Sunday, 20 January 2019

Trade optimism yields dollar's first positive week this year

NEW YORK (Reuters) - The dollar held firm against its rivals on Friday, set for its first weekly gain since mid-December on optimism about talks to end the trade war between China and the United States.

Media reports on Thursday and Friday suggested both countries were considering concessions ahead of a Washington visit from Chinese Vice Premier Liu He on Jan. 30 and 31 for talks aimed at resolving the trade standoff between the world’s two largest economies.

China has offered to go on a six-year buying spree to ramp up imports from the United States in order to reconfigure the relation between the two countries, Bloomberg reported on Friday, citing people familiar with the matter.

U.S. Treasury Secretary Steven Mnuchin discussed lifting some or all tariffs on Chinese goods and suggested offering a tariff rollback during the trade discussions scheduled for Jan. 30, the Wall Street Journal reported on Thursday, citing people familiar with the internal deliberations.

Although a Treasury spokesman denied Thursday’s report, the positive sentiment was enough to lift the dollar index and the three major U.S. stock indexes Friday morning. Following the publication of the Bloomberg story on Friday, the dollar index added to its gains rising 0.3 percent, last at 96.352.

“Yesterday’s WSJ headline concerning a possible rollback of the Trump tariffs was a setback for (the U.S. dollar/renminbi cross), and although it was subsequently denied, it had created confusion in the foreign exchange space,” said Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets in London.

Stronger-than-expected U.S. industrial production numbers also helped lift the greenback. American manufacturing output increased by the most in 10 months in December, pushed up by a surge in the production of motor vehicles and a range of other goods, the Federal Reserve said on Friday.

Wall Street rallies
Going into 2019, weakness in the dollar was a consensus view among currency market traders. The bet was that the U.S. central bank would stop raising interest rates and the economy would slow after a fiscal boost last year. While expectations of a U.S. rate pause have manifested in money markets, bets on policy tightening by other major central banks have also receded, giving a boost to the dollar.

Against a basket of rivals, the dollar was set to rise 0.68 percent on the week, its first positive week since mid-December. Against the euro, the dollar had strengthened 0.26 percent to $1.137, its strongest since Jan. 4.

The pound slipped against the euro and against the dollar, trimming overnight gains, as traders wagered on a second referendum vote on Britain’s EU membership.

Reporting by Kate Duguid and Saikat Chatterjee

Friday, 18 January 2019

Pound set for biggest weekly gain vs euro in more than a year on Brexit hopes

LONDON (Reuters) - The pound weakened on Friday as investors took profits after a stellar rally this week that set the currency up for its biggest weekly gain against the euro in more than a year on growing confidence that a no-deal Brexit can be avoided.

Data showing that British shoppers cut back on spending in the three months to December was broadly in line with market expectations and sparked just a brief rise in sterling.

The bigger focus for sterling traders remained Brexit, especially after a tumultuous week in which British Prime Minister Theresa May’s Brexit deal suffered a heavy defeat in parliament on Tuesday but won a subsequent vote of confidence.

This week’s developments appear to have boosted a perception in markets that Britain will be able to avoid crashing out of the EU without a deal, boosting the pound.

The currency has risen about 1.3 percent against the euro EURGBP=D3 this week, set for its biggest weekly gain since November 2017.

“Sterling has rallied quite a bit over the past week-and-a- half and the weakness today is a bit of check on those gains and a bit of profit taking,” said Tapas Strickland, a market strategist at National Australia Bank in London.

“The market is pricing out the risk of hard Brexit and some kind of agreement... so against this background, you’d expect sterling to grind higher above $1.30.”

At 1220 GMT, the pound was down 0.4 percent at $1.2936 GBP=D3, having touched $1.30 on Thursday.

Against the euro, sterling tumbled 0.5 percent to 88.13 pence and below two-month peaks hit a day earlier at around 87.65 pence.

On Friday, prominent Brexit campaigner Nigel Farage said the United Kingdom is likely to delay Brexit and another referendum is possible so opponents of EU membership need to organize.

Markets: Europe's shares lifted by trade hopes, Ryanair's grounded
May is due to hold a series of meetings with some of her top ministers on Friday to discuss the way forward on Brexit after her deal with Brussels was rejected by parliament, her spokeswoman said.

“It is our understanding that markets, and I think rightly, see the risk of no-deal Brexit as having receded substantially,” said Ross Hutchison, rates portfolio manager at Aberdeen Standard Investments.

“And the move in gilts and sterling reflects this.”

Britain’s 10-year government bond or gilt yield rose to 1.376 percent GB10YT=RR, its highest level in more than six weeks.

Reporting by Dhara Ranasinghe

Shutdown clouds outlook for consumer-driven U.S. economic growth

NEW YORK (Reuters) - After tax cuts, rising incomes and buoyant stock markets set off a consumer boom in 2018, signs are emerging that the main engine of U.S. economic growth could sputter, and a record-long government shutdown further muddies the waters.

Federal Reserve officials and many economists have long counted on continued robust consumer spending to keep the economy chugging along, despite headwinds from recent financial markets turbulence, trade conflicts and weakening global growth.

Now they fear the consumer boom could be on the cusp of a reversal. The warning signs span the income spectrum - from the well-heeled possibly cutting back after their stocks got hammered last fall, to the poor potentially getting squeezed if a lingering government shutdown delays food assistance payments. Economists are also not certain, for example, whether last year’s personal income tax cut will lead to higher refunds and boost big-ticket purchases, such as home appliances, typical for this time of year, or whether the windfall was already spent last year when paycheck withholding declined.

The shutdown, now in its 28th day, could delay refunds and hit companies that rely on consumers spending a chunk of that money on their goods or services.

The chief financial officer at T-Mobile US told investors last week any delay in refunds was a concern for the company because its prepaid business, roughly 30 percent of sales, was “particularly sensitive” to tax refunds.

“Hopefully, this situation doesn’t go on too long,” J. Braxton Carter said.

A delay in refunds could also hurt home improvement chains, such as Home Depot, Lowe’s Cos Inc (LOW.N) and Wayfair Inc (W.N) that see furniture purchases and early spring projects boost sales. “We don’t see any material impact,” a Home Depot spokesman said without elaborating. Lowe’s and Wayfair did not respond to a request for comment.

The government shutdown clouds the outlook for spending, retailers and the economy at large because executives and policymakers weigh not the direct impact of 800,000 federal workers going without pay, but also how much it can hurt consumer and business confidence.

Chicago Federal Reserve President Charles Evans said last week that while the immediate effects of the shutdown on the U.S. $20.7-trillion economy would be small, the indirect, psychological impact could be substantial.

“Consumers get risk averse and start hunkering down, businesses start planning to do less, and you start magnifying these effects,” Evans said.

Former Federal Reserve chair Janet Yellen noted a general cooling of business sentiment at a retail trade show in New York last week. “We are hearing anecdotal reports about businesses beginning to put investment plans on hold because of [economic] uncertainty,” she said. Those investments could include things like upgrades to a retailer’s supply chain, Yellen said.

Constance Hunter, chief economist at KPMG told Reuters if the shutdown goes on until the end of the month “we will shave a couple of percentage points from first quarter (gross domestic product).”

Such concerns have spread among Fed officials who now advocate patience before considering any further rate hikes.

Consumer spending accounts for about two-thirds of U.S. economic activity, and the 4 percent jump in household spending on goods last year was a major reason the economy probably grew by a healthy 3 percent in 2018.

More recently, robust consumption offset weaker-than-expected business investment and the drag from trade, and was expected to mitigate the waning impact of the Trump administration’s earlier spending splurge.

Economists had already anticipated that higher interest rates and trade tensions would slow growth in household spending on goods and services after it hit $13 trillion last year.

The question is how much and the shutdown made the answer more difficult.

Weak bond trading hurts Morgan Stanley results
Steven Blitz, chief U.S. economist at TS Lombard said the economy appeared to be slowing down, noting reports from Macy’s, Nordstrom and other retailers talking of a weak December, and he expected the shutdown to hurt first quarter growth.

“Some of it will come back in the second quarter, but there will be some industries that will see lasting damage such as restaurant operators,” he told Reuters.

These would include chains like McDonald’s Corp (MCD.N), Chipotle Mexican Grill (CMG.N) and Starbucks Corp (SBUX.O), which analysts said will be unable to make up for lost sales to government workers during a shutdown.

The companies did not immediately respond to a request for comment.

Brian Cantor, managing director of Alvarez & Marsal’s retail performance improvement group, said grocery chains, incliding Walmart Inc (WMT.N) and Kroger (KR.N), could feel the pinch of weaker discretionary spending. While food staples sales will hold up, typical add-on purchases like batteries, chips, magazines or chocolates will suffer, hurting profit margins.

Kroger CEO Rodney McMullen expressed this concern last week at a retail trade show. “From a customer standpoint ... they feel incredibly good about the economy, but very nervous about where are things headed,” he said.

Walmart declined comment.

Small, independent retailers, which often serve low-income communities, may also suffer.

While the administration has assured funding through February for government transfer payments for the Supplemental Nutrition Assistance Program (SNAP), which provides food assistance to 19 million low income households, the shutdown has impaired granting new licenses and renewals.

Peter Larkin, President and Chief Executive of the National Grocers Association, sent a letter to Congress on Jan. 10, saying the shutdown prevents many independent retailers from acquiring SNAP licenses for their newly opened stores, and that more than 2,500 retailers have experienced a lapse or inability to reauthorize their license.

“The inability to acquire new SNAP licenses for newly-opened or purchased stores could have significant negative impacts to local economies,” Larkin said.

Reporting by Nandita Bose and Howard Schneider

Dollar set for first weekly rise in five weeks on rate gap bets

LONDON (Reuters) - The dollar steadied on Friday but was set for its first weekly rise in five weeks as doubts grew on the ability of other major global central banks such as the European Central Bank to start raising interest rates this year.

While the prospect of another Fed rate hike has been virtually ruled out of money markets this year, markets have also whittled down the odds of the ECB raising interest rates on the back of weak economic data, weighing on the single currency.

Money markets are assigning less than a 50 percent probability of an ECB rate hike this year and 80 percent likelihood of a rate hike from the Bank of England.

Against a basket of its rivals .DXY, the dollar was broadly steady but was set to rise 0.4 percent on the week, its biggest weekly rise since mid-December.

“For non-dollar currencies to make further gains from these levels, we have to see evidence that other major central banks are preparing to tighten policy,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Weaker economic data is also a feature in China. On Friday, China’s statistics bureau revised down its final 2017 gross domestic product (GDP) growth to 6.8 percent from 6.9 percent, after scaling back initial estimates of the industrial and services sector.

Still, despite the weak economic data, market sentiment was slightly boosted on signs of growing optimism in trade talks between China and the United States.

Chinese Vice Premier Liu He will visit the United States on Jan. 30 and 31 for the latest round of trade talks aimed at resolving the trade standoff between the world’s two largest economies.

That optimism was evident in the euro/Swiss franc cross which edged higher towards a one-week high at 1.1329 francs per euro.

The pound managed to hold on to most of its overnight gains against the euro EURGBP=D3 as traders wagered on a second referendum vote on Britain’s EU membership.

Weak bond trading hurts Morgan Stanley results
While Prime Minister Theresa May has repeatedly rejected a second referendum, a vocal campaign in favour of holding a new vote has drawn the support of some lawmakers.

Sterling was last down about 0.2 percent at 87.90 pence, trading close to a two-month peak of 87.60 scaled overnight. It is set for its biggest weekly gain in more than 15 months.

Reporting by Saikat Chatterjee

Thursday, 17 January 2019

New EU rules boost electronic fixed income trading volumes

LONDON (Reuters) - Electronic trading volumes in fixed income have jumped since the introduction of European rules a year ago, research by Greenwich Associates has found, the latest sign that tough legislation is upending the way market participants trade.

Total average daily volumes of EU government bonds traded electronically in the first three quarters of last year rose by 36 percent to $57 billion, the report by Greenwich Associates based on a survey of fixed income investors said.

Credit volumes on electronic platforms jumped 39 percent to $4 billion over the same period, it found.

Market participants are using electronic platforms more because the European Union’s Markets in Financial Instruments Directive II (MiFID II), introduced in January 2018, made it more onerous to execute over the counter (OTC) trades, it said.

Electronic venues make time stamping and data reporting easier compared with OTC, the report said.

Electronic trading in interest rate swaps by European buy-side fixed income traders jumped by 36 percent in 2018, compared with 20-percent growth a year earlier, the report showed.

MiFID II, the second iteration of sweeping rules aimed at increasing transparency in financial markets, was broadened beyond equities to cover other asset classes, including fixed income, derivatives and exchange-traded funds (ETFs).

Spot foreign exchange was excluded, but forex derivatives are covered by the rules, which require pre- and post-trade data to be reported. For instance, the prevailing price in the market must be checked and recorded prior to executing a deal.

Reporting by Josephine Mason

Pound holds off two-month highs as uncertainty sets in after key Brexit votes

LONDON (Reuters) - Sterling hovered just off two-month highs against the euro and the dollar on Thursday as uncertainty crept back in a day after British Prime Minister Theresa May won a confidence vote in parliament.

Lawmakers backed May’s government 325 to 306, just 24 hours after handing her European Union withdrawal deal a crushing defeat that left Britain’s exit from the bloc in disarray.

The pound has strengthened in recent weeks on growing confidence that a no-deal or hard Brexit is unlikely, touching a two-month high to the euro on Wednesday and a similar milestone against the dollar on Monday.

But with this week’s two key votes in parliament over, some caution appeared to be setting in, analysts said.

“You could say that in the last few days, many investors have been betting that there will be a delay of Brexit or bets that there will not be a hard Brexit,” said Jane Foley, a senior currency strategist at Rabobank.

“Actually we have not had anything concrete to support this, so we need something in the next week to really keep investors’ confidence that a hard Brexit is not going to happen.”

By 0915 GMT, the pound dipped 0.1 percent to $1.2866, holding below a two-month high hit on Monday just above $1.2930.

Against the euro, sterling also dipped 0.1 percent to 88.56 pence, having strengthened to around 88.40 pence in the previous session.

After the confidence vote late on Wednesday, May met several party leaders, but the main opposition leader, Labour’s Jeremy Corbyn, refused to hold talks unless a no-deal Brexit was ruled out.

Mohammed Kazmi, a portfolio manager at UBP in Geneva, said that investors were now likely to be more focused on Brexit scenarios that are becoming skewed in the direction of a softer exit from the European Union, or an extension of Article 50 that could delay the exit and pave the way for a second referendum.

“Either of these scenarios should play out positively for UK assets, especially as it is clear that cross-party consensus on a Withdrawal Agreement will lead to the government having to rule out a no-deal Brexit scenario as well, removing this fear for markets and narrowing the possible outcomes,” he said.

Indeed, trading in currency options markets show an increasing bias towards bets that Britain will extend its deadline to leave the European Union - a positive sign for sterling in the near term.

Three-month implied volatility — a measure of expected swings in the currency — a contract encompassing the end-March period, dropped to the lowest in more than two months to 11.225 volatility — well off 2-1/2-year highs around 15 volatility hit in December.

Reporting by Dhara Ranasinghe

Stocks turn red, pound finds some peace

LONDON (Reuters) - Concern over China’s economic outlook and possible U.S. tariffs on European cars dragged stocks lower on Thursday, while an anti-climactic end to the latest chapter in the Brexit saga offered sterling a moment’s peace.

Fresh news was thin as European trading got underway, but traders had more than enough to digest from last 24 hours to follow Asia’s overnight dip into the red.

Carmakers fell more than 1.5 percent after U.S. Senate Finance Committee Chairman Charles Grassley said he thought Donald Trump was inclined to impose tariffs on European cars to win better terms on agriculture.

Banks were hit by disappointing Societe Generale results and the tech sector was under pressure after one of world’s biggest chip producers, Taiwan Semiconductor (2330.TW), forecast its steepest drop in revenue in a decade.

“There is some focus on the Grassley comments in relation to auto trade tariffs and also reference to there not being much progress in the U.S. China negotiations last week,” said Bank of Tokyo Mitsubishi strategist Derek Halpenny.

“There has obviously there has been a lot of optimism (in markets) since the start of the year and risk appetite has had a pretty good run, but this will place a few question marks over that.”

MSCI’s broadest index of world stocks .MIAPJ0000PUS was down 0.1 percent. Markets like Japan had dithered in both directions, while Wall Street’s S&P 500 futures ESc1 drifted down 0.26 percent.

China's blue-chip index .CSI300 ended down 0.55, led lower by a decline in the country's second-largest home appliances maker, Gree Electric 00065.SZ, after it warned of slower profit growth as the economy loses steam.

Chinese Premier Li Keqiang promised increased government investment this year and the country’s central bank injected more cash into the financial system, bringing the amount for the week to 1.14 trillion yuan ($168.74 billion).

Stoking some caution was news that U.S. lawmakers introduced bills on Wednesday that would ban the sale of U.S. chips or other components to Huawei Technologies Co Ltd HWT.UL or other Chinese telecommunications companies that violate U.S. sanctions or export control laws.

That came shortly before the Wall Street Journal reported federal prosecutors were investigating allegations that Huawei stole trade secrets from U.S. businesses.

Separately, Handelsblatt reported the German government is actively considering stricter security requirements and other ways to exclude Huawei from a buildout of fifth-generation (5G) mobile networks.

Also lurking were worries the U.S. government shutdown was starting to take a toll on its economy. White House economic adviser Kevin Hassett said the shutdown would shave 0.13 percent off quarterly economic growth for each week it goes on.

As expected, British Prime Minister Theresa May narrowly won a confidence vote overnight and invited other party leaders for talks to try to break the impasse on a Brexit agreement.

An outline for Plan B is due by next Monday. Markets assume the exit date will be extended past March 29.

“Nothing has happened in the last 24 hours to dissuade us from the view that we are headed in the direction of an Article 50 delay, a softer Brexit or no Brexit,” said Ray Attrill, head of FX strategy at NAB.

All of which left the pound steady at $1.2872 GBP=, though still short of Monday's peak at $1.2929. It reached a seven-week low against the euro before steadying at 88.50 pence EURGBP=.

Wall Street rises with help from Netflix
The U.S. dollar was mixed, easing against the yen to 108.79 JPY= but flat versus the euro at $1.1396 EUR=. The dollar index was up at 96.088.

In commodity markets, palladium XPD= hit record highs thanks to increasing demand and lower supply. Spot gold XAU= was little changed at $1,294.91 per ounce.

Oil prices eased as traders worried about the strength of demand in the United States after its gasoline stockpiles grew last week more than analysts had expected.

U.S. crude futures fell 38 cents to $51.93 per barrel. Brent slipped 40 cents to $60.92.

Reference: Marc Jones