves

Stocks

• The U.K.’s FTSE 100 edged 0.5% higher.
• The MSCI Emerging Market Index jumped 1.1% to the highest in six weeks.
• The MSCI Asia Pacific Index climbed 1.1% to the highest in more than six weeks.

Currencies

• The Dollar Index slipped 0.4% for the second day of a total of 1.00%.
• The euro climbed 0.4% to $1.1275, the largest gain in almost two weeks.
• The British pound advanced 0.4% to $1.2695, the strongest in more than a week.
• The Japanese yen increased 0.5% to 107.60 per dollar, the strongest in 14 months.

Bonds

• The yield on 10-year Treasurys slid four basis points to 1.98%, the lowest in more than two years.
• Britain’s 10-year yield dropped five basis points to 0.812%, the largest dip in four weeks.
• Germany’s 10-year yield dipped three basis points to -0.32%.

Commodities

• West Texas Intermediate crude rallies 3% to $55.37 a barrel, the highest in three weeks.