Thursday, 21 June 2018

Bank of England chief economist votes for rate rise, boosting chance of Aug hike

LONDON (Reuters) - The Bank of England bolstered expectations that it will raise rates for only the second time since the financial crisis at its next meeting in August, after its chief economist unexpectedly joined the minority of policymakers calling for a hike.

The central bank also set out new guidance on when it might start to sell its 435 billion pounds ($574 billion) of British government bonds, saying this could come once rates have reached around 1.5 percent, sooner than previous 2 percent guidance.

Short-dated government bond yields jumped on the news and sterling rallied by more than half a cent against the U.S. dollar on the prospect of tighter monetary policy.

“This all suggests that an August rate hike is ... more likely than not,” ING economist James Smith said. “While the Bank hasn’t offered any firm signals or commitments ... the overall outlook and tone suggests they’d still like to raise rates (if) the data allows.”

Last month the BoE had said it wanted to see signs of stronger growth before it prepared to raise rates, in contrast to the United States where the Federal Reserve has raised rates twice this year and plans to do so twice more.

The BoE’s Monetary Policy Committee (MPC) voted 6-3 this month to keep rates at 0.5 percent, where they have been for most of the past decade, in contrast to economists’ expectations in a Reuters poll for a continued 7-2 split.

Chief economist Andy Haldane joined long-term dissenters Michael Saunders and Ian McCafferty in calling for rates to rise to 0.75 percent, due to concerns that recent pay deals and labour demand could push wages up faster than expected.

This opens the door for a rate rise in August, something expected by most economists in a Reuters poll but which market pricing of one set of rate futures before the meeting viewed as a less than 50 percent probability.

There was only a modest move in this measure after the decision BOEWATCH, possibly reflecting doubts over whether Haldane’s shift in view reflected the direction of other members’ thinking.

The MPC as a whole said its previous view that first-quarter weakness was temporary and linked to unusually poor weather appeared “broadly on track”.

Household spending and sentiment bounced back strongly, and a sharp fall in factory output in April could reflect firms having built up excess stocks during the period of bad weather in the first quarter of the year, the BoE said.

At the end of last year Britain was the slowest-growing economy among the G7 group of rich nations, as businesses held back from investing ahead of Brexit and high inflation triggered by the 2016 referendum eroded households’ disposable income.

Inflation is drifting down from a five-year high of 3.1 percent hit in November, and growth in the first three months of the year was the slowest since 2012, after snow storms worsened existing weaknesses in the economy.

But with unemployment at its lowest since 1975, the BoE says the economy is running near full capacity, and that the longer-term direction for interest rates over the next two to three years is likely to be up.

Economists had expected the BoE to raise rates in May, until a string of weak data and discouraging words from BoE Governor Mark Carney in April quashed those expectations.

Reference: by David Milliken

Global shares edge up, China pulls Asia down, oil subdued pre-OPEC

SYDNEY (Reuters) - Shares crept higher in most major markets on Thursday as a lull in the Sino-U.S. trade tussle and talk of more stimulus in China helped calm nerves, though the nagging trade tensions caused Chinese shares to slip, dragging other Asian markets lower.

Oil prices eased a touch as nerves grew ahead of Friday’s meeting between OPEC and other big producers, including Russia, with growing expectations that the Vienna talks could result in an agreement to increase crude supplies.

European shares are expected to rise, with spread-betters calling a higher opening of 0.4 percent in Britain's FTSE .FTSE and France's CAC 40 .FCHI and 0.3 percent in Germany's DAX .GDAXI.

Japan's Nikkei .N225 added 0.6 percent while futures for the S&P 500 ESc1 rose 0.3 percent as investors waited for new developments on global trade.

Australia’s main index had another strong day, rising 1 percent on fund manager demand before the end of the local financial year next week.

Asian shares, however, struggled to keep early gains on concerns about the trade war.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS had gained as much as 0.5 percent before falls led by Chinese shares pushed it down 0.4 percent.

The CSI300 index of Shanghai and Shenzen shares dropped 0.4 percent .CSI300.

Still, the mere absence of new threats from President Donald Trump on tariffs was enough to stem recent selling in many markets, with investors clinging to the hope that all the bluster was a ploy which would stop short of an outright trade war.

“Many participants see the Trump Administration’s hard line as part of the negotiating strategy,” said Richard Grace, chief currency strategist at CBA.

Markets had also been encouraged by the People’s Bank of China’s move to set firm fixings for its yuan, along with the addition of extra liquidity.

There was also much speculation the central bank would cut bank reserve requirements, thus boosting lending power in the economy.

On Wall Street, resilience in tech stocks helped the Nasdaq to an all-time high, though the moves were modest. While the Dow Jones .DJI fell 0.17 percent, the S&P 500 .SPX gained 0.17 percent and the Nasdaq .IXIC 0.72 percent.

Twenty-First Century Fox Inc climbed 7.5 percent after Walt Disney Co sweetened its offer for some of the company’s assets to $71.3 billion, looking to topple Comcast Corp’s bid.

Receding risk aversion softened safe-havens such as the yen, with the dollar adding 0.31 percent to 110.71 yen JPY=.

The dollar .DXY also firmed 0.3 percent against a basket of currencies to 95.323, hitting an 11-month top. The euro EUR= was down slightly at $1.1552.

Sterling GBP=D4 hit seven-month lows at $1.3140 having made only a fleeting bounce after Prime Minister Theresa May won another crucial Brexit vote in parliament.

The Bank of England holds a policy meeting later in the session but not a single analyst polled by Reuters expects a rate hike, and some are getting cold feet about a rise in August given recent soft economic data.

While the European Central Bank has signalled an end to bond buying it also pledged to keep rates low past next summer, while the Bank of Japan shows no sign of winding back its stimulus.

“It feels like the yellow warning lights are flashing for the global economic system,” noted analysts at Citi. “However, with the ECB and BoJ still pumping in liquidity and keeping rates lower for longer, the chances of a systemic event are low.”

Ahead of Friday’s meeting of oil producers in Vienna, Saudi Arabia is trying to convince fellow OPEC members of the need to raise oil output, according to sources familiar with the talks. Iran on Thursday signalled it could be won over to a small rise in output, potentially paving the way for a deal.

Brent crude futures were down 43 cents at $74.31 a barrel, while U.S. crude was down 23 cents at $65.48.

Reporting by Wayne Cole

Dollar hits fresh 11-month peak as rate divergence bets weigh on euro

LONDON (Reuters) - The dollar rose to a fresh 11-month high and the euro sagged towards its 2018 lows on Thursday as investors increased their bets on a prolonged period of monetary policy divergence between the U.S. and European central banks.

Concerns over an escalation in a U.S.-China trade conflict, underlined by comments from top central bankers on Wednesday, have also boosted the dollar as traders reckon a more serious dispute would be inflationary for the U.S. economy, forcing the Federal Reserve to tighten rates further.

“We are really seeing divergence in monetary policy in the euro zone and the U.S. for many months to come,” said Esther Reichelt, a currencies analyst at Commerzbank in Frankfurt.

“This general sentiment has not been fully priced into the market.”

The dollar index .DXY against a group of six major currencies rose 0.3 percent to 95.406, its highest since mid-July 2017.

Buoying the greenback, long-term Treasury yields also bounced back from three-week lows. Those yields were propped up by remarks from Fed Chairman Jerome Powell, who said on Wednesday that the U.S. central bank should continue with a gradual pace of rate increases.

The euro fell 0.2 percent to $1.1548 EUR=, close to its 11-month weak point of $1.1531 hit last week.

The dollar rose 0.2 percent to 110.6 yen JPY=, moving further ahead from a one-week low of 109.55 struck on Tuesday.

Elsewhere the pound GBP= hit a new 7-month low ahead of the Bank of England policy meeting, at which the central bank is expected to keep rates on hold.

The Swiss National Bank kept its negative interest rate on hold on Thursday, as expected, and the franc was unmoved EURCHF=. Norway’s central bank will also give its policy decision later on Thursday.

The New Zealand dollar retreated to a six-month low of $0.6838 NZD=D3 after domestic data that showed slowing first quarter economic growth boosted expectations that the central bank would keep interest rates low.

The Mexican peso climbed more than 0.8 percent overnight, helped by expectations that the country's central bank will raise interest rates on Thursday. It later gave up some of those gains.

The peso has extended a rebound from 1-1/2-year low it hit last week when it was dented by a broad dollar rally, a deadlock in talks around the NAFTA free trade deal and nervousness ahead of Mexico’s July 1 presidential election.

In contrast, Brazil’s real was flat despite the country’s central bank refraining from tightening monetary policy again on Wednesday.

The real has lost 5 percent this month and brushed its lowest level since March 2016.

The tariff feud between China and the United States has added to woes for emerging markets, already under pressure due to steadily rising U.S. interest rates.

“The decline by emerging market currencies and stocks has been a key risk-off theme over the past few weeks, only offset by positive effects U.S. tax cuts are having on the global economy,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

Additional reporting by Tommy Wilkes and Shinichi Saoshiro

Wednesday, 20 June 2018

FTSE rebounds as trade worries ease, pound weakens further

MILAN (Reuters) - The UK’s top share index rose on Wednesday in a broad-based rebound in Europe as immediate worries over the impact of a trade spat between the U.S. and China eased, although Berkeley (BKGH.L) slumped after warning of a profit fall this year.

The FTSE 100 was up 1 percent at 7,681 by 0815 GMT following three straight session of losses, as the pound weakened on continued worries over Brexit talks, while the domestically focused FTSE 250 .FTMC gained 0.8 percent.

“Calls for a positive start come after a turnaround in sentiment in Asia overnight thanks to investors calming their fears about the current US-China trade tariff dispute,” said Mike van Dulken and Artjom Hatsaturjants at Accendo Markets.

In Asia, equity markets bounced as bargain hunters stepped in and shares in China rose on indications of government support. In Europe, the STOXX 600 regional benchmark was up 0.6 percent.

Materials stocks were the biggest boost, adding 15 points to the FTSE, as copper prices rebounded from a three-week low. Shares in Glencore, Rio Tinto and BHP Billiton rose between 1.5 and 2.7 percent.

The export-oriented index was also supported by gains in big international companies, which in turn found support in a weaker pound. Among them, Imperial Brands rose 3 percent, helped by an upbeat broker note.

Sterling slid to a fresh seven-month low against the dollar as concerns over the latest round of Brexit negotiations sapped demand for the British currency before a central bank meeting on Thursday.

Berkeley fell 4.3 percent after the London-focused house-builder said pre-tax profits would fall 30 percent this year following a better-than-expected “peak” performance in 2017/18.

“We remain impressed by the resilience of Berkeley’s profits in spite of a slower London market. However, we do take the guidance of fading returns seriously and therefore see the shares close fair value,” Liberum analyst Charlie Campbell said.

Ocado was the biggest FTSE gainer, up 5.4 percent, underpinned by a price target upgrade from Peel Hunt which said the online grocer had potential to become a “standard” platform for retail logistics across all sectors.

Reporting by Danilo Masoni

EU to hit U.S. imports from Friday in response to Trump tariffs

BRUSSELS (Reuters) - The European Union will start charging import duties of 25 percent on a range of U.S. products from Friday after Washington imposed tariffs on EU steel and aluminum at the start of June, the European Commission said on Wednesday.

The Commission formally adopted a law putting in place the duties on 2.8 billion euros ($3.2 billion) worth of U.S. goods, including bourbon and motorbikes.

LONDON (Reuters) - The Aussie dollar takes a thumping, soybean prices swing and German carmaker shares are stuck in reverse.

Financial markets have been roiled by fears of an all-out trade war between the United States and China, prompting investors to dump assets at risk from rising tariffs and seek safety in havens such as Japan’s yen and U.S. Treasury bonds.

U.S. President Donald Trump’s promised this week to slap tariffs on $200 billion of Chinese goods, drawing swift threats of retaliation from China.

Below are some of the currencies, stocks and commodities seen most vulnerable to an escalating trade conflict:

Countries with open economies reliant on global trade are most at risk when disputes over international commerce hit.

The Australian dollar ticks those boxes. Australia counts China as its biggest trading partner and its currency is heavily correlated to global growth. Many investors see the currency, known as the Aussie, as a better global trade bellwether than the Canadian dollar, which has been buffeted by negotiations over NAFTA, the North American trade pact.

This week, the Aussie fell to its lowest level in 13 months, and the positioning of options signal more weakness ahead.

Another candidate is Sweden's crown, given the Nordic nation's open economy and big exporting industries. The currency has weakened about 2.5 percent in the last three days to a six-week low against the euro.

“Currencies which are heavily exposed to global growth are going to feel the pressure from any escalation in the trade dispute,” said James Binny, global head of currency at State Street Global Advisors based in London.

Asian currencies such as the Korean won as well as the Singapore and Hong Kong dollars have also weakened this week for similar reasons.

Bank of America Merrill Lynch’s European fund manager survey in June found a record drop in allocations to auto stocks, indicating that investors are jittery about the sector due to Trump’s threat of imposing U.S. tariffs on German carmakers.

European automakers send around $50 billion worth of cars to the United States each year. BMW is the most exposed with up to one fifth of its global sales heading to the U.S. market.

Retaliatory Chinese tariffs on U.S. cars would also hurt European firms as many export to China from their U.S. plants.

As a result, shares in Volkswagen, BMW and Daimler have fallen sharply, taking Europe’s autos index to a seven-month low.

Boeing is the single largest U.S. exporter to China, and its shares, along with those of its European counterpart, have fluctuated as trade tensions have risen.

Europe-based manufacturers that import steel for U.S. factories may also become entangled in the conflict.

There could be some winners, if European manufacturers such as ABB and Siemens win market share in China at the expense of U.S. rivals such as Honeywell.

But higher trade barriers are likely to hurt most economies, leaving even the winners with a smaller market to work with.

China buys about a third of its soybeans from the United States so Beijing’s move to slap 25 percent duties on U.S. soybean imports has made the commodity a key battlefield.

It will raise the cost of soymeal, which is used in China to feed pigs and poultry. China’s most active soymeal futures DSMcv1 rose 4.2 percent on Tuesday.

Soybean prices tend to be affected more by weather than economic factors, but tit-for-tat tariffs might shift trade flows. U.S. CBOT soy futures Sv1 have tumbled to multi-year lows as U.S. suppliers may now lose a chunk of China’s market to Latin American rivals.

Finally, prices for copper CMCU3, a metal widely used in the construction and power industries, have fallen to their lowest since May 31. Copper prices can be expected to tumble further if world growth slides.

Reporting by Saikat Chatterjee, Helen Reid, Danilo Masoni, Pratima Desai, Nigel Hunt and Tommy Wilkes Philip Blenkinsop

Dollar perched at 11-month highs as trade concerns weigh

LONDON (Reuters) - The dollar hit a 11-month high against a basket of its rivals on Wednesday as an escalating trade conflict kept investors from buying higher-yielding currencies and markets braced for growing volatility.

Currency markets had breathed a sigh of relief after Beijing signalled its tolerance of a stronger currency by fixing a stronger daily midpoint than expected. Safe-haven currencies such as the Swiss franc and the Japanese yen were still well-supported, though.

On Wednesday, the dollar edged 0.1 percent higher against a basket of its rivals at 95.30, its highest since mid-July 2017.

“Market volatility remains very low and the headline risks from trade concerns should push that higher,” said Hans Redeker, global head of currency strategy at Morgan Stanley in London.

Led by the U.S. Federal Reserve, global central banks are pulling back from their financial-crisis policies, and market expectations are for volatility to pick up.

Morgan Stanley estimates that FX volatility remains one standard deviation below its long-term average. U.S. bond market volatility was more than 1.5 standard deviations below its long- term average.

A gauge of perceived equity market swings rose to a two-week high of 14.64 vol on Tuesday before pulling back.

The euro slipped a quarter of a percent, with traders wary of pushing it higher before some large option expiries this week. In addition, European Central Bank policymaker Ewald Nowotny said on Wednesday the euro weakness was caused by the growing interest rate differential between the United State and Europe.

Roughly $2 billion of currency options on the euro/dollar are set to expire this week between $1.1550 and $1.1500, dampening any large moves in the cash markets.

Emerging currencies won some reprieve, with the Mexican peso stronger on the day along with the Taiwan dollar and the South African rand

The Australian dollar, considered sensitive to shifts in sentiment towards China, fell to a 13-month low of $0.7347 on Tuesday before pulling back slightly to $0.7391.

The Swiss franc slipped 0.1 percent to 0.9953 franc per dollar, handing back the previous day’s gains.

Before Thursday’s Bank of England policy decision, the pound struggled near a seven-month low of $1.3151.

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Before market opening on Wednesday, the People’s Bank of China lowered the midpoint rate by 0.54 percent to 6.4586 per dollar. Traders said the daily fixing was far stronger than their models suggested, an attempt to stabilise sentiment and prevent the yuan from sinking further.

Markets also turned their focus to Sintra in Portugal, where U.S. Federal Reserve Chair Jerome Powell, European Central Bank President Mario Draghi, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of Australia Governor Philip Lowe are all scheduled to speak at a conference on Wednesday.

Reporting by Saikat Chatterjee

Tuesday, 19 June 2018

Sterling falls to seven-month lows on trade, Brexit concerns

LONDON (Reuters) - Sterling fell to a fresh 2018 low on Tuesday, as concerns about an escalation in the trade dispute between the world’s two biggest economies weighed on risk sentiment.

With all eyes focused on the Bank of England’s policy decision on Thursday, in which it is expected to unveil its monetary policy stance for the rest of the year after a run of mixed data, investors cut bets on the British currency

In early London trading, sterling edged 0.3 percent lower at $1.3204, its lowest since late November.

Perceived safe havens such as the Japanese yen and the Swiss franc got a boost against the dollar, though the greenback was broadly stronger against a basket of currencies after U.S. President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, ratcheting up a trade dispute with Beijing.

Commerzbank strategists said if the trade dispute were to escalate further, the dollar would be the ultimate beneficiary because costlier imports would push inflationary pressures higher, forcing the U.S. Federal Reserve to raise interest rates quicker than expected.

Latest Brexit headlines offered no support.

Prime Minister Theresa May’s Brexit plans were rejected by parliament’s upper chamber on Monday, setting up a confrontation with pro-EU lawmakers later this week which will test her ability to lead a minority government.

LONDON (Reuters) - The Bank of England will be looking to see if Britain’s economy has recovered from a severe winter chill as it weighs the prospects for a future interest rate rise this week.

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Patchy growth as the economy prepares to leave the European Union in March next year places BoE policy in sharp contrast to the United States, where the Federal Reserve plans to raise rates four times in 2018, and three times in 2019.

“The Monetary Policy Committee will be wary of providing any firm guidance over the likely timing of the next hike as it won’t want to tie its hands,” BNP Paribas economist Luigi Speranza said on Monday.

Goldman Sachs currency strategists said sterling - which is already near a 2018 low - continued to price in too high a chance of an August move.

BoE Governor Mark Carney has said first-quarter weakness looks temporary and expects to rates to rise gradually over the next couple of years, to prevent overheating at a time of above-target inflation and the lowest unemployment since 1975.

But he has been much vaguer about precise timing. A putative May rate rise was thrown off course by an unusually harsh winter - and a possible underlying slowdown - that led to the economy almost stagnating from January to March.

A record proportion of the public in a BoE survey last month had no idea what would happen to rates over the coming year - perhaps reflecting Brexit uncertainty as well as BoE indecision.

Trade concerns exist outside Britain too. The Bundesbank sharply cut its growth forecast for Germany on Friday, partly due to worries that U.S. President Donald Trump may spark a trade war with his tariffs on European and Japanese steel.

If it wishes, the BoE will have ample chance to bring clarity on Thursday, when the MPC will publish a statement at 1100 GMT and Carney is due to give a major speech at 2015 GMT.

But many economists expect the central bank to keep hedging its bets. Since its last meeting, inflation has fallen to a one-year low of 2.4 percent and April industrial output and construction data were strikingly weak.

However, business surveys for May have perked up, pointing to second-quarter growth of 0.3-0.4 percent, according to IHS Markit, a financial data company. This is just about in line with the maximum rate the BoE thinks the economy can sustain without causing too much inflation.

Wage growth has been solid if unspectacular, and May retail sales were strong, reflecting sunny weather, a royal wedding and a partial easing of the inflation pressure that has squeezed British consumer demand since June 2016’s Brexit vote.

Two BoE policymakers - Ian McCafferty, whose term ends in August, and Michael Saunders - are expected to stick with their view, held since March, that rates need to go up now.

The rest of the MPC are likely to conclude that there is little cost in waiting until at least August before deciding whether to raise rates, economists say.

Even then, it could find further reason to delay. A change to the Office for National Statistics’ publication schedule means second-quarter GDP data will not be released until after the BoE’s August rate meeting.

“August would be too much of a gamble and (we) see November as the next best opportunity for a hike, assuming data strengthens more than we expect and that Brexit remains free of major disruption,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said.

Reporting by David Milliken and Saikat Chatterjee