Monday, 15 October 2018

Yen gains as geopolitical tension weighs on currency markets

LONDON (Reuters) - The yen hit a one-month high and the Swiss franc gained on Monday as rising geopolitical tension and investor anxiety about the global economy left investors skittish at the start of the week.

Equity markets fell on worries the ongoing Sino-U.S. trade dispute is hitting China’s economy, while Saudi Arabian shares tumbled on rising tensions between Riyadh and the West after the monarchy warned against trying to punish it over disappearance of a journalist.

German Chancellor Angela Merkel’s Bavarian allies suffered their worst election result since 1950 on Sunday, in a setback that raised tensions within the country’s crisis-prone national government.

“I don’t think it’s a huge political risk, but it does tell you that political risks in Europe are not going away,” said Alvin Tan, a currencies analyst at Societe Generale.

Tan said the yen and franc, both considered safe-haven currencies that attract investors when markets are in flux, had benefited as equity markets dropped, although the moves were not huge.

The yen rose as much as half a percent to 111.69, its strongest since Sept. 18. The franc also rose versus both the euro and dollar, but the gains were limited.

The Australian dollar, often seen as a barometer of global risk sentiment, shrugged off the mood and rose 0.2 percent to $0.7128 against the dollar, suggesting investors were far from panicked. The Aussie had hit a two-year low of 0.7039 on Oct. 5.

The euro nudged higher to $1.1571 against the dollar, while the dollar traded flat against a basket of currencies.

Analysts said the euro’s fortunes would be determined in part by the Italian government’s annual budget, which the cabinet is due to approve later on Monday.

Analysts expect the yen to strengthen as a downturn in equities catalyses safe-haven demand for the yen.

“Our bias is that equities will remain under pressure this week, and thus see scope for USD/JPY to ease somewhat further towards the 110 level,” a research note from Mizuho Bank said.

U.S. Treasury Secretary Steven Mnuchin said on Saturday that Washington wants to include a provision to deter currency manipulation in future trade deals, including with Japan, based on the currency chapter in the new deal to revamp the North American Free Trade Agreement.

Japanese media ran front-page stories questioning whether that would give Washington the right to label as currency manipulation any future foreign-exchange market interventions by Tokyo to curb sharp yen rises.

Sterling dropped 0.2 percent $1.3121 after warnings that Brexit talks appear to have hit an impasse. The pound also fell 0.4 percent against the euro to 88.190 pence.

Reference: Tommy Wilkes

FTSE relatively stable as Brexit impasse has mixed impact

MILAN (Reuters) - Britain’s top share index was steady on Monday as a deadlock in Brexit talks depressed domestic stocks but helped internationally focussed companies as it weakened the pound.

The FTSE 100 .FTSE was down 0.1 percent by 0813 GMT, while the domestically focussed midcap index .FTMC fell 0.7 percent, further hit by warnings from ConvaTec and Superdry.

The FTSE outperformed the pan-European STOXX 600 index , which declined 0.4 percent.

“Thanks to the situation with sterling, the FTSE ended up being one of the better performers,” said Connor Campbell, analyst at

The stubborn problem of Britain’s land border with Ireland thwarted a drive to clinch a Brexit deal before a European Union summit this week, as negotiators admitted defeat after marathon talks and pressed pause for the coming days.

“Any delay or disagreement only heightens the chances of a no-deal Brexit, hence the pound’s red headache,” added Campbell.

Shares in big international firms such as British American Tobacco (BATS.L), Shire (SHP.L) and Unilever (ULVR.L), as well as oil majors, which tracked rising crude prices, provided the biggest boost to the FTSE.

Shares in precious metal miners Randgold Resources and Fresnillo also rose, up 3.6 and 2.1 percent respectively, as gold prices hit a near 12-week high.

Among companies with bigger exposure to the domestic economy, banks Lloyds (LLOY.L) and Royal Bank of Scotland (RBS.L) fell 1.2 and 0.7 percent respectively, while house builders Derwent (DLN.L) and Persimmon (PSN.L) dropped by around 1 percent.

Analysts expect a no-deal scenario to lead to a significant downward revision to Britain’s economic growth, with sterling likely to fall further under such a scenario.

Among mid-caps, ConvaTec plunged 27 percent after the medical devices maker lowered its expectations for revenues and margins, citing a change in inventory policy by its largest customer in its Infusion Devices business.

Fashion group Superdry warned 2018-19 profit could be as much as 17 percent below current expectations, blaming a hit to sales from unseasonably hot weather and rising foreign exchange costs. Its shares tumbled 17.7 percent.

Reporting by Danilo Masoni

Friday, 12 October 2018

Sterling slips before EU summit next week

LONDON (Reuters) - Sterling edged lower on Friday as investors booked profits after a rally, though the British currency is poised for a second consecutive week of gains on growing optimism about a Brexit deal at a European Union Summit next week.

Underscoring the British pound’s gains has been favourable comments from EU Brexit negotiator Michel Barnier earlier this week that an agreement with Britain could be “within reach” next week.

Negotiators from both sides have been locked in talks this week to overcome differences on the biggest outstanding hurdle to a deal - how to keep the UK frontier with the Irish republic free of border checks after Britain leaves the EU in March.

ING strategists advised caution on adding long bets on the British currency around current levels, because domestic politics might prove to be a major headwind.

The British currency slipped 0.2 percent lower but is down 0.4 percent from the day’s highs at $1.3207. Against the euro, it was broadly steady at 87.60 pence.

While long positions in sterling has increased in the last two weeks, overall bets remain near their lowest since May 2017, according to latest positioning data.

Brexit negotiations have changed pace and have become more positive over the past week, though there are still some big differences to resolve, British finance minister Philip Hammond said.

LONDON (Reuters) - The dollar crept up on Friday, reflecting investor confidence in the U.S. economy, despite criticism by President Donald Trump of the Federal Reserve and a sell-off in U.S. equities.

The decline in stocks has yet to spread into foreign exchange markets, with emerging market currencies still appreciating and the safe-haven Japanese yen and Swiss franc not budging significantly.

Concern about a trade war between the United States and China and expectations interest rates will rise further in coming months have underpinned the dollar’s 2.5 percent rise since July.

But a drop in U.S. Treasury bond yields and weaker-than-forecast rise in U.S. consumer prices saw the dollar shed half a percent on Thursday as traders cut their bets on Federal Reserve rate hikes.

Hedge fund have staked out their longest dollar positions since the end of 2016 and markets are focused on any tweak in data that could alter the Fed’s thinking.

The dollar index, a gauge of its value against six major currencies, traded flat at 95 on Friday, down from its monthly high of 96.15 on Tuesday.

“We doubt the dollar will derive much further cyclical support through the remainder of the year. Political uncertainty could also undermine the dollar ahead of the mid-term elections on 6 November,” said Derek Halpenny, European head of Global Markets Research at MUFG.

“The longer-term negative structural implications of the growing U.S. twin deficits will increasingly weigh on U.S. dollar sentiment,” he added.

Other analysts see few signs the dollar will fall further. Fed officials said last month they expected three rate hikes in 2019.

“If the equity markets were to calm down again quickly without developments spreading to other asset markets, there is no reason in our mind why the Fed should not continue its rate hikes as planned,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

“The dollar will be able to maintain its current strong levels for now but further appreciation potential is limited,” she said.

Reporting by Saikat Chatterjee and Tom Finn

Dollar at October lows as weak Wall Street sours sentiment, euro firms

(Reuters) - The U.S. dollar traded at its lowest level this month against its major peers on Friday as declining U.S. treasury yields and further losses on Wall Street soured sentiment.

The dollar index, a gauge of its value against six major currencies, traded at 95 on Friday, down from its monthly high of 96.15 hit on Tuesday.

The Dow Jones Industrial Average closed at a two-month low of 25,052 on Thursday, down 2.13 percent, while the S&P 500 ended 2.05 percent lower. The Dow has lost around 7 percent from an all-time high of 26,951 hit on Oct. 3.

A weaker-than-forecast rise in U.S. consumer prices undermined the dollar as traders cut back their wagers on the U.S. Federal Reserve stepping up the pace of its planned rate hikes.

Fed officials said last month they expected three rate hikes in 2019, and some have said they are open to a rate increase in December, which would be the fourth this year.The benchmark 10-year Treasury yield fell to 3.1705 percent on Friday, after hitting a seven-year peak of 3.261 percent on Tuesday.

The euro was the primary beneficiary of broad-based dollar weakness on Friday, hitting a fresh weekly high at 1.1611 on the back of dollar selling and a positive tone in minutes of the last European Central Bank (ECB) meeting.

The minutes suggested the ECB was on track to normalise its ultra-loose monetary policy this year despite concerns about slowing growth in Europe.

“We’ve heard quite a bit of comment from euro zone policymakers recently about rising inflation including from (ECB) President Draghi and the message is consistent, which is that price pressures are growing,” said Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.

“Part of this is due to the higher oil prices but the weaker euro also boosts inflation,” she added, noting there could be more dollar/euro short covering with multiple moving average resistance points between 1.1.1580-1.1630.The Japanese yen, which is a preferred currency in times of market turbulence, traded at 112.34 on Friday. It had strengthened to 111.83 versus the dollar on Thursday, its highest since Sept. 18.

Singapore’s central bank tightened monetary policy for the second time this year on Friday. The Singapore dollar changed hands at 1.3739.The Australian dollar was at $0.7122, recovering from a two-year low of $0.7039 hit on Monday. The rally was aided by promising news out of China, its biggest trade partner.

“Commodity prices suggest the Australian dollar should push higher and there are calls in Chinese media for fiscal stimulus to support growth as Chinese exporters struggle with U.S. tariffs,” said Sean Callow, senior currency strategist at Westpac in a research note.

The Canadian dollar changed hands at 1.3024.

The U.S. dollar has gained almost 1 percent versus the loonie in October.

The New Zealand dollar traded relatively unchanged at 0.6518 on Friday.

Gold traded at $1,220 per ounce on Friday, down 0.22 percent. It staged a 2 percent rally on Thursday in the face of dollar weakness and global financial uncertainty.
(This version of the story corrects euro’s high to 1.1611, not 1.6009.)

Reporting by Vatsal Srivastava

Opaque markets get a little clearer after EU rule change

LONDON (Reuters) - Ten months after new European Union rules designed to boost market transparency kicked in, the initiative appears to be working, having fuelled a dramatic jump in electronic trading across some of the financial world’s most opaque markets.

Long stuck in a time warp, with most deals conducted over the phone and shrouded in secrecy, exchange-based trading has surged in the EU for such instruments as credit and interest rate derivatives.

The catalyst is MiFID II, or the Markets in Financial Instruments Directive II, which requires all interactions between trading counterparties to be captured, stored, and often even disclosed to markets.

The aim, a decade after the global financial meltdown, is to provide regulators with better access to price and liquidity data in order to gauge risks in the system.

Crucially, certain trade details were exempted from the rules and others were allowed to be given on a delayed basis, addressing concern that real-time disclosures of trades could hurt a trader’s competitive edge.

Data from bond-trading platform Tradeweb Markets LLC — majority owned by Thomson Reuters and banks including Barclays, HSBC and Citibank — shows sharp increases in average daily turnover executed by European clients.

In the year to the end of August, trading in cash European government debt and corporate debt rose 31 percent compared with the same period last year on the platform.

Bigger increases came in interest rate derivatives and credit derivatives, where volumes tripled and doubled respectively, Tradeweb said. Exact volumes were not available.

“The overarching goal of (MiFID II) is to ensure more trading is done electronically than on the phone as that makes markets more transparent and surveillance easier,” said Christian Voight, a senior regulatory adviser at British software firm Fidessa .

As a result, exchanges are benefiting, with U.S. operator CME Group (CME.O) enjoying a 13 percent increase in FX trades and an 18 percent rise in rates trades so far this year.

Companies such as Thomson Reuters (TRI.TO) and NEX Group (NXGN.L) all reported record trading volumes this year; Thomson Reuters in February cited MiFID 2 in the growth in activity on its FX platforms.

While banks have also set up their own platforms to capture trading volumes, e-platforms are often perceived as more impartial.

The European Securities and Markets Authority (ESMA) and Britain’s Financial Conduct Authority declined to comment on their assessment of the success of MiFID in moving more trades on to exchanges.

What is clear, though, is that there remains scope for a lot more e-trading.

In derivative markets, for instance, 60 to 80 percent of swaps and options now trade electronically, well below cash foreign exchange, where over 90 percent of total volumes go through electronic platforms.

In fixed income, U.S. Treasuries are the most electronically traded, at more than 90 percent, and U.S. corporate debt trades electronically 60 percent of the time. The e-trading market share is lower in Europe.

However, that is changing, with the threshold to work a trade by phone moving higher and often determined by its size, complexity and how fast it needs to be completed.

“Whatever could be automated is being automated,” the head of fixed income and foreign exchange trading at a leading European asset manager said.

One other incentive to use exchanges and other platforms is that they record full details of the deal, as required by MiFID to ensure investors get so-called “best execution”, which includes comparing prices across a number of brokers.

“For certain types of trading, doing it on a system that logs all the prices that came in and you’re able to put several dealers in competition, that fulfils the need,” said Samik Chandarana, head of data analytics and machine learning at JPMorgan.

There is oversight, however, with traders employing kill switches that enable them to take control over the algorithms when markets turn more volatile or if the order is above a particular size.

Peter Harrison, CEO at Schroders (SDR.L), said the three broad technology growth areas remain better data insights to help make better trading decisions, using robotics at the back end to reduce costs and greater application of artificial intelligence.

“We are seeing this as a technology business, as there is a awful lot of help a machine can give you,” Harrison said.

Reporting by Simon Jessop and Saikat Chatterjee

Thursday, 11 October 2018

Rattled Wall Street stock investors fret about a correction

(Reuters) - The deepest one-day selloff in Wall Street stocks in eight months has investors using the market equivalent of a dirty word: “correction”.

With traders spooked by rising U.S. Treasury yields and fears of a deepening U.S.-China trade conflict, the benchmark S&P 500 index .SPX on Wednesday dropped 3.29 percent, its worst one-day decline since February, bringing its loss to almost 5.0 percent since closing at a record high on Sept 20.

Many investors define a stock market correction as a fall of at least 10 percent from a high, often as a reaction to excessive gains.

“It’s probably the beginning of the correction,” said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in New York.

“It’s going to come down to earnings. The big concern isn’t really what third-quarter earnings numbers are, but really what the outlook for the fourth quarter and first quarters are.”

Fears of a potential correction became more acute as the S&P 500 technology index plummeted 4.77 percent, the deepest one-session decline since 2011 for the sector behind much of the market’s gains in recent years.

U.S. President Trump blamed the Federal Reserve, which he said has gone “crazy” raising interest rates.

“Actually it’s a correction that we’ve been waiting for for a long time, but I really disagree with what the Fed is doing,” Trump told reporters before a political rally in Pennsylvania.

Investors are worried about how aggressively the Fed will raise interest rates, and some are skeptical about whether the central bank will support markets the way it was seen to have done under previous Fed chairs.

A stock market downturn hitting voters’ retirement savings would be inopportune for Trump and the Republican party ahead of U.S. midterm elections on November 6.

The S&P 500 index fell 10 percent in early February from a high the previous month, raising fears that a decade-old bull market was ending.

However, fueled by the deep corporate tax cuts passed by the Trump administration last year and an expanding economy, Wall Street deftly recovered. It racked up a 2018 gain of nearly 10 percent in late September, until soaring 10-year U.S. Treasury bond yields and trade policy related worries sent investors fleeing for safety.

“When interest rates go up it can throw a cold towel on an overheating economy, and that’s what it looks like is happening now,” said Sandy Villere, a portfolio manager at Villere & Co in New Orleans.

U.S. stocks are widely considered to be in the longest ever bull market, which started in March 2009, when investors grappled with the global financial crisis that had vaporized over half of the U.S. stock market’s value.

Since then, the S&P500 index has more than quadrupled, and many investors have been debating when, not if, the run-up in stock prices would end.

“The market has been on a 10-year bull run and we have seldom seen a 10 percent correction during that time. Every time we get around that number, markets come rallying back. What’s different now is that the 10-year bond yield is much higher. I think we’re getting an overdue correction in the market,” said Trip Miller, managing partner at Gullane Capital Partners in Memphis.

Whether the S&P 500 index slides into a prolonged downturn may hinge on what companies say about their outlooks when they report their quarterly results in coming weeks.

Analysts expect aggregate S&P 500 earnings per share to surge 21 percent, year over year, in the September quarter and 20 percent in the December quarter, according to data from Refinitiv.

But in 2019, deep corporate tax cuts that started in 2018 will be a year old, and companies are unlikely to repeat the same strong earnings growth they saw this year. Earnings repatriated from abroad this year as part of the tax overhaul may lead to fewer big increases in stock buybacks next year.

Executives on quarterly earnings call will also provide details about how they expect Trump’s trade conflict with China to affect their businesses.

September consumer price data due on Thursday might fuel worries that the Fed may raise interest rates more aggressively than previously thought.

“The market is digesting the potential that rates moving upwards eventually seep into the real economy in the form of mortgage rates, auto rates, student lending rates,” said Mona Mahajan, U.S. investment strategist at Allianz Global Investors in New York. “What we’re seeing here is the market positioning for potential lower growth going forward.”

Reporting by Noel Randewich

Dollar extends losses as stock selloff widens; U.S. data awaited

LONDON (Reuters) - The dollar extended losses and hit its lowest levels in nearly two weeks on Thursday following an overnight drop in U.S. Treasury yields, with investors focused on monthly inflation data to gauge whether the selloff has more room to run.

While concerns of a widening trade war between the United States and its rivals have affected the U.S. currency in the second quarter of the year, growing expectations of more interest rate increases in the coming months have played a leading role in the dollar’s 2.5 percent rise since July.

But the overnight drop in U.S. Treasury bond yields pushed the greenback lower, with the dollar index falling 0.4 percent to hit its lowest levels since Oct. 1.

“It is a bit too early to say whether the dollar’s rise is coming to an end as it may rally further if yields on ten-year U.S. Treasuries break above the 3.25 percent levels,” said Thomas Flury, head of currency strategy at UBS Global Wealth Management’s Chief Investment Office in Zurich.

With long dollar positions at their biggest since end-2016 among hedge funds, markets have become focused on any slight tweak in likely policy settings from the U.S. Federal Reserve and any data that might change the central bank’s thinking.

U.S. inflation data for September is due later in the day with market expectations of a 0.2 percent rise on a monthly basis. A stronger rate might push 10-year yields higher.

“The dollar’s weakness may be due to some unwinding of very long positions ...after the overnight drop in U.S. yields but these are very volatile markets,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Risk appetite remained broadly robust in currencies, with the Aussie AUD=D3 and kiwi NZD=D3 dollars rallying by half a percent each against the greenback.

As investors selectively took shelter in safe-haven assets, the MSCI index of global stocks hit its lowest levels since early February while gauges of market volatility jumped.

Yields on 10-year U.S. Treasury debt ticked four basis points lower to 3.18 percent though similar gauges in currency markets such as the Japanese yen JPY= and the Swiss franc CHF= were broadly steady.

The Swedish crown rallied 1 percent against the euro after robust house price and general inflation data.

The euro edged half a percent higher to $1.1577 on the broad dollar weakness, though widening yield spreads between Italian and safe-haven German debt capped gains.

Reporting by Saikat Chatterjee