As European stock markets recovered solidly after Tuesday’s sharp falls, Wall Street has put in a far less promising result as the unrelenting rise of the dollar instilled renewed uncertainty in many about the prospects for the US economy.
With government bond yields falling on both sides of the Atlantic, the Eurozone debt continued to respond enthusiastically to the European Central Bank’s (ECB) quantitative easing programme, whilst US treasuries took heart from a solid auction of 10-year paper.
Speaking to the Financial Times, Hans Mikkelsen, Credit Strategist at BofA-Merrill Lynch said “With US labour market data leaving a June Federal Reserve rate hike on the table and the ECB finally printing money to buy sovereign debt, financial markets are likely pricing in the ultimate consequesnces of such divergent monetary policies.”
He continued, “Thus in March we are seeing the dollar surging against the euro, and US Treasuries underperforming German Bunds - by more than 30 basis points in 10-year yield difference in March to 190bp today. Clearly, US stocks are uncomfortable with these big moves.”
As the S&P 500 slipped a further 0.2% on Tuesday to 2,040, its biggest drop in two months, it has given up all of its year-to-date gains.
The US equity benchmark has retreated more than 3.5 per cent from a record high that was reached only 10 days ago.
However, in Europe, the German Xetra Dax index leapfrogged 2.7 per cent to a record high, partly thanks to the positive impact on export-focused stocks from further fragility in the Euro, whilst the London market lagged behind its European peers as weakness in the mining sector left the FTSE 100 just 0.3 per cent firmer. The pan-European FTSE Eurofirst 300 rose 1.5 per cent to a seven year closing high.
The euro was down 1.5 per cent against the dollar at a 12 year low of $1.0538, as the US currency climbed a further 1.1 per cent.
President of ECB, Mario Draghi, credited the fall in the euro as a key component behind recent signs of improvement in the Eurozone economy.