Europe Points to a Strong Start After The Return of Risk Appetite Boosts US & Asia to Record Highs

US stocks continued their roller coaster ride overnight, recovering from the 283 point sell off on Tuesday, by soaring 322 points on Wednesday, leading the Dow to close over 26,000 for the first time.

More strong earnings and an announcement by Apple signalling its intention to repatriate billions of dollars held overseas, meant tech stocks led the charge higher on the S&P. The S&P gained 0.9% to close at 2802, whilst the Nasdaq ended the session at 7298, another record high.

Strong Earnings Support Valuations

Equity indices are able to trade at these elevated levels because Q4 earnings are so far providing the evidence that investors have been waiting for, to confirm these high valuations. So far, of the S&P firms that have reported, 78% have beaten on earnings, whilst 89% have surpassed expectations on the top line. The fact that, what is forecast to be a very strong earnings season, has started precisely that way, is fuelling optimism in traders.

Dollar Finally Gets A Lift

Optimism was also seen returning to the US dollar in late trade on Wednesday. It took a hawkish shift from Fed President Evans, who previously voted against a hike, and Fed President Kaplan, who sees 3 rate hikes this year as a base case, and ECB members talking down the euro, to finally pick the dollar up. If the Fed doves are starting to make hawkish calls, surely its time to get bullish on the dollar again?

Time To Start Believing That 3 Hikes Are Coming?

Following the Fed speakers and an encouraging US Beige Book, the Fed Funds futures market lifted to 55%, from 48% on Tuesday. The fund tracks the possibility of the Fed raising interest rates by 0.25% three times by the end of 2018. As the odds of 3 interest rate rises increased so did the value of the dollar, which bounced off a session low of 90.11, to end trading 0.66% higher, in its strongest day of trading in 2 ½ months.

Return of Risk Appetite To Boost Europe on the Open

Risk appetite appears to be firmly back on the table, which was noticeable by fresh record in Asia and the strong start expected Europe, on Thursday. FTSE futures are pointing to a positive start, as are the Dax futures after two days of declines.

Near term the focus will be on Chinese GDP data due at 7am GMT. Economic growth in China, is expected to have dropped to 6.7%, from 6.8%. Should strong consumption and exports manage to boost the GDP reading, in China, the world’s biggest consumer of metals, we could expect the UK listed miners to pop higher on the open.

Pound to $1.40?

GBP/USD hit $1.3940 earlier in the US session. The pound crept up to this post Brexit high, on nothing more than dollar weakness on Wednesday, so a revival in dollar strength unsurprisingly brought the pair lower. Despite the pull back in cable, the market is eyeing up the $1.40 psychological level. Whilst Thursday’s economic calendar doesn’t offer anything for the UK, investors might need to wait for retail sales data on Friday, a strong number and $1.40 could be in the bag.