Market Moves

Small-cap and micro-cap stocks rallied more strongly on the day than did large-cap stocks. The S&P 500 and the Nasdaq 100 stocks rose to their highest levels in a month after opening higher to begin the trading session, closing 1.2% and 1.8% higher, respectively. The Russell 2000 small-cap index and its micro-cap index counterpart backed off their highs later in the trading session, although both closed higher than the large-cap indexes.

This dynamic hasn't occurred all summer, so today's trading action marks the first intraday indication in the past three months that investors are willing to take risks. Such indications are usually a bullish sign because it means that investors no longer need to move their money away from risky assets and instead may seek them out. 

Chart showing the outperformance of riskier asset classes

Global Currency Easing Means U.S. Stocks are Attractive Again

On Sept. 12, the Governing Council of the European Central Bank is scheduled to meet to discuss rates and policy. Institutional investors are watching this meeting closely. Most of them appear to expect consideration for more quantitative easing

Since so many countries in Europe have established negative interest rates for their currencies, investors are becoming increasingly concerned about the effects of these rates over the long term. Should the discussions feature talk of even lower (more negative) interest rates, investors will likely seek more risk-related assets as the only viable alternative.

Currency movements are beginning to show signs that investors are anticipating even more negative interest rates. For example, the U.S. dollar has been showing a strong surge against the Chinese yuan, and the Australian dollar-Japanese yen pair jumped for the second time in two days. This pair works as a good proxy for global risk appetite because the yen has a negative interest rate, while the Australian dollar maintains a positive interest rate. (See charts below.)

Performance of U.S. dollar vs. Chinese yaun

Chart showing the performance of the U.S. dollar vs. the Chinese yuan

Performance of Australian dollar vs. Japanese yen

Chart showing the performance of the Australian dollar vs. the Japanese yen

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IBM Rallies Strongly as Currency Talk Buoys Investors

One company that historically shows vulnerability to currency movements is International Business Machines Corporation (IBM). Many of its customers are multinational corporations and may pay for their products or services in any number of different denominations.

As a consequence, IBM's share price is influenced by currency moves. Perhaps this is the reason that IBM shares jumped so significantly today without any particular news regarding analysts or corporate officers making announcements. Such moves may indicate the start of a strong new trend. (See chart below).            

Chart showing the share price performance of International Business Machines Corporation (IBM)

The Bottom Line

Stocks moved significantly higher amid talk of global currency easing. This expectation is bullish for stocks in general and particularly bullish for those stocks with multinational reach. IBM shares are likely an example of this, as the stock closed nearly 3.5% higher today.

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