What Affects Wall Street

 

The Dow Jones Industrial Average

The Dow Jones Industrial Average is currently trading at 21,571.98, up 16.56% over 1 year, while the NASDAQ composite index is trading at 6,292.59, up 25% over the same time. Similar trends are evident with the S&P 500 index which is currently trading at 2452.25, up 13.33% over 1 year. In all cases, US bourses have shown positive gains, (albeit minimal) over the past 1 month.

The same cannot be said of European bourses which have all reported losses over the past 1 month. Leading the losses is the FTSE 100 index at 7,364.08, followed by the DAX 30 down 1.44%, and the Spanish Ibex 35 down 1.18% over the past 1 month. The performance of US indices has been remarkably resilient given the recent economic data releases.

The June jobs figure was a big surprise, especially since analysts were expecting just 180,000 new jobs for the month, but 222,000 new jobs were added. This overshadowed the bearish sentiment in early July, following a tech stocks selloff. The US dollar index has retreated somewhat to 95.23, down 0.55%, but still ahead of its 52-week low of 94.08.

The 5-day performance of the US dollar index shows a decline of 0.79%, and the 1-month performance is down 1.98%. For the year to date, the greenback is in the red to the tune of 6.98%, which helps exporters drive profits, but raises the cost of imports domestically.

Asian Equities Markets Register Slight Gains

The US dollar has enjoyed tempered losses owing to the interest rate hikes by the Fed. Presently, the federal funds rate is in the region of 1.00% – 1.25%. On Friday, 14 July, stocks on the Nikkei 225 index showed little change, as they were anticipating the release of economic data from the US. Fortunately, we have seen a slight firming of oil prices taking place in the markets, and this has renewed confidence in the energy sector.

Janet Yellen recently addressed Congress, and her comments indicate a degree of bullishness about the Fed’s perception of the US economy. Across the Pacific, the Bank of Japan is in the midst of policy decision-making processes and this will affect Asian equities markets. At the close of trade on Friday, 14 July, the Nikkei 225 index was trading at 20,118.86 points, for a slight gain.

How Will the Stock Market Respond to a Dovish Fed?

By Wednesday, 12 July 2017, US stock markets edged higher, notably the Dow industrials after the Fed chair, Janet Yellen, indicated that she would be pushing for a gradual rise in interest rates. There wasn’t much movement when the Beige Book was released by the Fed.

Quinton R. Markham, a trading expert from Trade-24, believes that we’re in for some normalization, ‘Normalized monetary policy means that the Fed will have a negligible impact on the stock market or the economy, and it can do this by selling off its $4.5 trillion worth of assets, and allowing markets to find their own equilibrium. Yellen is a dove by nature, and does not favour aggressive rate hikes. Her tenure as Fed chair is expected to come to an end in February 2018.’

Stock markets prefer a dovish approach to monetary policy. If interest rates are rising, the cost of capital is increasing. This adversely affects trading activity on companies listed on the Dow Jones, the NASDAQ and the S&P 500 index. If the Fed opts to sell assets instead of raising interest rates, stock markets will prefer that and remain at their bullish levels.

This process of normalizing monetary policy is the preferred option for equities traders. We have already seen the Bank of Canada increasing interest rates by 25-basis points, and there is chatter that the Bank of England will also pull the trigger soon. In an era of gradually increasing interest rates, many Wall Street traders are a little concerned that the Fed will jump on the bandwagon.

 

 

The Federal Reserve

 

For now, the Fed believes that US economic growth is best described as moderate. The shortfall of skilled workers is adding pressure to the economy, and the best way to grow it is through a series of gradual interest rate hikes.