Global Stocks Hit Fresh Record High As Dollar Rally Fizzles

It’s deja vu all over again.

In a repeat of yesterday’s session, where US equities and the dollar levitated in a one-way trade, Tuesday’s muted session – where in addition to closed China and South Korean markets, Germany’s DAX is also shut for holiday – has seen early dollar and European equity strength, while the S&P is set for new record highs amid higher E-minis and a VIX that is again lower after 5 consecutive days of declines.

It is also another day for global records: world shares hit their latest all time high on Tuesday, while the dollar was the highest in 6 weeks as encouraging U.S. data lifted it in tandem with global bond yields. MSCI’s 47-country ‘All-World’ index was pushed to the fresh peak as Europe’s main bourses added to gains made in Asia and after Wall Street set its own record close again overnight. It was the tenth new high since late July alone and extends the year’s blizzard of records that started in February to more than 40 according to Reuters, with no sign it is about to run out of steam yet.

That said, both European stocks and the dollar lost some momentum on Tuesday as concerns reemerged about the probability of Trump’s tax cuts. The euro drifted as tensions bubbled in Catalonia, with the common currency sliding briefly below 1.16 before rebounding.

Europe’s Stoxx 600 Index was mixed, and unchanged so far on Tuesday despite US stocks hitting new all time highs and amid a rally in Asian markets. Materials found a bid in Europe, as the sector outperforms, led by Anglo American, buoyed by its upgrade at HSBC. Yesterday’s volatility seen in Spain, and in the IBEX has slowed, with the Spanish stock index trading marginally lower this morning, as many investors await clarification and insight into further developments in regards to the Catalonian region.

Japanese shares closed at their highest in more than two years, while Chinese stocks in Hong Kong surged, reopening after a one day vacation and boosted by the weekend’s targeted RRR-cut by the PBOC. Developing nation equities also jumped.

SEB investment management’s global head of asset allocation Hans Peterson pointed to strong economic and trade data and signs that firms in large economies like the United States and Europe were finally increasing investment spending. “The fun thing about that is that is will take over from the consumption cycle and means the (global business growth) cycle will be longer than consensus. So I think that is the mechanism that is driving equities at the moment. So we are long equities, we are long emerging markets and we are long Europe. We are risk on.”

The greenback pared an increase but remained higher against almost all its major counterparts. As Bloomberg’s FX strategist Vassilis Karamanlis writes this morning, dollar bulls may need to wait for U.S. jobs data and a speech by Janet Yellen to find the fresh catalyst that could finally push the Bloomberg Dollar Spot Index above its 2017 trendline resistance. The gauge pared early gains as it failed to escape this year’s downtrend. Further hawkish remarks by the Federal Reserve chair or strong employment data due Wednesday may do the trick, yet for now investors are happy to take some chips off the table. The dollar’s inability to breach the technical resistance weighed on sentiment as the euro and pound decisively rose from their day lows, which saw the common currency below $1.1700 for the first time since Aug. 17, and sterling at the lowest in nearly three weeks. The market remains long gamma in euro-dollar and thus any dips are bound to find fading interest.

As a result, profit taking was the name of the game as soon as London trading was underway, according to currency traders. Still, Goldman analysts released a report overnight, in which they see the greenback as having more room to run, thanks to solid growth prospects and the chance that Fed interest-rate hikes will prove more aggressive than market players currently anticipate. As a result, Goldman sees the dollar rising particularly against the euro, which could be hurt by political concerns amid the Spanish woes over Catalonia and by elections in Austria and Italy in coming months.

Meanwhile, the yen weakened to 113.20 per dollar, just a breath away from its Sept. 27 low at 113.26. While USD/JPY follows the market’s latest narrative of a strong dollar, risk reversals buck the trend, diving further into bearish territory for the greenback. Yen calls find good demand on structures expiring post the Oct. 22 election in Japan, while calendar trades are also in play.

“Investors have capacity to buy as the fiscal second half begins, with dip- buying potential for 10-year yields around 0.8%,” says Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan; “Even with strong data, inflation is subdued.”

“With views strongly intact that BOJ will cap the 10- year yield around 11 basis points, 8 basis points is where most investors are looking to buy as there is very little downside risk,” says Satoshi Shimamura, head of rates and markets in the investment strategy department at MassMutual Life Insurance Co. in Tokyo; “Some may even wait until 9 basis points. Until all this appetite has been met, it’s hard to see yields falling.”

Cable traded near session lows in the mid 1.32 range after EU’s Barnier said there is “still a serious divergence on financial settlement on Brexit” while European president Jean-Claude Juncker said the UK “have not yet made sufficient progress” in Brexit talks. Not helping was news that U.K. construction unexpectedly shrank in September, moving below the the 50 level that divides expansion from contraction.

Japanese bonds were mixed after a soft auction for benchmark 10-year notes as investors remained cautious about buying at the start of the fiscal second-half. Borrowing costs across the euro zone nudged higher too. Southern European bonds continued to underperform meanwhile as political tensions remained in Spain after Sunday’s independence vote in Catalonia was marred by police violence. In the US, the 10Y yield rose 2bps to 2.36%, while a stronger view that the Federal Reserve will raise U.S. interest rate for a third time this year in December kept two-year U.S. government bond yields hovering at a 9-year high.