Monday, 25 September 2017

Dudley sees Fed rate hikes as U.S. inflation weakness fades

SYRACUSE, N.Y. (Reuters) - The Federal Reserve is on track to gradually raise interest rates given factors depressing inflation are “fading” and the U.S. economy’s fundamentals are sound, an influential Fed policymaker said on Monday.

New York Fed President William Dudley, among the first U.S. central bankers to speak publicly since their decision last week to hold rates steady for now, cited the soft dollar and strong overseas growth among the reasons he expects slightly above-average U.S. economic activity and a long-sought rise in wages.

“With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the (Fed‘s) 2 percent objective over the medium term,” he told students and professors at Onondaga Community College.

“In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually,” added Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on monetary policy.

Dudley’s comments were similar to his speech earlier this month, and reinforced the growing expectation that the Fed is set to raise rates for a third time this year in December. That notion was driven home by Fed policymakers’ forecasts published last week.

Dudley nodded to the three devastating hurricanes that have struck parts of the U.S. south and Caribbean, noting their effects will likely make it more difficult to interpret economic data in coming months. He said, though, that the effects would likely be short-lived and noted that such events tend to boost economic activity as rebuilding gets underway.

Reference: Jonathan Spicer

Euro, kiwi slip on political uncertainties, Asia shares fall

TOKYO (Reuters) - The euro slipped on Monday after German Chancellor Angela Merkel won a fourth term but faced a fractured parliament as support for the far-right surged, while Asian shares pulled back, weighed by concerns about China’s economy.

The New Zealand dollar also took a hit as the ruling National Party won the largest number votes in a weekend election but failed to secure a ruling majority, with a protracted period of coalition building now a possibility.

Spreadbetters expected European stocks to start slightly lower, forecasting Britain’s FTSE to open down 0.1 percent, Germany’s DAX to open little changed and France’s CAC to start 0.2 percent lower.

The euro slid 0.2 percent to $1.1933, putting more distance between a 2-1/2-year high of $1.2092 reached on Sept. 8, when a European Central Bank policy meeting left currency bulls optimistic the ECB would begin tapering its big stimulus programme.

MSCI’s broadest index of Asia-Pacific shares outside Japan handed back earlier modest gains and was last down 0.6 percent.

Two years after Merkel left German borders open to more than 1 million migrants, the anti-immigration Alternative for Germany (AfD) stunned the establishment by becoming the first far-right party to enter parliament in more than half a century.

Merkel now turns to the task of sounding out new partners to build a coalition government after her current Social Democrat (SPD) coalition partner said it would go into opposition.

“The market reacted by selling the euro on the possibility of Merkel running into difficulties in forging a coalition. The euro, however, was already losing support from the European Central Bank’s monetary policy theme and appeared to be on its way lower,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

“The election outcome in Germany showed the country was no longer a special presence in Europe amid growing support for populism and the far right.”

In New Zealand, the kiwi, the world 11th most-traded currency, was down 1 percent at $0.7264 and headed for its biggest intraday percentage loss since May.

It was at a 1-1/2-month high of $0.7435 as recently as Sept. 20, when speculation for a comfortable ruling party win had boosted the currency.

“While there are a few different scenarios and some potentially testy issues to negotiate, ultimately the political landscape appears as though it will remain relatively centralist and we are reasonably agnostic on what it all means,” wrote economists at ANZ.

Chinese stocks remained shaky after falling towards the end of last week following the Federal Reserve’s hawkish policy stance and S&P’s downgrade of China’s sovereign rating.

Hong Kong’s Hang Seng was down 1 percent and Shanghai slipped 0.4 percent after a number of Chinese cities rolled out new measures to cool housing prices.

Investor sentiment was also undermined by concerns that China’s beefed-up environmental protection could reduce demand, and consequently economic growth.

South Korea’s KOSPI shed 0.4 percent while Japan’s Nikkei bucked the trend and rose 0.5 percent thanks to the yen’s weakening against the dollar.

The S&P 500 and Nasdaq closed slightly higher on Friday as worries about the Graham-Cassidy proposal to reform U.S. health insurance eased and investors shrugged off concerns about North Korea.

The pound inched up after sliding on Friday when British Prime Minister Theresa May failed to give any concrete details for how Britain might retain preferential access to Europe’s single market after Brexit.

The currency faced additional pressure on Friday after ratings agency Moody’s downgraded Britain’s credit rating, saying the government’s plans to bring down its heavy debt load had been knocked off course and Brexit would weigh on the economy.

Sterling was up 0.3 percent at $1.3544 after losing 0.6 percent on Friday.

Its peers’ troubles lifted the dollar, with its index against a basket of six major currencies up 0.1 percent at 92.257.

The greenback added 0.2 percent at 112.260 yen , reversing losses suffered on Friday when the exchange of insults between U.S. President Donald Trump and North Korea heated up, sapping broader risk appetite.

Oil prices consolidated after surging on Friday, when OPEC and other oil producers said they were clearing a glut that has weighed on crude prices and may wait until January before deciding whether to extend their output curbs beyond the first quarter of 2018.

Brent crude futures was down 0.1 percent at $56.80 a barrel, not far from a 6-1/2-month high of $56.91 set on Friday.

U.S. crude lost 0.3 percent to $50.52 a barrel.

Reference: Shinichi Saoshiro

Futures slightly lower as U.S.-North Korea tensions escalate

(Reuters) - U.S. stock index futures were slightly lower on Friday after tensions between North Korea and the United States escalated again, pushing investors to safe-haven assets.

* North Korea said on Friday it might test a hydrogen bomb over the Pacific Ocean after U.S. President Donald Trump vowed to destroy the reclusive country in his United Nations address.

* Trump on Thursday put more economic pressure on North Korea by ordering additional sanctions, including on its shipping and trade networks but stopped short of going after Pyongyang’s biggest trading partner, China.

* The latest spike in tensions prompted demand for gold, which rebounded from a four-week low on Friday.

* Wall Street slipped on Thursday as investors braced for a third interest rate hike this year and shares of Apple fell on worries about demand for its latest smartphone.

* Investors increased bets the central bank would raise rates again this year and were also assessing its decision to start reducing its roughly $4.2 trillion in treasury bonds and mortgage-backed securities.

* Market will look for more insights into Fed’s policy from speeches by Dallas Fed president Robert Kaplan and his Kansas City counterpart Esther George later in the day.

* Oil prices were narrowly higher on Friday as the market waited to see whether major oil producers would back an extension to output cuts beyond March.

* Apple was down about 0.58 percent in premarket trading, as the launch of iPhone 8 kicked off in a less lively mood in Asia versus previous debuts.

* Versartis tanked about 84 percent after its experimental drug for treatment of growth hormone deficiency in children failed in a late-stage study.

* United States Steel fell about 3 percent after Cowen downgraded the stock to “underperform” from “market perform”.

Futures snapshot at 7:06 a.m. ET (1106 GMT):

* Dow e-minis 1YMc1 were down 13 points, or 0.06 percent, with 22,027 contracts changing hands.

* S&P 500 e-minis ESc1 were down 2.25 points, or 0.09 percent, with 148,256 contracts traded.

* Nasdaq 100 e-minis NQc1 were down 10 points, or 0.17 percent, on volume of 34,017 contracts.

Reference: Sruthi Shankar

Friday, 22 September 2017

Sterling steadies as traders eye May's Brexit speech

LONDON (Reuters) - Sterling was steady on Thursday, having pulled away the previous day from its highest level since last year’s Brexit vote result, after the U.S. Federal Reserve signalled it would hike interest rates again this year, lifting the dollar across the board.

The Fed left rates unchanged on Wednesday but signal led it still expects one more increase by the end of the year despite a recent bout of low inflation, and said it would start trimming its balance sheet from October, in a further tightening measure.

That drove up the dollar to its highest level in more than two weeks against a basket of currencies, and the pound slipped to as low as $1.3452, having reached $1.3659 earlier in the day, its highest since June 24, 2016.

The pound had until the Fed statement been building on the gains of last week, when it jumped around 3.3 percent against the dollar after the Bank of England said it was likely to hike interest rates in the “coming months”.

By 0840 GMT on Thursday, it was trading around $1.3500, flat on the day, while the dollar slipped back a touch.

“Fed policy is having less impact at strengthening the U.S. dollar in the current environment as overseas central banks are also moving closer to tightening policy,” said MUFG currency economist Lee Hardman, in London.

“Higher UK rates are supportive for a stronger pound although the risk posed by (Prime Minister) Theresa May’s keynote speech in Florence on Friday makes us somewhat cautious in the near-term, especially after the pound’s recent sharp gains,” he added.

May is expected to flesh out her vision of Britain’s future relationship with the European Union in her speech on Friday in Florence, Italy. European capitals expect her to signal a readiness to pay to stay in the single market - an issue over which her government is divided.

Analysts said sterling could suffer a knock if it appeared that May was pushing for any kind of “hard Brexit” in which Britain does not have preferential access to the single market, but that monetary tightening expectations would keep the pound supported.

A Reuters poll on Wednesday found almost two-thirds of economists now expect a BoE rate hike to come in November, though three quarters of those queried believed that tightening policy then would be a mistake.

“We are coming around to the view that the BoE may be prepared to hike interest rates once either in November 2017 or February 2018 and then sit back for a while digesting the impact on sterling and on consumption in particular,” wrote Rabobank analysts in a note to clients.

“Not only would a policy move consolidate the support provided to the pound by the Bank’s hawkish rhetoric, but it would protect the central bank’s credibility ... following so much hawkish talk.”

Reference: Jemima Kelly

Asia stocks slip, yen and franc rise as North Korea moots H-bomb test

TOKYO (Reuters) - Asian stocks fell and the Japanese yen and Swiss franc gained on Friday after North Korea said it might test a hydrogen bomb in the Pacific Ocean and escalated a war of words with U.S. President Donald Trump.

Spreadbetters expected European stocks to start lower amid a chill in risk appetite, forecasting Britain's FTSE  to open down 0.3 percent, Germany's DAX  to open 0.2 percent and France's CAC to start 0.05 percent lower.

North Korean Foreign Minister Ri Yong Ho said on Friday he believes the North could consider a nuclear test on an “unprecedented scale” in the Pacific Ocean, South Korea’s Yonhap news agency reported.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS handed back earlier gains and was down 0.7 percent.

The index rose to a decade high on Tuesday, lifted as Wall Street advanced to record levels, but fell back after the Fed heightened expectations for a third interest rate hike this year.

South Korea's KOSPI .KS11 fell 0.9 percent on the latest bout of geopolitical tensions.

Australian stocks managed to advance 0.3 percent while Japan's Nikkei .N225 slipped 0.4 percent following a rise to a two-year high on Thursday.

“The headline about North Korea’s nuclear test gave a little shock to the market,” said Takuya Takahashi, a strategist at Daiwa Securities in Tokyo.

“Though the market is not expecting that there will be an immediate military action, it has triggered a profit-taking opportunity since the Nikkei had risen sharply recently.”

Hong Kong's Hang Seng .HSI shed 0.8 percent and Shanghai .SSEC was down 0.5 percent after S&P Global Ratings downgraded China's long-term sovereign credit rating on Thursday, less than a month ahead of one of the country's most sensitive political gatherings, citing increasing risks from its rapid debt build-up.

The dollar dropped 0.6 percent to 111.785 yen JPY=, pulling away from a two-month high of 112.725 touched on Thursday when U.S. yields spiked on the back of the Fed's hawkish stance.

The 10-year Treasury yield declined about 3 basis points to 2.251 percent as risk aversion favoured government bonds. It had risen for nine consecutive sessions prior, brushing a six-week high of 2.289 percent.

The Swiss franc rose 0.2 percent to 0.9687 franc per dollar CHF=. The yen and franc are often sought in time of broader risk aversion.

Safe-haven gold ticked up, with spot prices up 0.5 percent at $1,297.11 an ounce, after marking its lowest since Aug. 25 at $1,287.61 in the previous session on a firmer dollar.

Apart from geopolitical risks, the focus was on how the region’s markets would fare when the Federal Reserve takes a step towards normalising monetary policy, as it projected on Wednesday following its policy meeting.

“It is difficult to pass a verdict on the Fed’s stance until it actually starts its balance sheet reduction and the markets can gauge its effects,” said Kota Hirayama, senior economist at SMBC Nikko Securities in Tokyo.

“Fundamentals continue to support emerging markets including those in Asia, although the Fed’s latest stance did add a layer of uncertainty going forward.”

In currencies, the Australian dollar was down 0.1 percent at $0.7926 after sliding 1.2 percent the previous day when Reserve Bank of Australia Governor Philip Lowe said the central bank does not have to follow a general move globally to raise interest rates.

A sharp drop in the price of iron ore, Australia’s main export commodity, to a two-month low, has also weighed on the currency.

The New Zealand dollar was down 0.3 percent at $0.7284 on jitters ahead of a hotly-contested general election on Saturday.

The euro inched up 0.1 percent to $1.1954 EUR= and on track to end the week 0.8 percent lower.

The dollar index against a basket of six major currencies was down 0.2 percent at 92.052.

Crude oil prices were little changed amid a wait-and-see mood as ministers from the Organization of the Petroleum Exporting Countries, Russia and other producers meet later on Friday to discuss a possible extension of supply cuts.

Brent crude was down 0.1 percent at $56.39 a barrel after reaching a five-month high of $56.53 overnight.

Reference: Shinichi Saoshiro

Renewed talk of Fed rate hike lifts dollar to two-month high versus yen

LONDON (Reuters) - The dollar rose to a two-month high against the yen on Thursday after a hawkish-sounding U.S. Federal Reserve heightened expectations of an interest rate increase in December.

At the end of a closely watched two-day policy meeting on Wednesday the Fed left interest rates unchanged as expected and signalled that it is still on track for one more increase by the end of the year despite recent low inflation.

After some talk before the meeting that the Fed could hold off from raising rates again this year, the dollar jumped on the statement and extended those gains on Thursday to a two-month high of 112.725 yen. It later edged back slightly to 112.540 yen, still 0.3 percent up on the day.

The index that measures the dollar’s strength against a basket of currencies dipped 0.1 percent on the day to 92.451 after rising more than 1 percent after the Fed meeting to its highest level in two weeks.

“I don’t expect the dollar will strengthen very much over the course of today’s session,” said Commerzbank’s Frankfurt-based head of FX strategy Ulrich Leuchtmann.

“Even if the dollar gets stronger, it will not be on a scale comparable to yesterday, because I think the outlook is still uncertain and the Fed for a long time had promised to hike rates much more aggressively.”

Interest rate futures traders now price in about a 70 percent chance of a December Fed rate hike, up from above 50 percent before the meeting, according to CME’s FedWatch tool.

The euro recovered ground against the dollar to trade 0.1 percent higher at $1.1903 after a four-session wining run had come to an end with the previous day’s 0.8 percent fall.

Some currency analysts said the dollar has further room to rally.

Kathleen Brooks, research director at City Index in London, said that if data continued to point to strong jobs growth and a low unemployment rate, a December Fed rate rise was likely, boosting prospects for the dollar.

“The dollar index has been a one-way bet for so long... there’s so much room for the dollar to move higher,” she said.

Currencies were little moved by the Bank of Japan’s widely expected decision to stand firm on monetary policy.

New Zealand’s dollar was down 0.7 percent at $0.7309, with its rally the previous day losing steam against a broadly stronger dollar.

The Australian dollar was the biggest mover on the day, falling 1.1 percent to $0.7941.

Norway’s crown strengthened against the dollar and euro after the country’s central bank kept its policy rate unchanged but said a rise is likely earlier than previously expected.

The crown was up 0.4 percent at 9.314 per euro and 0.7 percent firmer against the dollar at 7.82 crowns.

Reference: Ritvik Carvalho and Dhara Ranasinghe

Thursday, 21 September 2017

Dollar shines, Asia shares slip after Fed signals December rate hike

TOKYO (Reuters) - The U.S. dollar shone while Asian shares slipped on Thursday after the U.S. Federal Reserve announced a plan to start shrinking its balance sheet and signalled one more rate hike later this year.

European shares are expected to benefit from a fall in the euro against the dollar with spread betters looking at a higher opening of 0.5 percent in Germany's DAX and France's CAC .

Japan's Nikkei .N225 gained 0.2 percent as a rise in U.S. bond yields lifted financial shares, while the yen's fall against the dollar after the Fed's decision helped exporters.

The Bank of Japan, as widely expected, left its policy settings unchanged, with markets awaiting a news conference by its governor later in the day.

MSCI’s broadest dollar-denominated index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.5 percent, with Australian shares among the hardest hit with fall of 0.8 percent.

Major U.S. share indexes recovered quickly from initial losses following the Fed's announcement, with the S&P 500 .SPX ending slightly higher, helped in part by gains in financials .SPSY and energy shares.

“While a rate hike is negative, the fact that the Fed’s confidence in the economy is strong enough to expect a rate hike can be taken as supportive of market sentiment,” said Soichiro Monji, chief strategist at Daiwa SB Investments.

The Fed’s view also prompted a rotation from tech shares into financial shares, which benefit from higher interest rates, he added.

“In a way, what the Fed did was not much of a surprise. From now, the markets will be focusing on individual earnings rather than macro themes,” said Hisashi Iwama, senior portfolio manager at Asset Management One.

As expected, the Fed said it would begin in October to trim its massive holding of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

The Fed signalled it still expects one more interest rate hike by the end of the year, despite a recent bout of low inflation, but ratcheted down its long-term interest rate forecasts.

Fed fund rate futures  are now pricing in about a 65 percent chance of a rate hike by December compared to around 50 percent before the latest meeting. Markets expect the Fed move to coincide with revisions of its economic projections.

The yield on two-year U.S. Treasury notes jumped to 1.451 percent, its highest level since November 2008 late on Wednesday. The 10-year U.S. Treasuries yield rose to 2.278 percent, briefly hitting a six-week high of 2.289 percent.

“The markets reacted to the Fed quite straightforwardly, with shorter yields rising more than long-dated bond yields. The bond markets have fairly strong conviction that low inflation and low growth will persist,” said Hiroko Iwaki, senior strategist at Mizuho Securities.

In the currency market, the rise in Treasury yields boosted the dollar's attractiveness. The euro EUR= dropped to $1.1883 from above $1.20 just before the Fed's policy announcement.

Likewise the dollar jumped to 112.595 yen , a two-month high, from around 111.30.

Gold also hit a three-week low of $1,296 per ounce.

Oil prices flirted with multi-month highs, despite a rise in U.S. crude inventories, after the Iraqi oil minister said OPEC and its partners were considering extending or deepening output cuts, ahead of the planned meeting between OPEC and non-OPEC nations on Friday.

Brent crude futures LCOc1 rose to a five-month high of $56.48 a barrel on Wednesday and last stood at $56.17, down slightly from late U.S. levels.

U.S. benchmark West Texas Intermediate (WTI) crude futures CLc1 hit a four-month high of $50.79 per barrel and last traded at $50.64, down slightly from the U.S. close on Wednesday.

Reference: Hideyuki Sano