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Monday, 25 June 2018

Euro slips as trade tensions keep FX markets on edge


LONDON (Reuters) - A rally in the euro faded on Monday as the dollar edged up with trade tensions between the United States and the European Union seen deciding the near-term direction for the currencies.

Investors steered away from risk, with Asian equities in retreat and Treasury yields declining, after a report that U.S. President Donald Trump plans to bar many Chinese companies from investing in U.S. technology firms and block more tech exports to Beijing.

The report added to the sense of caution felt after President Trump on Friday threatened to impose a 20 percent tariff on all cars imported from the European Union. The EU responded by saying it will have no choice but to retaliate to such a move.

The euro at 0730 GMT on Monday was down 0.2 percent at $1.1629. EUR=EBS

The euro had climbed on Friday as traders were encouraged by improved regional economic growth data and new assurances by Italian politicians that their nation would not leave the single currency.

On Monday, the greenback rose 0.2 percent against a basket of major currencies, moving toward an 11-month high.

But the dollar hit a two-week low versus the safe-haven Japanese yen, another sign that the latest flare-up in global trade concerns has dented investor risk appetite.

“U.S. plans to unveil limits on Chinese tech firms’ investments in U.S. companies have delivered another blow to risk sentiment this morning. The trade dispute drags on and the yen is the main beneficiary,” said Societe Generale macro strategist Kit Juckes.

The greenback fell half a percent to 109.40 yen JPY=D3, its weakest since June 8.

Despite last week’s gains, the euro still appears vulnerable to regional political instability and U.S. tariffs.


U.S. President Donald Trump on Friday called for a 20 percent levy on European Union-assembled car imports.

German Chancellor Angela Merkel faces pressure to deal with the migration dispute that has divided Europe and threatened her own government.

“For the euro there’s a continuous potential for event risks, amongst others political crises in Berlin, and this means a disadvantage in the race for the status as the world’s leading currency,” said Commerzbank currencies strategist Ulrich Leuchtmann.

Commodity-linked currencies dipped as a surge by crude oil prices ran out of steam amid the latest round of trade jitters.

Oil had rallied on Friday after OPEC agreed to an unexpectedly modest increase in production from next month after Saudi Arabia persuaded Iran to cooperate.

The Australian dollar was down 0.1 percent at $0.7432 AUD=D4 after gaining 0.85 percent on Friday. The Aussie had fallen to a one-year low of $0.7394 last week, hurt by the Sino-U.S. trade spat.

The Canadian dollar slipped 0.25 percent to C$1.3295 CAD=D4 per dollar after advancing 0.4 percent on Friday. The loonie had brushed a one-year low of C$1.3384 last week, buffeted by volatility in crude oil prices.

The Turkish lira was up about 1.5 percent at 4.59 per dollar.

The lira had initially soared after Turkish president Tayyip Erdogan and his ruling AK Party claimed victory in presidential and parliamentary elections on Sunday, overcoming the biggest electoral challenge to their rule in a decade and a half.

Reference: Tom Finn

Take Five - World markets themes for the week ahead


LONDON (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

1/TRADE WINDS IN CHINA

As the trade war rhetoric starts to turn into action, China’s markets are on the defensive. The yuan has fallen to its lowest against the dollar since early 2018, stocks just had their biggest weekly decline in five months, and cash rates are rising, with the 14-day repo rate hitting a two-month high as firms locked in funding to cover the end of the quarter.

The question is: What might authorities do? At present they are trying to keep markets flush to make sure the economic wheels keep turning – the central bank injected a net 340 billion yuan ($52.3 billion) in the past week, including 200 billion yuan via its one-year medium-term lending facility. Banks’ reserve ratios are also likely to be cut further.

These policy easing expectations are partly driving the yuan’s slide, but investors are wondering now how far the weakness could go.

A weak yuan might help offset the trade impact. Yet a rapid currency fall, aside from provoking more ire in Washington, could feed on itself by fuelling further outflows of money from China, as happened after the August 2015 devaluation. It would also be bad news for other emerging markets such a Taiwan, Mexico and South Korea that compete with China in export markets.

China eyes reserve cuts, other policy measures to aid small firms

EXPLAINER-What can Beijing do if China-U.S. trade row worsens?

Slowdown, default risks to prompt China reserve cut-sources


2/CONSUMED BY TRADE

Increasingly hostile trade war rhetoric, mixing in with tit-for-tat tariffs increases risks for investors and consumers concerned about their portfolios and prices they pay for imported goods.

U.S. consumer confidence however is expected to remain at a lofty level in June as corporate profits remain healthy. The report, due on June 26, is forecast by a Reuters poll of economists to hold steady at 128, just off an 18-year high hit in May.

Economists point out the amount of tariffs being threatened is overall quite small in the context of a $20 trillion U.S. economy. In the case of China-U.S. trade, Beijing exports more than it imports, meaning it will run out of products it can tax well before Washington does. But try explaining that to people buying a TV to watch the World Cup.


3/HERE’S LOOKING AT EU

The migration debate is overshadowing the official agenda for the June 28-29 EU summit, which means chances are slim of market-moving reforms being finalised. Nonetheless, up for discussion will be blueprints for strengthening the ESM bailout fund, a common euro zone budget and the banking union project to boost trust in the bloc’s financial sector. The summit may also debate plans to further ease debt restructurings in Europe.

As for country-specific issues, Italy and Britain will be in focus — the summit will mark the first EU airing for Italian Prime Minister Giuseppe Conte. For Britain, meanwhile hopes are ebbing the event will break a deadlock on how to exit the EU as Prime Minister Theresa May is struggling to find a proposal on post-Brexit customs arrangements to take into the negotiations.

The weekend marks the second anniversary of the Brexit referendum and the clock is ticking down to the scheduled exit date of March 29, 2019. Sterling, down 8 percent since mid-April, is enjoying a brief reprieve thanks to an unexpectedly hawkish Bank of England meeting on Thursday but remains on course for its worst quarter since the Brexit vote.


4/SOFTLY, SOFTLY

Flash euro zone inflation figures are expected to show exactly why the ECB’s retreat from crisis-era stimulus measures will be glacial. Economists anticipate a 1.3 percent annual rise in consumer prices in June, short of the ECB’s target of “below, but close to, 2 pct over the medium term”.

The ECB will end its 2.4 trillion euro bond-buying programme in December, but signalled that negative interest rates are here to stay for some time. That means Mario Draghi’s 8-year term as ECB president could end in October 2019 without his ever having presided over a rate rise.

Since the ECB policy decision and Draghi’s press conference on June 14, the euro has fallen as much as 2.6 pct and came close to breaking below $1.15 for the first time in almost a year. Morgan Stanley and others have lowered their euro forecasts, and weak inflation data could see another test of $1.15.


5/SYNCHARITIRIA ELLADA (CONGRATULATIONS GREECE)

Having received three bailouts since 2010, Greece has taken a big step forward — the euro zone has agreed to extend bond maturities and defer interest on a major part of its loans to Athens, along with a big cash injection. This makes Greece’s debt load more sustainable, smoothing its path for the time after it exits the bailout in August.

Markets have reacted accordingly, with five- and 10-year bond yields falling 23 and 16 bps respectively, the latter at a four-week low.

This is good news for a euro zone facing the risk of another crisis, this time in Italy. For Greece, the question now is when it can start borrowing on markets again. It sold bonds last year for the first time in three years and wants to raise another 4.5 billion euros in 2018, including its first 10-year issue in a decade.

The prospect of a new Greek issue is also tantalising fund managers and investment bankers. But Greece has no immediate need for cash and the selloff in Italian debt has made issuance harder for southern European borrowers. Still, syndicate bankers reckon Athens should be able to grab a window of opportunity sometime before the August lull.


Reporting by Daniel Bases in New York, John Mair in Sydney, Abhinav Ramnarayan, Jamie McGeever and Tom Finn in London

Trade worries hit world stocks, oil gives back gains


LONDON (Reuters) - World shares fell on Monday, dented by worries over a worsening trade dispute between the United States and other major economies, while oil prices gave up some of the gains made after major exporters agreed a modest production increase.


The Wall Street Journal said U.S. President Donald Trump planned to bar many Chinese companies from investing in U.S. technology firms and block additional technology exports to China.

The report hit Asian stocks overnight and in London the pan-European STOXX 600 index was down over half a percent in morning trade.

S&P500 mini futures fell as much as 0.6 percent while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.95 percent to 6-1/2-month lows. Japan's Nikkei .N225 lost 0.8 percent.

Taking a particular hit on the trade tensions was the European autos sector, falling 1.4 percent and set for its seventh straight day of losses after Trump said on Friday he aimed to hike tariffs on EU car imports by 20 percent.

MSCI’s All-Country World index .MIWD00000PUS, which tracks shares in 47 countries, was down 0.3 in morning trade in Europe.

As the threat of a full-blown trade war has grown, the gauge has fallen in five of the last six weeks. Last week it fell one percent - its biggest weekly drop in three months.

“We suspect the Trump team will push ahead with these policies (which will elicit reciprocal tariffs from China and the EU) until U.S. equities start to crumble and polls move against Trump,” wrote ING strategists in a research note.

A spread between approval and disapproval ratings of the U.S. President had reached its narrowest since March 2017, they noted.

Chinese shares were among the biggest losers, falling 1.27 percent and tumbling 3.7 percent last week, as Trump threatened to hit $200 billion of Chinese imports with 10 percent tariffs.

Policymakers in China moved fast to temper any potential economic drag from the dispute, as its central bank said on Sunday it would cut the amount of cash some banks must hold as reserves by 50 basis points.

That reduction in reserve requirements, the third this year, had been widely anticipated by investors and is aimed at accelerating the pace of debt-for-equity swaps and spurring lending for smaller firms.

Despite the move, the CSI300 Index .CSI300 of mainland Chinese shares lost 0.8 percent, edging near the one-year low it touched on Friday.

The index of global auto manufacturers .MIWO0AC00PUS fell 0.7 percent. It lost 4.7 percent last week.

Trump threatened to impose a 20 percent tariff on Friday on all imports of EU-assembled cars, a month after his administration launched an investigation into whether auto imports posed a national security threat.

A senior European Commission official said on Saturday that the European Union would respond to any U.S. move to raise tariffs on cars made in the bloc.

Investors and traders are worried that threats of higher U.S. tariffs and retaliatory measures could derail a rare period of synchronised global growth.


SLIPPERY OIL
Oil shed some of the gains posted on Friday after OPEC and non-OPEC producers agreed a modest increase in production from next month.

They did not however announce a clear target for the output hike, leaving traders guessing how much more will actually be pumped.

OPEC and non-OPEC said in a statement they would raise supply by returning to 100 percent compliance with previously agreed output cuts, after months of underproduction.


“Saturday’s OPEC+ press conference provided more clarity on the decision to increase production, with guidance for a full 1 million bpd ramp-up in 2H18,” Goldman Sachs said in a note on Sunday.

“This is a larger increase than presented Friday although the goal remains to stabilise inventories, not generate a surplus.”

U.S. crude futures traded at $68.64 per barrel, up 0.1 percent for the day after Friday’s 4.6 percent rally.

International benchmark Brent fell 1.2 percent, however, to $74.61 per barrel, giving up nearly half of its gains made on Friday.

In the currency market the euro trade flat, having retreated in early trade.

German business confidence deteriorated in June, a survey showed on Monday, suggesting the mood among company executives in Europe’s biggest economy was darkening in light of the threat of a global trade war.

The dollar fell nearly half a percent to 109.48 yen JPY=, hitting its lowest levels in two weeks as the Japanese currency firmed on concerns about the global trade frictions.

The Turkish lira gained up to 1.6 percent on expectations of a stable government after Tayyip Erdogan and his ruling AK Party claimed victory in presidential and parliamentary polls.

But his victory kept alive worries about inflation and the central bank’s independence given recent comments suggesting he wanted to take greater control of monetary policy.

The lira traded at 4.59 to the dollar, up 1.7 percent from 4.6625 at the end of last week.

Bitcoin steadied after hitting seven-month lows during the weekend as the security of cryptocurrency exchange operators came under more scrutiny. The digital currency fell as low as $5,780 overnight and last stood at $6,155.

Reporting by Ritvik Carvalho

Saturday, 23 June 2018

Sterling hits six-day high after BoE meeting but Brexit fears limit gains


LONDON (Reuters) - The pound rose to a six-day high on Friday after a Bank of England meeting revived expectations of a rate hike this year, but fears of a breakdown in Brexit talks next week limited sterling’s gains.

The British currency has struggled through much of June, weighed down by worries about a slowdown in the economy and fraught attempts by British diplomats to secure a deal to exit the European Union in March.

Sterling rallied on Thursday, though, when the Bank of England’s chief economist unexpectedly voted for an interest rate hike.

The central bank kept interest rates on hold but the decision by Andy Haldane to join two other policymakers in calling for rates to rise to 0.75 percent lifted the pound off a seven-month low as expectations grew that the BoE could tighten policy in August.

The upbeat outlook for interest rates and a weaker dollar on Friday helped sterling climb half a percent to a six-day high of $1.3312 in early European trading.

The pound later gave up most of those gains to trade at $1.3264 and the currency remains almost 8 percent below a post-Brexit referendum high hit in April.

The pound on Friday fell versus a broadly stronger euro to 87.75 pence.

Markets now see a nearly 50 percent likelihood of the BoE raising interest rates in August by 25 basis points and a 90 percent chance of a rate hike happening by the end of 2018.


“The BoE may prefer to act sooner rather than later given Brexit uncertainties may intensify later this year and make a November rate hike difficult,” analysts at MUFG said.

Nine months before Britain’s exit from the EU, the country seems to be trapped in a period of relatively low growth. In the first quarter of 2018, the economy grew by just 0.1 percent, the slowest rate since 2012.

Some market observers say the pound could rise in the coming weeks if economic data suggests any turnaround in the economy because it would help cement expectations of a rate hike.

But an EU summit on June 28-29 at which Britain is hoping to make progress in securing a favourable Brexit deal with the EU could hurt sterling, strategists say.

Prime Minister Theresa May is struggling to find a proposal on post-Brexit customs arrangements - the biggest stumbling block so far in exit talks - to take into negotiations with Brussels.

“For now I would focus more on the EU summit than the Bank of England’s August meeting. I expect the summit to be harsh on Britain and for GBP to fall next week as a result,” said ACLS analyst Marshall Gittler.

Reporting by Tom Finn

Friday, 22 June 2018

Trade and rate worries set FTSE for fifth week of losses


MILAN (Reuters) - The UK’s top share index rebounded on Friday but was set for a weekly loss as trade war concerns and the revived prospect of an interest rate hike in August took their toll.

The FTSE 100 .FTSE rose 0.5 percent by 0853 GMT, underpinned by strength among financials and materials stocks. The index was down 0.5 percent on the week and set for its fifth straight week of losses, its worst losing streak in 5 years, although the combined losses were just around 4 percent.

“Trade tensions remain the dominant theme, clarity still lacking about how far things will ultimately go between U.S. and China, and the potential ripple effect for world trade,” said Mike van Dulken and Artjom Hatsaturjants at Accendo Markets.

The FTSE hit a seven-week low in the previous session when index turned lower following a Bank of England policy vote that bolstered expectations of a rate hike in August.


Financials provided the biggest lift to the FTSE on Friday with domestically exposed banks Royal Bank of Scotland and Lloyds, which would benefit from tighter monetary policy, rising 1.6 and 1.1 percent respectively.

Sentiment on the sector also found support after big U.S. banks passed the Federal Reserve’s latest stress tests Thursday.

Heightened expectations that the BoE could tighten policy at its next meeting helped the sterling extend its rebound from seven-month lows.


Big international firms, which benefit from weaker sterling, were mixed with drugmaker GlaxoSmithKline (GSK.L) falling 1.2 percent and HSBC up 1.3 percent, as banks rose.

Oil stocks Royal Dutch Shell (RDSa.L) and BP (BP.L) fell slightly as OPEC countries were meeting in Vienna together with non-OPEC oil producers to discuss output policy.

Materials stocks were up as copper prices ticked higher although were poised for a second week of decline on fears that a trade conflict between the U.S. and China would hit demand.

Elsewhere, online clothing retailer ASOS fell 5 percent on worries a U.S. internet tax ruling could hit its local earnings.

Reporting by Danilo Masoni

Dollar eases off 11-month high; pound buoyant after hawkish BOE


TOKYO (Reuters) - The dollar pulled back from an 11-month peak against a basket of major currencies on Friday as investors took profits after the currency’s earlier rally, while sterling rebounded from a seven-month low after a slightly hawkish tilt from the Bank of England surprised the market.

The Philadelphia Federal Reserve’s manufacturing index fell sharply to a 1-1/2 year low, raising concern about the world’s largest economy and prompting some traders to book profits on bullish dollar bets, analysts said.

“The weak Philly Fed index reinforced fears that President Trump’s trade war would hurt the U.S. economic outlook and worsened the mood,” said Kengo Suzuki, chief forex strategist at Mizuho Securities.

The Philadelphia Fed index on U.S. Mid-Atlantic business activity fell to 19.9 in June from 34.4 in May, its steepest fall since January 2014.

Lower yields on U.S. Treasuries and the euro finding chart support in the $1.15 area also contributed to the dollar’s weakness.

Escalation in the U.S.-China trade conflict had underpinned safe-haven support for the dollar in recent days. The Philly Fed weaker data dragged down U.S. Treasury yields, with the 10-year yield falling to 2.897 percent in North American trade overnight.

The dollar index, which tracks the greenback against six other currencies, was effectively flat at 94.81 after touching 95.533 the previous day, its highest level since last July.

The euro EUR= rebounded from a fresh 11-month low of $1.1508 it hit overnight after testing technical support in the $1.15 area. It last traded $1.1609, up 0.05 percent on the day.

The single currency had fallen on bets of a protracted period of monetary policy divergence between the U.S. Federal Reserve and the European Central Bank.

In addition, the Italian government’s appointment on Thursday of two euro skeptics to head key finance committees reignited worries about anti-euro voices in the euro zone’s third-largest economy.


Against the yen, the greenback was little changed and last traded 110.02 yen JPY=, pulling back from a one-week high of 110.76 scaled the previous day amid lingering concerns over the trade dispute between the United States and China.

“The potential for all-out trade war, European political risks and emerging market volatility remain potent factors that should contain dollar/yen within the current range, though the lack of downside over the last week or so suggests stronger underlying demand,” wrote Robert Rennie, head of market strategy at Westpac.

Sterling last traded at $1.3262 GBP=D3, not far from Thursday's high of $1.3270.

The pound rose 0.7 percent overnight, recovering from a seven-month trough, after BOE Chief Economist Andy Haldane unexpectedly joined the minority of policymakers calling for rates to rise to 0.75 percent, citing concerns about growing wage pressure.

The Canadian dollar CAD=D4 was a shade firmer at C$1.3300 after hitting a fresh one-year low of C$ 1.3336 overnight, when it was pressured by lower oil prices and an uncertain outlook for trade, with investors eyeing a meeting of major oil producers.

The Organization of Petroleum Exporting Countries meets on Friday to decide output strategies amid calls from top consumers such as the United States, China and India to cool down oil prices and support the world economy by producing more crude.

Iran, OPEC’s third-largest producer, has so far been the main barrier to a new deal as it said OPEC was unlikely to reach an agreement and should reject pressure from U.S. President Donald Trump to pump more oil.

The Mexican peso was at 20.29 per dollar after reaching 20.2000 the previous day, its strongest level in more than two weeks, after Mexico's central bank increased benchmark rates by a quarter point to 7.75 percent in a bid to hold down inflation.

Reporting by Tomo Uetake

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