Stronger dollar erodes NFP elation

Heading into the close the FTSE 100 is down 30 points, as a stronger dollar takes the shine off a good US non-farm payrolls report.

City of London
Source: Bloomberg

Miners hit hard in post-NFP selloff

European markets continue to feel the benefit of Mario Draghi’s largesse, as the likes of the DAX hit fresh all-time highs; however, in London things have rather taken a turn for the worse.

The dollar has been given a new lease of life this afternoon, on expectations that a robust rate of job creation in the US provides further reason to believe a US rate hike in the middle of this year is on its way. Miners took the brunt of the selling, after a difficult week that saw China cut growth targets, as commodity prices fell, implying that a 7000 close for the FTSE 100 is still some distance away.

Also hard hit today were property firms like British Land and other strong dividend payers such as National Grid; rising US rates will erode some of the appeal of these high-yielding shares, which have seen their valuations pushed higher thanks to the attraction of their payouts.

With little heavyweight economic news out next week and the European Central Bank’s quantitative easing announcement now largely priced in, equities could struggle in coming sessions, providing a short-term dip after weeks of steady gains.

NFP report impresses

For yet another month, the headline numbers in US job creation look hard to beat. The 295,000 jobs created were far ahead of average estimates, and yet another month of job creation above 200,000 is likely to turn the screws on Janet Yellen and her team. They can still point to a lack of real wage growth as a reason to steady their hand, which still suggests a September rather than June increase, but markets are ignoring the more nuanced approach in favour of a broader ‘buy the dollar, sell equities’ mode.

In comparison to Europe US equities have looked much less buoyant of late, and a short bout of profit-taking will take some heat out of the market generally, while still leaving US indices well up on the year so far.

Gold firmly below $1200

A soaraway dollar has knocked commodities back again and sent gold tumbling far below $1200. ECB QE failed to lift precious metals, and now a rising US Treasury yield is going to reduce still further the number of reasons to hold gold. The week ahead promises more dollar strength, and more pain for this beleaguered sector.

Oil is not immune either, and oversupply fears are overdue a return that could see recent gains swiftly eroded.

Euro sellers return

Parity for EUR/USD is now openly discussed in a manner that was unthinkable just a few short months ago. The past two days have only served to reinforce the stark differences between the ECB and the Federal Reserve, leading to a raft of fresh sell orders on the euro.

It seems implausible to believe that this trade can get any more crowded, but faced with QE of €60 billion a month there seems little reason to buy the euro in anything but the shortest of short-term trades.

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