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Powell confirmation boosts the US dollar, and equity markets

Jerome Powell, Chairman of the Federal Reserve

Despite opening slightly higher, European markets spent most of the day trading in broadly negative territory until the afternoon announcement of the confirmation of Jay Powell as Fed chairman for another 4 years helped provide an afternoon uplift.

Europe

This news has helped outweigh the broader negativity that has seen the euro slide back towards its recent lows, as protests in Europe over new Covid 19 restrictions acted as an initial broader drag on sentiment.

The FTSE100 has been more resilient than its European peers, with the telecoms sector helping to support the index after US private equity company KKR put in a bid €10.8bn for Telecom Italia, which helped to give the rest of the sector a lift with Vodafone and BT Group trading higher.

BT Group has already been at the forefront of similar takeover speculation in recent months after Altice took a £2bn stake in the business back in June, raising the prospect it might look at making a formal offer once its six-month time commitment to refrain from doing so expires in early December.

Royal Mail shares are also higher on expectations that they will benefit from this week’s Black Friday and Cyber Monday promotions, as well as the leadup to Christmas

Marks and Spencer shares are also higher on weekend media reports that private equity giant Apollo has moved on from missing out on acquiring Morrisons, and has set its sights on the recovering retail giant, now that it has a 50% stake in Ocado. The problem for Apollo is they may have left it a little bit late, given the recent surge in the share price, which it has seen the shares rise over 20% in the past few weeks, to two- and half-year highs, and up 82% year to date, putting them on course for a potential return to the FTSE100. That said they are still well below the levels they were trading at in 2015, when they were up over 500p.

The biggest decliners have been Polymetal and Fresnillo on the back of a sharp slide in gold prices.

US

US markets also got a decent uplift from today’s news that Jerome Powell will remain as Fed chairman for a second term.

While Lael Brainard was perceived as a more than capable candidate, the fact that President Biden has chosen continuity over change has been welcomed by the markets, with stocks and yields both pushing higher on the open, with the S&P500 and Nasdaq setting new record highs in the process.  Brainard will slot into the post vacated by Richard Clarida as vice chair when his term comes to an end in January next year.

Early gainers have been banks, with JPMorgan Chase, Bank of America and Citigroup leading the way, as higher short-term yields give a lift to their shorter-term funding models. We’ve also seen long-term yields rise as well, although they haven’t risen as quickly, implying a slightly flatter curve further out.   

Tesla shares have pushed higher despite a software fault locking owners out of their cars at the weekend, while Rivian Automotive shares have continued their recent declines as the lustre continues to come off the recent blow off seen post IPO.  

Nvidia is also seeing further gains hitting fresh record highs as more and more investors bet on the prospect that it will be a big winner from the transition to electric vehicles and the metaverse.

We’ve also seen an uplift in the likes of Moderna, Novavax and BioNTech as a consequence of events in Europe, and the prospect of an accelerated booster dose program.

FX

The US dollar has been given an additional lift from today’s announcement that Jay Powell is set to be reappointed Chairman of the Federal Reserve for another 4-year term. US 2 year and 5-year yields have also edged higher on the basis that this continuity at the head of the Fed will mean that all the recent talk of a faster taper remains very much on the table. The US dollar index has pushed up to its best levels since July 2020.

The euro has continued to slide, on the back of the deterioration of the Covid situation in Europe, after German Chancellor Angela Merkel painted a picture of much tighter restrictions in an attempt to rein in the virus, which is running out of control in some states.      

Commodities

Gold prices sank to their lowest levels in over a week today in the aftermath of Powell’s nomination for a second term as Fed chairman. This continuity is important in that it keeps the prospect of an accelerated Fed taper very much on the table, thus pushing short term rates higher as well as a stronger US dollar.

Crude oil prices initially sank to seven week lows on lower demand expectations as well as continued speculation that the likes of US, China and others could decide on a co-ordinated SPR release. However a statement from OPEC in the afternoon session that they might look at adjusting their monthly production increase plans if an SPR release were to occur has pulled prices off their lows, and Brent back towards $80 a barrel.


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