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Dollar, stocks in strong rally
Global stocks, the Canadian dollar and oil are all rallying this morning as the mood in financial markets changes considerably. The Canadian dollar shot up, oil is well above $73 a barrel, and The Dow Jones industrial average , S&P 500 and S&P/TSX composite index all jumped as North American markets opened.
Helping to drive stocks, and commodity-linked currencies such as the loonie, was positive news from Spain, the OECD's economic forecast yesterday and a denial by China of a news report that it is reviewing its holdings of euro assets, which is described as "groundless." In Spain, the parliament approved a €15-billion austerity package, though it passed by just one vote.
Market Blog columnist David Berman notes this morning that while global markets are rebounding, stocks have behaved erratically recently, to say the least, and markets have been whipsawed over the past two trading days.
As for the loonie, Scotia Capital economists Derek Holt and Karen Cordes Woods note this morning that, while there have been extreme ups and downs, the Canadian dollar is outperforming most of its global peers. "The [U.S. dollar]has outperformed almost all currencies this month, but [the Canadian dollar]has held its own better than most. The [loonie]has slipped 4.9 per cent against the greenback so far this month ... The point is that [the Canadian dollar]has outperformed on the upside and downside of broad movements in global risk appetite compared to a basket of currencies. Investors have done well over-weighting both the [U.S. dollar]and [the Canadian dollar]in portfolios. Yes this has been a [U.S. dollar]friendly environment, at least for now and until U.S. admonishment of European finances swings around to focus on U.S. fiscal austerity and drag effects on U.S. GDP over the next three years."
North American stocks closed on a down note late yesterday but futures are now surging.
"The surge in risk aversion heading into the U.S. close led to a selloff in U.S. equities dragging risk proxy currencies down with them," said strategist Christian Lawrence of RBC Dominion Securities. "This proved short-lived however and the overnight session was spent recouping those losses. The initial move was attributed to comments that China is considering a review of its euro zone bond holdings, but this was subsequently denied leading the way for a reversal ... As you would expect, these [foreign exchange]moves were accompanied by a rally in U.S. stock futures (S&P up 1.9 per cent), gains in Asian and European bourses (Nikkei +1.23 per cent, DAX +1 per cent) and a general bid tone across the commodity world. We have seen some paring back of the risk bid in the last few hours however, with a moderate bounce in [the U.S. dollar]and the high yielding currencies coming off their highs."
Related: Wild dollar swings cause headaches
U.S. rebound weaker than believed
The recovery in the U.S. economy is slightly weaker than initially believed. The U.S. Commerce Department said this morning the economy expanded in the first quarter at an annual pace of 3 per cent, compared to an initial estimate of 3.2 per cent and below what economists had expected. The revision was largely due to lower consumer and business spending, on equipment and software, compared to the initial reading.
"With the first quarter in the rear-view mirror, attention now turns to the second quarter (and beyond)," said Toronto-Dominion Bank economist James Marple. "All the indicators point to a growth rate in the second quarter at least on par with the first quarter and likely above, leaving little doubt that the recession is over and a recovery is under way ...
The key to a sustainable recovery in the United States remains conditions in the labour market."