Wednesday, 28 June 2017

Stocks, dollar ease as central bank officials take centre stage

The dollar weakened on Tuesday as investors awaited Federal Reserve signals on whether the U.S. central bank will stick to its guns and raise rates this year, while firmer commodity-related shares helped limit losses across major stock indices.

The Fed's Chair, Janet Yellen, is scheduled to take part in a discussion in London later on Tuesday. Investors expect her to underline her positive view on the U.S. economy, which would support the Fed's forecast of a rate hike this year.

But softer-than-expected U.S. data overnight gave rise to some caution. New orders for key U.S.-made capital goods unexpectedly fell in May and shipments also declined, suggesting a loss of momentum in the manufacturing sector halfway through the second quarter.

"Her words will be scrutinised for any color about the timing of the next rate hike against a backdrop of mounting concerns over the inflation outlook," strategists at Societe Generale said in a note to clients.

U.S. stock futures were off 0.1 percent.

The dollar fell 0.1 percent against a basket of six major currencies .DXY, though it hit a five-week high against the Japanese yen.

A packed roster of top central bank officials speaking at various events kept volumes light and investors cautious. Also due to speak on Tuesday were Fed officials Patrick Harker and Neel Kashkari.

Fed officials have stuck to their hawkish scripts, in stark contrast to the firmly dovish view expressed by Draghi against exiting super easy monetary policy too quickly.

Draghi reiterated his views at an ECB conference in Portugal but also highlighted the continued recovery in the euro zone.

His comments helped bond yields in the single-currency bloc nudge higher and lifted the euro to a nine-day high.

In Britain, the Bank of England raised banks' capital requirements and warned about levels of credit growth in pockets of the economy.

Worries about an extended consumer binge have weighed on the outlook for the country's retailers, spurring some hedge funds to double down on bearish bets on the sector.

The BoE said it was continuing to oversee banks' preparations for Brexit, including for if Britain exits the European Union in 2019 without securing any trade deal, cutting off banks from their European customers, which could undermine financial stability.

Sterling fell almost half a percent against a broadly stronger euro on Tuesday, a tightening of capital controls on banks offering only brief support given competing interpretations of what it means for interest rates and growth going forward.

The defection by several Monetary Policy Committee officials to the camp supporting a rise in base interest rates has given the pound, battered by another round of political uncertainty after this month's elections, some support in the past week.

On the one hand, reinstating the 0.5 percent of risk-weighted assets banks are asked to hold as a buffer against shocks to consumer finances was a sign of confidence in an economy which has looked to be slowing.

But it may also take any unwanted steam out of areas of loan growth which could otherwise be cited as one reason for raising rates, helping policymakers hold off for longer with any hike in the Bank's main borrowing rates.

"When you're looking at the buffer, they have increased it and that is a marginal tightening of monetary conditions, and hence possibly a plus for the pound," said Oanda analyst Craig Erlam.

"The interesting thing for the next few hours is will people see it as the compromise between policymakers that lets them agree to leave rates where they are for now? Sterling is drifting off now and we may see a further retreat."

After jumping around 0.2 percent to as high as $1.2770 immediately after the Bank's announcement, the pound retreated to trade just 0.1 percent higher on the day at $1.2735.

It fell half a percent to 88.29 pence per euro.

Derek Halpenny, a strategist with MUFG in London, has been one of the bank analysts calling for a rise in sterling in recent months, judging the worst of the pound's Brexit-led sell-off is now in the price.

But he also says the uncertainty generated by Prime Minister Theresa May's loss of her parliamentary majority in elections on June 8 has made it harder for sterling to rise in the near term.

May has sealed the deal she needs to approve a stripped-down legislative programme, but many political commentators still expect another election to be called in the next year under a new Conservative leader.

After initial salvos on EU citizens' rights in the past week, Halpenny said it will be how the rest of the talks on Britain's departure from the European Union pan out that should be crucial to sterling in the coming weeks.

"While macroeconomics might start to have a greater influence, the big events are still Brexit related," he said.

"The sooner this first stage of talks is over and we can get on to what investors really care about - the negotiating of a smooth transition period - the better

In other corporate news, the EU slapped a record 2.42 billion euro fine on Alphabet's Google saying it had abused its dominant market position. Google said it was considering an appeal.

More broadly, firmer metals and oil prices as well as upbeat data on Chinese industrial profits helped mining shares recover recent losses.

Brent crude futures, the international benchmark for oil prices, gained 1.2 percent to $46.39 per barrel while U.S. West Texas Intermediate crude futures rose 1 percent to $43.83 per barrel.

Gold prices, which tumbled to their lowest level in nearly six weeks on Monday after large sell order sent ripples through the market, steadied, supported by an easing dollar.

Spot gold was up 0.6 percent to $1251.21 per ounce.

Reference: Vikram Subhedar

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