Tuesday, 25 September 2018

Dollar rises before Fed; trade woes check risk appetite

TOKYO (Reuters) - The dollar carved out small gains against the euro and yen on Tuesday as investors looked to policy clues from the U.S. Federal Reserve, which is widely expected to hike rates this week, and as the Sino-U.S. trade dispute kept markets cautious.

The euro edged lower, having hit a 3-1/2-month high in the previous session after European Central Bank chief Mario Draghi expressed confidence in eurozone inflation and wages growth.

Global markets have been sideswiped over the past few months as the intensifying trade row between China and the United States stoked uncertainty about the outlook for global growth and broader monetary policy for some developed and emerging market economies.

On Monday, the United States and China imposed a new round of tariffs on each other’s goods with no sign either side is willing to back down.

The Fed begins its two-day policy meeting later on Tuesday at which it is expected to raise interest rates for the eighth time since late 2015. Markets are also betting on another rate hike before year-end, though the outlook for 2019 is less clear.

“The dollar remains the absolute go to currency when there is any question about risk or stability or any of these geopolitical situations,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank.

“If we have negative news out of the Brexit talks, that’s going to be a huge push for the dollar...If we get some sort of more-than-expected hawkish sentiment out of (the Fed), that should be another push for the dollar,” Wakabayashi said.

The dollar index, which measures the greenback against a basket of six major currencies, was 0.15 percent higher at 94.323.

Against the Japanese yen, the dollar gave up some of its gains after the release of minutes from the July policy meeting by the Japanese central bank.

The minutes showed a few of the Bank of Japan’s board members said the central bank must consider more seriously the potential dangers of ultra-easy policy, such as the negative impact on the country’s banking system.

The greenback edged 0.05 percent higher to 112.86 yen, after briefly reaching as high as 112.96 yen, its highest level since touching 113.18 yen on July 19, in early trade.

The Australian dollar, a proxy of China-related trades and a gauge of broad risk appetite, shed 0.2 percent to $0.7240, extending losses from the previous two sessions.

Speculators have ramped up bets that interest rate differentials between the United States and other major economies, including Japan and Australia, will increase.

For example, net long positions for the dollar have grown to nearly $25 billion according to CFTC data.

The euro was slightly lower at $1.1749 after surging to $1.1815 the previous day, its highest level since June 14, before giving up most of its gains during U.S. trade overnight.

The common currency rose after ECB’s Draghi on Monday described an acceleration in underlying inflation in the euro zone as “relatively vigorous” and expressed confidence that a pick-up in wage growth would continue.

But Draghi reaffirmed the ECB’s pledge to keep rates at their current, rock-bottom level “through the summer” of next year, effectively rebuffing calls from some policymakers to tighten policy more quickly.

“The sentiment of euro area corporates is not as buoyant as before, so I think it’s not the timing for the ECB to be more hawkish,” Yamamoto said.

“The rise of the euro was temporary yesterday because there is an anchor for the interest rate expectation for the euro area.”

Reference: Daniel Leussink

Monday, 24 September 2018

Fed hikes give cash appeal; stocks no longer only game in town

NEW YORK (Reuters) - The U.S. Federal Reserve’s anticipated interest rate hike this week will make cash the most attractive it has been in about a decade and end the era of stocks as the only game in town.

During this bull market which in August broke the record as the longest ever, interest rates were so low that most fixed income assets other than junk bonds yielded less than the inflation rate or the dividend yield on the S&P 500. This drove yield-hungry investors to stocks, the one asset that delivered a real rate of return, or return on investment adjusted for inflation.

“One of the big influences in the market over the last decade has been that bonds as an alternative have been pretty much out of the market,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors in Chicago.

“There is historically a tug of war between stock investing and bond investing and since the financial crises the bond market has been in the tug of war with one arm tied behind its back,” he said.

That may be set to change.

The Fed ended its regime of rate suppression when it stopped expanding its balance sheet and then began raising interest rates in late 2015. Since then, bonds have slowly returned to delivering real returns relative to inflation.

With next week’s anticipated rate action, cash will join the party. A broad array of money market assets should finally regain a real return versus inflation. It will be the first time since early 2008 that money market assets will deliver a real return.

“It certainly gives cash a boost. It gives risk aversion a boost,” said Ablin.

“The regime of safe asset shortages is over. We are now in a safe asset glut regime,” Credit Suisse Group AG analyst Zoltan Pozsar, said in a recent note.

The stock market, meanwhile, is bracing for the rate hike at a time when the forward price-to-earnings(P/E) of 17.2 versus the historic average of 15. This was not a headwind three or five years ago when the competition yielded a negative real return, but that valuation now may look a bit pricey, especially with profit growth expected to moderate after this year’s extraordinary, tax-cut induced showing.

S&P 500 earnings growth should hit its peak for the cycle this year, estimated at 23.2 percent, while growth for 2019 is now estimated at just 10.2 percent, according to Thomson Reuters data.

“As long as earnings growth outpaces the interest-rate rise, stocks should be fine. If earnings growth slows in comparison to the interest-rate rise, then you’ve got an issue,” said Oliver Pursche, chief market strategist at Bruderman Asset Management in New York.

Equity mutual funds posted outflows of more than $1 billion in the week ended Sept. 19, marking the group’s 13th consecutive week of net outflows, according to Lipper data. At the same time, investors have been pouring money into ultra-short obligation funds, in a sign of increased allure of investments with shorter maturities.

The ultra-short obligation funds peer group, used to offset interest rate risk, had net inflows of $614 million in the week ended Wednesday, the 28th straight week of net inflows, Lipper data showed.

Even as cash grows more attractive, analysts do not see stocks falling out of favor soon.

“I think the euphoria around the economy and forward earnings growth is swamping this yield comparison idea that bonds are starting to look more attractive than stocks,” said David Lafferty, chief market strategist at Natixis in Boston.

“I think investors will have real choices to make in the second half of next year as (bond) yields become more attractive and the earnings outlook becomes more fragile,” he said.

Reporting by Saqib Iqbal Ahmed and April Joyner

Dollar snaps losing streak; pound bounces

LONDON (Reuters) - The dollar edged higher on Monday, snapping a two-week losing streak, as investors bought the greenback before a widely expected interest rate hike by the U.S. central bank this week while trade war concerns checked investor appetite for risk.

The dollar had struggled as trade war concerns faded and emerging market central banks led by Turkey took aggressive steps to stabilise their markets.

But the weekend brought tensions back into the spotlight and boosted the dollar after Beijing released a white paper on the trade dispute saying it would seek a reasonable outcome, while also describing U.S. tactics as “bullying”.

With the U.S. Federal Reserve set to increase interest rates by a quarter point for the eighth time since late 2015, speculators ramped up bets that interest rate differentials between the United States and other major economies, particularly Europe, will stretch wider.

“We typically see this brief window before a U.S. rate meeting when hedge funds buy the dollar and the trade war headlines are also aggravating that trend,” said Viraj Patel, an FX strategist at ING in London.

Latest positioning data confirms that trend with net speculative long positions on the greenback increasing by its biggest daily rise in more than two months.

The greenback rose 0.1 percent to 94.37 against a basket of its rivals as net long positions for the dollar swelled to $25 billion according to CFTC data.

The euro held at $1.1745, on some relief that German Chancellor Angela Merkel’s ruling coalition resolved a dispute over the country’s scandal-tainted spymaster on Sunday, ending a threat to the six-month-old government.

The pound was the biggest gainer against the dollar in early London trading with the British currency rising half a percent against the dollar above the $1.31 line after latest comments by British Brexit Secretary Dominic Raab.

Raab said on Monday that he was confident that the United Kingdom will make progress and eventually clinch a Brexit deal with the European Union.

Still, investors remained bearish on the British currency with overall short positions rising to a 4-1/2 month high of $6.5 billion, according to latest CFTC data.

Volumes were relatively thin with many Asian centres closed including Japan, China and South Korea.

Reporting by Saikat Chatterjee

Friday, 21 September 2018

Switzerland tries to stem blockchain exodus by improving access to banks

ZURICH (Reuters) - In an effort to maintain its status as a cryptocurrency hub, Switzerland has taken steps to help blockchain companies access the traditional financial system by making it easier for them to open corporate bank accounts.

Faced with an exodus of cryptocurrency projects from the country due to falling access to the banking sector, the Swiss Bankers Association (SBA) on Friday issued guidelines to banks who may want to do business with the start ups.

Around 530 blockchain startups have settled in Switzerland’s Crypto Valley hub around Zurich and Zug, Oliver Bussmann, head of the Crypto Valley Association said.

The companies need access to traditional banking services to deposit cash, pay salaries and carry out other day-to-day financing activities, but Swiss banks fear falling foul of anti-money laundering (AML) rules and other regulations.

“We believe that with these guidelines, we’ll be able to establish a basis for discussion between banks and innovative startups, making the dialogue simpler and facilitating the opening of accounts,” SBA strategic adviser Adrian Schatzmann told a news conference.

Only a handful of Switzerland’s 250 banks ever allowed companies to deposit the cash equivalent of cryptocurrencies raised in digital fundraisers known as initial coin offerings (ICOs).

Two of those withdrew their services in the last year, with Zuercher Kantonalbank (ZKB), the fourth largest Swiss bank, closing the accounts of more than 20 companies, industry sources told Reuters in July.

The banks are worried because some of the companies that carried out ICOs did not do AML checks on their contributors, meaning the banks themselves could fall foul of AML rules, the sources said.

The new guidelines spell out separate checks that the association recommends when opening accounts for blockchain firms that carry out ICOs and those that do not.

They outline recommended know-your-customer and AML checks for ICOs that raise funds in fiat currencies such as Swiss francs, euros and dollars, and those that raise funds through other cryptocurrencies.

The rules should help banks understand what assessments they should carry out, but will also help blockchain and cryptocurrency firms know what information they must provide, and what measures they must take, to qualify for an account.

“This provides more clarity not only to banks, but also to startups,” Bussmann said.

While initial discussions with the banks have been positive, according to SBA Deputy Chief Executive August Benz, it remains to be seen how they will respond to the new guidelines.

Reporting by Brenna Hughes Neghaiwi

Dollar bounces but still set for biggest weekly drop in seven months

LONDON (Reuters) - The dollar rebounded from early lows and edged higher against most of its rivals on Friday but was still on track for its biggest weekly drop in seven months as stronger equity markets and rising bond yields fuelled a rush to buy riskier assets.

With trade war concerns receding in the background and emerging market central banks led by Turkey taking measures to stabilise their currencies, investors pushed the euro to the $1.18 line for the first time in more than three months.

“This is textbook risk-on behaviour in the markets and, though it is hard to find an immediate catalyst, falling trade conflict concerns and improvement in emerging market sentiment has helped,” said John Marley, a senior currency consultant at Smart Currency Business, and FX risk-management specialist.

Premier Li Keqiang pledged on Wednesday that Beijing will not engage in competitive currency devaluation, a day after his country and Washington plunged deeper into a trade war with more tit-for-tat tariffs.

Global shares hit their highest levels in more than six months on Friday while the MSCI’s broadest index of Asia-Pacific shares outside Japan was up 1.27 percent, partly on expectations that Beijing will pump more money into its economy to weather the trade war.

The dollar index drifted 0.1 percent higher to 94.02 as investors consolidated positions before the weekend, but the greenback was set for its biggest weekly drop since February.

A sell-off in the dollar that began in the late European session on Thursday gathered steam overnight as investors ramped up bets that the U.S. Federal Reserve will be near the end of its rate-rise cycle after an expected increase next week.

Market expectations are for approximately two increases to U.S. interest next year and Russell Investments said that medium-term recession risks in the U.S. economy are now elevated, pointing to a number of indicators such as a tightening labour market.

“The weakness in the dollar is prompting investors to unwind their short bets against other currencies such as the euro, and this move may have further room to run,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

The dollar’s bounce pushed the single currency back into the red at $1.1768, taking its gains for the week to nearly 1.5 percent.

Amid a bounce in currencies such as the Turkish lira and South African rand, ravaged earlier in the month by trade friction and domestic factors, MSCI’s emerging market currency index climbed 0.4 percent to its highest since late August.

The Australian dollar, a proxy of China-related trades as well as a gauge of risk sentiment, climbed to a three-week high of $0.7297.

The pound was the only notable loser against the dollar, weakening nearly 1 percent to $1.3179 on Brexit concerns.

Reporting by Saikat Chatterjee

Cboe exchange turns to machines to police its 'fear gauge'

NEW YORK (Reuters) - Hard pressed to quash allegations that its popular “fear gauge” is being manipulated, Cboe Global Markets (CBOE.Z) is turning to artificial intelligence to help put those concerns to rest.

The exchange, which owns the lucrative volatility index the VIX .VIX, has taken several steps to confront manipulation claims that have helped drive the Cboe’s stock down about 15 percent this year, putting it on pace for its worst year ever.

In its latest effort to police trading tied to the index, the Cboe is working with FINRA, its regulatory services provider, to develop machine learning techniques to tell whether market conditions surrounding the VIX settlement are potentially anomalous, the exchange told Reuters.

“Incorporating the use of machine learning and AI (Artificial Intelligence) is a logical part of the ongoing enhancement of our overall regulatory program,” Greg Hoogasian, Cboe chief regulatory officer, said in an emailed statement.

Cboe declined to elaborate on when it began using machine learning techniques to monitor VIX settlements.

Any steps, however, may take a while to change investors’ minds on the stock.

“Any time you see controversy over manipulating markets and it involves a company, there are people who will walk away from the stock,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

“It ends up tarnishing the company and subjecting them to legal risk that is very hard to quantify,” he said.

Tuz said Chase Investment Counsel, which owned nearly 19,000 Cboe shares in mid-2017, began selling its stake early this year, shedding the last of it on May 21.

Cboe’s stock performance this year has lagged that of other major exchange operators. Shares of Nasdaq Inc (NDAQ.O) are up about 17 percent, Intercontinental Exchange Inc’s (ICE.N) is up about 10 percent and CME Group Inc (CME.O) shares have risen 18 percent.

Concerns the index was being manipulated surfaced last year after John Griffin and Amin Shams of the McCombs School of Business at the University of Texas, Austin wrote an academic paper that noted significant spikes in trading volume in S&P 500 index options right at the time of settlement.

The paper also compared the value of the VIX at settlement with its value as calculated from S&P 500 options right after the settlement, and showed the two tend to diverge.

Instances of big deviations are taken as evidence by some that unscrupulous traders have been deliberately moving the settlement price.

A stock market fall on Feb. 5 that caused the VIX to surge the most in its 25-year history brought further scrutiny to the index, and led to dozens of lawsuits and ongoing probes into the matter by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.

The regulators have yet to comment on the matter and Cboe has denied the manipulation accusations, citing liquidity problems and legitimate hedging activity as reasons for unusual moves on settlement days.

“Only a forensic analysis of those episodes can confirm or refute such a claim,” said Kambiz Kazemi, partner at Canadian investment management firm La Financière Constance.

Meanwhile, the steps Cboe has taken to address the claims of manipulation are going in the right direction, said Kazemi.

The exchange operator recently overhauled the technology behind the auctions, improved the speed with which it sends alerts about auction imbalances, and sought to increase the number of market makers that provide buy and sell quotes for the auction.

Orderly VIX settlement auctions over the last few months have helped take some of the pressure off the Chicago-based exchange operator.

“I think we all will be observing the effects of the Cboe measures in the next few months,” Kazemi said.

VIX and associated products accounted for roughly a quarter of Cboe’s 2017 earnings, analysts estimate, and the controversy around the product has spooked some stockholders.

While financial firms have been using artificial intelligence software for everything from compliance to stock-picking, a growing number of firms have started to use it for market oversight.

Given the huge amount of data involved in market surveillance, machine learning algorithms can be far more efficient than humans in rooting out potential market manipulation, said Richard Johnson, a market structure and technology consultant at Greenwich Associates.

“It’s going to be a must have,” he said.

FINRA, which already monitors Cboe’s market on the company’s behalf, confirmed it was working on machine learning to enhance surveillance of the VIX settlement auctions, but would not offer specifics.

More generally, the Wall Street watchdog is working to use artificial intelligence to catch nefarious activities more quickly, including schemes that may have previously been unknown to regulators, said Tom Gira, who oversees FINRA’s market regulation department.

He said FINRA has begun using machine learning to scan for illegal activities across stock and options exchanges and is in the process of adding a feedback loop to the software that would regularly incorporate analysts’ data and allow the machines to detect ever-changing manipulation patterns.

Reporting by John McCrank and Saqib Iqbal Ahmed

Thursday, 20 September 2018

Dollar stuck near seven-week low as trade war worries fade

LONDON (Reuters) - The dollar hovered near a seven-week low against a basket of major currencies on Thursday, its safe-haven appeal lessened by fading fears about a trade row between China and the United States.

After a knee-jerk reaction to new tariffs announced by Washington and Beijing on Tuesday, currency markets are settling down and expecting the fallout will take some time to show up in corporate earnings and not produce a sharp global shock.

The dollar, which has tended to gain as tensions escalate between the world’s two largest economies, dipped 0.2 percent to 94.410, near its seven-week low of 94.308 touched on Tuesday.

Traders also noted that U.S. macro economic data has remained strong so far despite trade disputes since early this year.

The dollar’s more risk-sensitive rivals held firmer.

Emerging-market currencies strengthened, led by the Indian rupee after China said it would not retaliate with competitive currency devaluations.

Despite its weaker tone on Wednesday, some market participants still see strength for the dollar.

“It is the champion reserve currency and it has the risk-free Fed funds rate. So the currency with the lowest risk is offering the highest yield in G10,” said Andreas Koenig global head of FX at asset manager Amundi.

“As long as this abnormality holds you can’t strategically sell the dollar.”

Investors were also awaiting next week’s Federal Reserve meeting. The U.S. central bank is expected to raise its benchmark rates and shed light on the path for future rate hikes.

Markets were closely watching a European Union summit where Prime Minister Theresa May appealed to fellow EU leaders on Wednesday to drop “unacceptable” Brexit demands that she said could rip Britain apart.

Sterling climbed 0.2 percent against the dollar, having erased most early gains after The Times reported on Wednesday that May had rejected an improved offer from the EU on the Irish border issue.

Economists expect Norway’s central bank on Thursday to deliver the first rate hike since 2011 and say the focus will be on the bank’s interest rate projections.

The Norwegian crown on Thursday approached a seven-week high versus the dollar of 8.1405 crown.

Elsewhere, the Swiss central bank is expected to leave monetary policy unchanged, with markets keeping a close eye on its assessment of the currency.

“Short term the SNB might be able to prevent franc appreciation with the help of interventions, but no doubt it would not manage to do so long term,” said Commerzbank currencies strategist Ulrich Leuchtmann.

“But the likelihood of [long-term] franc appreciation is slim because the euro zone crisis would have to boil up quite significantly for that to happen, and that seems unlikely at present,” he said.

The euro was 0.2 percent higher against the dollar at $1.17

The Australian dollar, a proxy for China-related trades as well as a barometer of broader risk sentiment, held at three-week highs, having gained 1.5 percent so far this week. It stood at $0.7268.

The yen traded at 112.23 to the dollar, staying close to a two-month low of 112.445 touched on Wednesday.

The yen has pulled back slightly this week as investors reassessed the impact of the Sino-U.S. trade war.

The New Zealand dollar jumped after data showed its economy grew at the fastest pace in two years in the second quarter.

The kiwi rose as much as 0.6 percent to a three-week high of $0.6653 and last stood at $0.6651.

Reporting by Tom Finn