Friday, 29 September 2017

Asia shares recuperate after rough week, dollar in better health

SYDNEY (Reuters) - Asian shares regained some poise on Friday after a tough week in which the gathering risk of a U.S. rate rise lifted Treasury yields towards nine-year highs and left the dollar on track for its best week so far this year.

European markets have fared much better with Eurostoxx 50 futures at a three-month top in early trade, while the DAX and FTSE both added 0.2 percent.

E-Mini futures for the S&P 500 ESc1 were steady near all-time peaks.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS bounced 0.4 percent, but was still down 1.7 percent for the week so far. For the quarter, it looked set to gain 4.7 percent.

Japan's Nikkei .N225 was a fraction lower, though South Korea .KS11 managed to rebound 0.8 percent. Shanghai shares .SSEC firmed 0.2 percent but were flat on the week.

Many Asian markets have been cold-shouldered this week as investors priced in a greater probability of a rate hike from the Federal Reserve in December.

Fed funds futures now imply around a 73 percent chance of a move at the Dec. 12-13 policy meeting, sharply higher than just a few weeks ago.

As a result, yields on two-year Treasuries  reached a near nine-year top before settling at 1.46 percent on Friday. They had been as low as 1.254 percent early in September.

Adding to the upward pressure was President Donald Trump’s proposals for steep tax cuts which, if passed, could benefit U.S. corporations’ profit margins.

The plan, however, lacked any detail on how it might be paid for and faces much opposition in Congress.

“As tax negotiations intensify, significant procedural, fiscal and political constraints are likely to become apparent,” cautioned Richard Franulovich, an analyst at Westpac, while noting the economic benefits of the plan were also in doubt.

“The size of the tax cut is simply too large to be realistic and repealing deductions will prove politically difficult.”

Still, a tax cut that made U.S. equities more attractive while lifting the dollar and Treasury yields would likely prove negative for emerging markets, particularly those that relied heavily on foreign investment.

The risk alone was enough to rattle share, bond and currency markets in Asia on Thursday, and they will remain vulnerable to headlines on the tax package as it moves through Congress.


The jump in Treasury yields proved a much-needed tonic for the U.S. dollar.

Against a basket of currencies the dollar .DXY was up 0.18 percent at 93.250, while gains for the week of 1.17 percent were the largest since December.

The euro EUR= hovered at $1.1776, having bounced from a six-week trough of $1.1715, but was still down 1.5 percent for the week so far. If it remains there, that would be the largest weekly loss since November 2016.

The dollar was also on track for its third week of gains on the Japanese yen at 112.66, just off a peak of 113.26.

On Wall Street, the Dow. had ended Thursday with a minor gain of 0.18 percent, while the S&P 500. added 0.12 percent and the Nasdaq. was flat.

All three were at or near record highs, stirring concerns about rich valuations.

The forward price-to-earnings ratio on the S&P stood at 17.9 compared with its long-term average of 15.1, while the forward P/E on the Russell is 26.3 against an average of 21.3.

Important data on inflation from the European Union and the United States are due later in the session, along with economic growth figures in Canada.

Early readings on Chinese manufacturing are out on Saturday ahead of a week-long holiday in the Asian giant.

The EU also faces more political uncertainty on Sunday when Catalan separatists are set to defy Spanish efforts to block an independence referendum.

In commodity markets, oil prices were near to chalking up another weekly gain as investors wagered that efforts to cut a global glut are working and the demand outlook is improving.

Brent was 7 cents higher at $57.48 a barrel, heading for a fifth weekly climb and a 10-percent gain for September. U.S. crude CLc1 eased 9 cents to $51.48.


Dollar, bond yields rise on Trump tax plan; Asia stocks fall

TOKYO (Reuters) - The dollar and U.S. bond yields rose on Thursday after President Donald Trump proposed the biggest U.S. tax overhaul in three decades and as strong U.S. economic data supported the case for a Federal Reserve rate hike later this year.

The dollar’s strength pressured many emerging market currencies and bonds, helping drag down MSCI’s broadest index of Asia-Pacific shares outside Japan 0.4 percent to one-month lows. South Korean 10-year yields hit a 2-year high.

In contrast, Japan's Nikkei rose 0.55 percent, taking cues from gains on Wall Street, where the Dow Jones Industrial Average rose 0.25 percent while the S&P 500 gained 0.41 percent.

Small-cap U.S. shares, seen as benefiting the most from the proposed tax cuts, soared, with the Russel 2000 small-cap index notching a record high, rising 1.9 percent for its biggest one-day gain in almost six months.

“The fact that Trump made the tax proposal was seen as a step forward,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

Trump offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.

Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying.

European stock futures suggested gains for those markets too, with FTSE futures FFIc1 up 0.18 percent and German DAX futures FDXc1 up 0.25 percent.

Trump’s tax proposal faces an uphill battle in Congress, however, with his own party divided, and the plan already prompting criticism that it favors companies and the rich and could add trillions of dollars to the national debt.

“It is hard to expect this proposal to pass the Congress smoothly. We have to pay attention to how the Republicans will view this,” said Takafumi Yamawaki, chief fixed income strategist at J.P. Morgan Securities.

“It is possible that the net fiscal spending will be smaller than what the stock markets expect,” he added.

The euro EUR= hit a six-week low of $1.1717 on Wednesday as the dollar broadly gained, and last traded at $1.1722, having shed 1.9 percent so far this week.

The dollar shot up to a 2-1/2-month high of 113.26 yen the previous day before stepping back to 113.08 yen Thursday.

The Canadian dollar CAD=D4 extended its losses, suffering its biggest drop in eight months on Wednesday, after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year.

Canada’s loonie fell to C$1.2469 to the U.S. dollar, its lowest in a month.

The dollar strengthened against many emerging market currencies while gold hit a one-month low of $1,281.5 per ounce.

“I don’t see any changes to growth stories in emerging economies so I would assume selling in them will prove temporary, unless yields in the developed world keep rising sharply,” said a senior currency trader at a major Japanese bank.

U.S. bond yields jumped with the yield on two-year notes rising to a nine-year high of 1.49 percent in anticipation of a rate rise in December.

Comments from Fed Chair Janet Yellen that the Fed needs to continue with gradual rate hikes have cemented expectations for policy tightening by year-end.

New orders for key U.S.-made capital goods grew more than expected in August, helping to boost optimism in the U.S. economy’s outlook.

Yields on longer-dated bonds soared as Trump’s tax proposal stoked worries about fiscal deterioration. U.S. municipal bonds were also sold for the same reason.

The 10-year yield rose to 2.357 percent, its highest in more than two months, compared to this week’s low of 2.214 percent while the 30-year bond yield climbed to 2.901 percent after having risen 9 basis points on Wednesday - the biggest one-day rise in almost seven months.

Japanese yields rose in tandem with benchmark 10-year futures 2JGBv1 set for their biggest fall in three months, partly driven by expectation of fiscal easing after Prime Minister Shinzo Abe called a snap election expected on Oct.22.

Oil prices hovered a tad below the peaks hit earlier this week as the market consolidated after a strong rally this month.

Brent futures traded at $57.78 a barrel, down from Tuesday’s 26-month peak of $59.49.

U.S. West Texas Intermediate crude fetched $52.05 per barrel, below Tuesday’s five-month high of $52.43 after oil stockpiles in the world’s top consumer unexpectedly drew down, with refiners coming back online following Hurricane Harvey last month.

Reference: Hideyuki Sano

Thursday, 28 September 2017

Dollar pushes higher on hopes for U.S. tax reforms

SINGAPORE (Reuters) - The dollar hit a one-month high against a basket of currencies on Thursday, underpinned by hopes that U.S. President Donald Trump’s administration may be making progress on tax reforms.

The dollar index .DXY, which measures the greenback against a basket of six major currencies, rose 0.2 percent to 93.575.

It touched a high of 93.613 at one point, its strongest level since Aug. 23. Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, offering to cut taxes for most Americans but prompting criticism that the plan favours the rich and companies and could add trillions of dollars to the deficit.

The proposal faces an uphill battle in the U.S. Congress, with Trump’s own Republican Party divided over it and Democrats hostile.

But the unveiling of the plan, coupled with upbeat U.S. durable goods orders, helped give an added lift to the greenback, which has benefited from rekindled expectations that the Federal Reserve will raise interest rates again by year-end.

“I think the market’s views toward the U.S. had become too pessimistic,” said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

“That view is being re-assessed and bond yields are rising so dollar-buying could continue for a while,” Murata said.

The greenback’s rise gained renewed momentum in Thursday’s Asian trade as U.S. bond yields pushed higher.

The U.S. 10-year Treasury yield rose to 2.344 percent at one point on Thursday, its highest level since mid-July.

Including Wednesday’s move, the U.S. 10-year yield has risen more than 11 basis points -- putting it on track for its biggest two-day rise in nearly seven months.

The movement in U.S. Treasuries probably gained steam due to stop-loss selling, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The resulting rise in U.S. bond yields was giving a broad lift to the dollar, he added.

The dollar rose 0.2 percent to 113.05 yen nearing Wednesday's high of 113.26 yen, the greenback's strongest level in more than two months.

Emerging Asian currencies came under pressure as U.S. bond yields rose.

The Indonesian rupiah fell to 13,550 per dollar at one point, its lowest level in nearly 10 months.

The euro also faltered, easing 0.1 percent to $1.1733, languishing near a one-month low of $1.1717 set on Wednesday.

Reference: Masayuki Kitano

Dollar supported by Yellen's rate hike talk, politics saps euro

TOKYO (Reuters) - The U.S. dollar was underpinned on Wednesday by remarks from the Federal Reserve chief on the need to continue with rate hikes, while the euro licked the wounds from political uncertainty following the German election at weekend.

The dollar’s index against a basket of six major currencies stood at 93.07, its highest level in almost a month, having risen from 93.286 the previous day.

Fed Chair Janet Yellen said on Tuesday that the Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation.

It would be “would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” she said.

“Her comments suggest that latest (soft) inflation readings do not have a big bearing on the Fed’s monetary policy. The Fed’s focus is not to delay rate hikes too much to avoid a situation where it needs to raise rates hastily in the future,” said Yukio Ishizuki, senior strategist at Daiwa Securities.

U.S. interest rate futures dipped further to price in about 70 percent chance of a rate hike by December compared to near 60 percent on Monday.

Against the yen the dollar edged up to 112.33 yen , bouncing back from Tuesday’s low of 111.50. Last week’s two-month high of 112.725 yen is seen as a resistance level.

The euro stood at $1.1784, having struck a five-week low of $1.17575 on Tuesday. The euro weakened against other currencies, hitting a 10-week low of 0.87545 British pound and two-week low of 1.14075 Swiss franc.

The common currency had rallied more than 10 percent against the dollar so far this year as worries about the rise of anti-establishment political forces in Europe faded while expectations rose for tapering the European Central Bank’s stimulus.

Investor sentiment toward the euro was dented by the rise of a far-right party and the decline of traditional parties in Sunday’s German election, which has left Chancellor Angela Merkel struggling to form a coalition government.

Tensions are rising also in Catalonia, as Spain’s government said on Tuesday that police would take control of voting booths in Catalonia to help thwart the region’s planned independence referendum that Madrid has declared illegal.

Still, most market players think the euro could rebound soon as investors will likely focus on how the ECB will wind back its stimulus at its policy meeting next month.

“No one really expects the European politics to become a dominant issue for the market. The euro’s slide is driven by position adjustments and now may be a good time to buy,” said Kazushige Kaida, head of foreign exchange at State Street in Tokyo.

Elsewhere, the Australian dollar slipped 0.3 percent to $0.7862 after having dropped to six-week low of $0.7860 on Tuesday.

The Aussie was undermined by a fall this month in the price of iron ore, its main export product.

The biggest focus for the market for Wednesday is the announcement of a tax plan by the U.S. administration and Republicans in Congress.

The plan has been developed over several months by six White House and congressional Republicans working behind closed doors. President Donald Trump told U.S. lawmakers on Tuesday he wants bipartisan cooperation on tax reform.

Reference: Hideyuki Sano

Wednesday, 27 September 2017

Fed's Yellen says gradual hikes should continue, despite weak inflation

CLEVELAND (Reuters) - The Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation, Fed Chair Janet Yellen said on Tuesday in remarks that acknowledged the central bank’s struggles to forecast one of its key policy objectives.

It is possible, Yellen said, that the Fed may have “misspecified” its models for inflation, and “misjudged” key facts like the underlying strength of the labor market and whether inflation expectations are as stable as they seem, and central bankers need to remain open to that possibility as they decide on policy.

Still, recent low inflation was likely a reflection of factors that would fade over time and despite uncertainties, it “would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” Yellen said in a 37-page address to the National Association for Business Economics

“Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession,” she said.

Yellen’s remarks attempt to resolve a debate that has split members of the central bank among those worried that inflation may be permanently anchored below the Fed’s 2 percent target because of structural changes in the global economy, and those who feel it is only a matter of time before tight labor markets lead wages and prices to rise.

She did not provide a definite answer, noting that in current forecasts there was a 30 percent chance inflation could range anywhere from 1 percent to 3 percent, vastly different outcomes either of which could rewrite the Fed’s policy approach. But she did make clear the Fed still feels a gradual pace of rate hikes remains the base case.

Kevin Logan, chief U.S. economist at HSBC Securities, in New York, said her message is that “they’re not really sure” whether the weak inflation is transitory but that “nonetheless policy is accommodative.”

“The gradual approach means that, even if they are wrong on inflation it won’t be a big mistake. That’s the message they are trying to convey.”

The dollar shot up then retreated after Yellen’s comments, reflecting uncertainty about her message. Treasury yields and stocks edged slightly higher.


The Fed, which has raised rates twice this year, last week held rates steady and released forecasts that suggest most policymakers expect to raise rates once more by year-end and three times further next year. Traders of short-term interest-rate futures see about a 76 percent chance of December rate hike, but are betting on only one rate hike next year.

Yellen said Tuesday she would be looking at inflation and labor market data closely in coming months to assess the outlook, but “the data is noisy and it’s not going to be a magic bullet.”

And while the timing of rate hikes may not be predictable, she said, “the path is likely to be gradual.”

Yellen walked systematically through arguments that weak inflation reflected structural changes, and largely discounted them.

There was not yet “empirical support” for the theory that global trade, worldwide supply chains, and other forces were holding down U.S. prices, she said.

Meanwhile, the Fed calculates that cyclical slack in the labor market was now having a “negligible” impact on low inflation readings, compared to oil prices and other changes that will fade. And some aspects of the labor market that appear weak, such as the still-elevated number of part-time workers, may reflect permanent changes in the workforce, and not cyclical factors, Yellen said.

There were many uncertainties, however, and downward pressure on inflation could prove unexpectedly persistent.

“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” possibilities which the Fed needs to examine over time and change the course of policy if needed.

But for now the Fed “continues to anticipate that, with gradual adjustments in the stance of monetary policy, inflation will rise and stabilize at around 2 percent over the medium term,” she said. “We should be wary of moving too gradually.”

Reference: Howard Schneider

Asian shares rise ahead of U.S. tax plan; dollar near one-month high

SYDNEY (Reuters) - Asian shares rose on Wednesday as investors hoped for progress on major tax reform in the United States, while the dollar hovered near one-month highs on growing expectations of a U.S. interest rate increase in December.

The administration and Republicans in Congress are due to outline a tax plan on Wednesday. If passed, it would be the first significant legislative victory for U.S. President Donald Trump since taking office in January.

It would also be a win for Wall Street as corporate tax cuts would potentially boost profits, while a tax amnesty on offshore cash holdings could fuel more buybacks and thus share values.

“We’re now seeing some embryonic prospects of a tax reform in the United States which is a much bigger issue for the markets than the Federal Reserve,” said Ray Attrill, Sydney-based global head of forex strategy at National Australia Bank.

“Our view has been the market had moved from applying a Trump-premium from November-December to applying Trump-discount due to his inability to pass any major reforms. A meaningful tax reform could serve to reduce some of that discount.”

Analysts said the U.S. tech space will be one to watch as it has mountains of cash that could be brought back for share buybacks and dividends.

Wall Street ended mostly flat on Tuesday, but the tech sector gained 0.4 percent, with Apple shares rising 1.7 percent after four sessions of declines.

On Wednesday, MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.2 percent, after falling for four straight days to a three-week trough.

Japan’s Nikkei was off 0.5 percent, with some stocks trading ex-dividend, while Australia’s main index eased 0.3 percent.


In currencies, the dollar index last stood at 93.06 from 93.286 touched on Tuesday, the highest since Aug. 31.

Markets were put on notice by Federal Reserve Chair Janet Yellen who used a Tuesday speech to warn it would be “imprudent” to keep policy on hold until inflation is back to 2 percent. She said the U.S. central bank “should also be wary of moving too gradually” on rates.

Atlanta Fed chair Raphael Bostin also talked up the prospect of a December rate hike.

The dollar also climbed on the yen to loiter near a 2-1/2 month high at 112.39, helped by rising U.S. Treasury yields.

The yield on 2-year Treasury notes, which rises with traders’ expectations of higher Fed fund rates, touched 1.4590 percent, a level not seen since October 2008.

The euro was near more than one-month lows at $1.1788 as investors faced weeks of political horse-trading in Germany before a new government could be formed.

Spot gold was a touch firmer, but still near one-month lows at $1,295.25, while copper edged 0.3 percent higher from a six-week trough.

Crude oil prices popped up on Wednesday after the weekly API inventory report showed a 761,000 barrel build-up in crude inventories, which suggests downside risks to consensus estimate of a 2.52 million barrel build in an official report due later in the day, analysts said.

U.S. crude climbed 26 cents to $52.14 per barrel, while Brent added 21 cents to $58.65.

Reference: Swati Pandey

Sterling hits 10-week high against weakening euro

LONDON (Reuters) - Sterling hit a 10-week high against the euro on Tuesday, as worries over a period of political uncertainty in Germany following elections on Sunday continued to drag the single currency lower.

Fears that German Chancellor Angela Merkel could find it difficult to strike a coalition deal with parties that are radically different from her own have weighed on the euro since the results of Sunday’s election, with the single currency recording its worst day this year against the dollar on Monday.

That weakness was the main reason for sterling’s rise, analysts said. In morning trade in London, the pound strengthened to 87.545 pence per euro, up 0.4 percent on the day. That was its highest level since July 17.

“It is the sentiment after the German elections on Sunday (that is causing this move) ... There’s ... uncertainty whether Merkel can find common ground between the three different parties,” said Nordea currency strategist Niels Christensen.

Investors were also closing out long-euro positions towards the end of the month, Christensen said, which was amplifying the euro’s weakness.

Sterling also climbed 0.1 percent to $1.3475, up from a 10-day low of $1.3432 hit on Monday.

Bets that the Bank of England will raise interest rates in coming months last week pushed the pound to its highest levels since the Brexit vote, with investors trimming their bets against the currency to the lowest in nearly two years.

However, traders said sentiment on the pound had turned somewhat negative after a speech on Friday by British Prime Minister Theresa May that was intended to revive Brexit negotiations. Investors said May had failed to give enough concrete details on Britain’s negotiating position.

“UK PM May’s landmark speech on Brexit negotiations was a step forward and reduces the risk of an early end to the negotiations and ultimately of a cliff-edge departure by the UK in March 2019,” wrote strategists at Credit Agricole.

“That said, the speech lacked the precise negotiating position needed to unblock the talks in the short term, thus discussions about the future relationship are unlikely to start before year-end.”

Negotiations have resumed this week in Brussels, with the European Union’s chief negotiator Michel Barnier saying on Monday that Britain, which has asked for a two-year transition period after it leaves the bloc in 2019, would have to abide by all EU rules during this phase.

Reference: Ritvik Carvalho

Tuesday, 26 September 2017

Euro hits one-month low after worst day of 2017

LONDON (Reuters) - The euro slipped to a one-month low on Tuesday after its worst day so far this year, as investors worried that months of coalition talks in Germany could weigh on the economy and would make closer euro zone integration difficult.

German Chancellor Angela Merkel, who won a fourth term in elections on Sunday but now faces a tough juggling act to form a government with other parties, on Monday struck a note of caution with respect to French calls for fiscal union.

French President Emmanuel Macron, who wants a fundamental overhaul of the European Union’s single currency zone and whose ideas include creating a euro zone budget and a euro zone finance minister, will lay out his plans in a speech in Paris on Tuesday.

But the results of Germany’s election have forced Merkel to consider a new coalition including the liberal Free Democrats (FDP), a party critical of Macron’s ideas on Europe, and investors are therefore worried the reforms that they would welcome will not end up going through.

The euro slipped as low as $1.1811 EUR= in morning trade in London, its weakest since Aug. 25, after falling around 0.9 percent on Monday - its heaviest one-day loss since December.

Commerzbank currency strategist Thu Lan Nguyen, in Frankfurt, said hopes for greater euro zone integration had been the main cause of a more than 10 percent appreciation by the euro against the dollar since the first round of France’s presidential election.

“The euro has been appreciating since the French elections because of the push by Macron for fiscal union,” she said. “There is some uncertainty (over that) in the market now against the background of the German elections.”

The euro faced additional pressure on Monday after European Central Bank President Mario Draghi singled out currency volatility as a source of uncertainty that required monitoring and argued that “ample” ECB accommodation was still needed, because a premature and hasty move could unravel its work.

The euro had risen to a 2-1/2-year high of $1.2092 soon after the ECB’s Sept. 7 policy meeting, with euro bulls buoyed by the central bank’s signal of an eventual end to its large bond-buying scheme, while the dollar’s weakness has also helped.


The dollar was flat at 111.73 yen JPY=, having earlier dipped against the Japanese currency as worries over North Korea flared up again amid an escalating war of words between it and the United States.

The yen made sharp gains versus the greenback on Monday after the North Korean foreign minister said President Donald Trump had declared war on the country and that Pyongyang reserved the right to take countermeasures, including shooting down U.S. bombers even if not in its air space.

“The dollar tends to fall on flare-ups in North Korean-related matters, but whether the Federal Reserve can hike interest rates in December as they projected still remains the ultimate decider (of dollar direction),” said Shin Kadota, senior strategist at Barclays in Tokyo.

The dollar index, which measures the greenback against a basket of six major currencies but is heavily skewed towards the euro, hit its highest in four weeks.

Immediate focus was on what views might be expressed by Fed Chair Janet Yellen, who is due to speak in Cleveland at 1645 GMT on “inflation, uncertainty, and monetary policy.”

New Zealand's dollar extended the previous day's slide and was down 0.6 percent at $0.7223, having sunk after New Zealand's National Party won the largest number of votes in Saturday's election but not enough seats to govern outright.

Reference: Jemima Kelly

Euro, NZ dollar sideswiped by political uncertainty after elections

SYDNEY/TOKYO (Reuters) - The euro slipped in early Asian trading on Monday after Germany’s election showed surging support for a far-right party that left Chancellor Angela Merkel scrambling to form a governing coalition.

The euro fell as much as 0.5 percent to $1.1896 and last stood at $1.1933, down 0.2 percent, holding above support around $1.1860.

Merkel did win a fourth term in office on Sunday but will have to build an uneasy coalition to form a government after her conservatives haemorrhaged support in the face of a surge by the anti-immigration Alternative for Germany (AfD).

Despite winning the most votes, Merkel’s bloc slumped to its worst result since 1949 and her current Social Democrat coalition partners said they would go into opposition after tumbling to 20.7 percent in projections, a post-war low.

“Probably the most significant announcement following the election was that the current junior coalition partner, SPD, immediately announced it would go into opposition,” said Peter Schaffrik, global macro strategist at RBC Europe in London.

“With the withdrawal (from a grand coalition) by the SPD, we think the only realistic option left is a coalition of Merkel’s CDU/CSU, the Free Democrats (FDP) and the Greens - dubbed ‘Jamaica coalition - due to the colours of the three blocks (black/yellow/green),” he said.

But building such a coalition could take months as the three-way tie-up has not been tested at national level.

Political uncertainty also took a toll on the New Zealand dollar after no single party won a majority in an election over the weekend.

The New Zealand currency dropped 0.9 percent to $0.7269.

The ruling National Party won the largest number votes in the election, but neither of the major parties won enough seats to gain a majority in parliament, forcing a round of coalition building that could last days or weeks.

Sterling steadied at $1.3486 after falling on Friday when ratings agency Moody’s downgraded Britain’s credit rating, saying government plans to bring down debt had been knocked off course and Brexit would weigh on the economy.

A few hours after Prime Minister Theresa May set out plans for new ties with the European Union, Moody’s cut the rating to Aa2, underscoring the economic risks that leaving the bloc poses for the world’s fifth-biggest economy.

May failed to give any concrete details for how Britain might retain preferential access to Europe’s single market in her speech.

The yen weakened 0.3 percent to 112.30 yen per dollar, helped by renewed hope of Prime Minister Shinzo Abe’s economic stimulus as he is expected to announce a snap election, to be held on October 22.

A weekend survey by the Nikkei business daily showed 44 percent of voters planned to vote for Abe’s Liberal Democratic Party (LDP) versus 8 percent for the main opposition Democratic Party.

“It’s easier for traders to start the week by selling the yen given expected resolution of the parliament and so on. But I would suspect a lot of election related stuff is already priced in and the yen would have limited downside,” said Kyosuke Suzuki, director of foreign exchange at Societe Generale in Tokyo.

Concerns over simmering tensions between North Korea and the United States could resurface any time, likely lifting the yen.

Japan is the world’s largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis, thus benefiting the yen.

North Korea said on Saturday targeting the U.S. mainland with its rockets was inevitable after “Mr. Evil President” Donald Trump called Pyongyang’s leader “rocket man”, further escalating rhetoric over the North’s nuclear weapons and missile programs.

Reference: Hideyuki Sano

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

Fed keeps U.S. rates steady, to start portfolio drawdown in October

WASHINGTON (Reuters) - The U.S. Federal Reserve left interest rates unchanged on Wednesday but signalled it still expects one more increase by the end of the year despite a recent bout of low inflation.

The Fed, as expected, also said it would begin in October to reduce its approximately $4.2 trillion (3.09 trillion pounds) in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

New economic projections released after the Fed’s two-day policy meeting showed 11 of 16 officials see the “appropriate” level for the federal funds rate, the central bank’s benchmark interest rate, to be in a range between 1.25 percent and 1.50 percent by the end of 2017, or 0.25 percentage points above the current level.

U.S. bond yields rose, pushing up the U.S. dollar after the Fed’s decision, but U.S. benchmark stock indexes were little changed.

U.S. benchmark 10-year Treasury note yields rose as far as 2.29 percent, the highest since Aug. 8., a move which helped push bank stock prices higher also.

“The Fed took another step on its path of beautiful normalisation, announcing that the gradual balance sheet reduction will start next month and limiting revisions to both projections and policy guidance,” said Mohamed El-Erian, Chief Economic Adviser At Allianz, in California.

In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it’s decision. It added that the near-term risks to the economic outlook remained “roughly balanced” but said it was “closely” watching inflation.

Fed Chair Janet Yellen said in a press conference after the end of the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.

“What we need to figure out is whether the factors that have lowered inflation are likely to prove persistent,” she said. If they do, “it would require an alteration of monetary policy,” Yellen said.

While the interest rate outlook for next year remained largely unchanged in the Fed’s latest projections, with three rises envisioned in 2018, the U.S. central bank did slow the pace of anticipated monetary tightening expected thereafter.

It forecasts only two increases in 2019 and one in 2020. It also lowered again its estimated long-term “neutral” interest rate from 3.0 percent to 2.75 percent, reflecting concerns about overall economic vitality.

“The US Federal Reserve has firmly signalled that a December rate rise is still on the table,” said Luke Bartholomew, of Aberdeen Standard Investments Investment Strategist in London.

”Clearly the Fed still believes that lower unemployment will eventually translate into a pick-up in inflation, but if inflation continues to undershoot it is hard to see the Fed following through on a hike,” he said.

The U.S. Federal Reserve will resume rate hikes in December and raise borrowing costs three more times in 2018, a Reuters poll found on Wednesday.

Federal Reserve Chairman Janet Yellen speaks during a news conference after a two-day Federal Open Markets Committee (FOMC) policy meeting, in Washington, U.S., September 20, 2017.

The U.S. central bank will also reduce the size of its asset stock pile by about $1.4 trillion over the next several years as it seeks to restore a normal environment for monetary policy, according to the poll of Wall Street’s top banks taken after the Fed’s latest policy meeting, which ended on Wednesday.


The Fed, as expected, also said it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities by initially cutting up to $10 billion each month from the amount of maturing securities it reinvests.

That action will start a gradual reversal of the three rounds of quantitative easing, or bond buying, the Fed pursued between 2008 and 2014 to stimulate economic growth after the 2007-2009 financial crisis and recession.

The limit on reinvestment is scheduled to increase by $10 billion every three months to a maximum of $50 billion per month until the central bank’s overall balance sheet falls by perhaps $1 trillion or more in the coming years.

Yellen said it would take a “a material deterioration” in the economy’s performance for the Fed to reverse a schedule that she expects to proceed “gradually and predictably.”


The policy statement and accompanying projections showed the Fed still in the middle of a balancing act between an economic recovery that has kept U.S. unemployment low and is gaining steam globally and a recent worrying drop in U.S. inflation.

Three of the hawkish policymakers appeared to move their expected policy rate down to account for only one more hike by the end of 2017, leaving a core 11 clustered around a likely December increase. The Fed has raised rates twice this year.

The Fed noted that the recent hurricanes in the United States would affect economic activity but are “unlikely to materially alter the course of the national economy over the medium term.”

Forecasts for economic growth and unemployment into 2018 and beyond were largely unchanged. Gross domestic product is now expected to grow at a rate of 2.4 percent this year, 2.1 percent next year and 2.0 percent in 2019.

The unemployment rate is forecast to remain at 4.3 percent this year before falling to 4.1 percent next year and remaining there in 2019.

Inflation is expected to remain under the Fed’s 2 percent target through 2018 before hitting it in 2019.

There were no dissents in the Fed’s policy decision.

Reference: Howard Schneider

Sterling jumps after UK retail sales beat expectations

LONDON (Reuters) - Sterling jumped by almost a cent against the dollar on Wednesday after data showed British retail sales surged unexpectedly in August, increasing pressure on the Bank of England to lift interest rates from their record lows.

The numbers showed a sharp pick-up in monthly sales growth to 1.0 percent, the fastest since April and far above forecasts for 0.2 percent growth.

Sterling jumped to as high as $1.3606 after the data, up from $1.3518 beforehand, and leaving it just a whisker away from a high of $1.3618 reached on Monday, which had been its highest since the Brexit vote.

British government bond futures slid around 15 ticks after the data to 124.00. The 10-year gilt yield hit its highest since Feb. 6 at 1.349 percent, up a basis point on the day.

Britain’s FTSE 100 dropped to a session low, down 0.3 percent as the data pushed sterling up, weighing on the index whose constituents mainly earn in foreign currencies.

The Bank of England has chosen an unusual time to announce that British interest rates are likely to rise for the first time in more than 10 years.

The economy is growing at half its usual pace, retailers are struggling to sell to shoppers whose wages are rising slowly, car sales are falling and the housing market has lost steam. Only employment figures look strong.

On top of that, Britain is leaving the European Union in 18 months’ time and the ruling Conservative Party is still split over whether to compromise with Brussels on the exit terms or risk a fight.

Even inflation, which has accelerated well above the central bank’s target to nearly 3 percent, offers only a limited justification for higher borrowing costs - most economists believe it is likely to peak soon.

So the BoE has taken a risk by saying last week that most members of its Monetary Policy Committee thought a rise was likely in the coming months.

It has long said any increases are likely to be gradual and to a level lower than before the global financial crisis.

A first rise of a quarter percentage point would only reverse a cut made after Britons voted for Brexit in June last year and take rates back to a historically very low 0.5 percent, their level for most of the decade since the 2007-09 crisis.

But the BoE is now sounding more urgent than before about raising borrowing costs because it believes Brexit is likely to impose a reduced “speed limit” on how fast the economy can grow without pushing up inflation.

It worries that Britain, at least initially, will be less open to trade, employers will have fewer workers from EU countries to hire due to a clampdown on immigration and companies are likely to scale back investment.

That, along with a push by other central banks away from their own post-crisis emergency stimulus programmes, means it needs to get on with raising rates, Governor Mark Carney said on Monday.

Many economists responded to the MPC’s surprise announcement last week by bringing forward their predictions of a first rate rise to its next meeting on Nov. 2. But they are not convinced it’s the right move at this point.

“The rationale for the change of our forecast has been driven by the change in the Monetary Policy Committee’s rhetoric, not a change in our assessment of the outlook for the economy, aside from the admittedly very low unemployment rate,” Sam Hill, an economist at RBC Capital Markets, said.


At 4.3 percent, unemployment is at its lowest level in more than 40 years and below the 4.5 percent level which the BoE has said would probably generate inflation.

But pay growth remains below inflation and there is little sign of a significant pick-up.

For supporters of higher rates, waiting for cast-iron evidence that domestic inflation pressures are rising risks leaving things too late.

By contrast, Chris Williamson, an economist at IHS Markit, said the signals coming from his firm’s closely-watched surveys of Britain’s services, manufacturing and construction sectors suggest the economy is more in need of a cut than a rise.

“How serious the impact of a hike will be will depend on the extent to which lenders see this as a once-and-done hike or the start of the process of material changes in interest rates,” Williamson said.

One-off rate moves by the BoE are rare, and financial markets are currently pricing in two increases by mid-2018.

Rain Newton-Smith, chief economist at the Confederation of British Industry, said she expected the BoE to move slowly after making an initial increase.

“My sense is that we’re talking about waiting six months to see how things bed down,” she said. “They’ll wait to see how the economy reacts, how investors react and how households react.”

Longer-term growth factors, chief among them Brexit, were more important for businesses than the cost of borrowing, she said.

Not all business groups are so relaxed. The British Chambers of Commerce, which typically represents smaller firms than the CBI, said it was too soon to raise rates.

A quarter-point rise would add little to borrowing costs but any move now could aggravate a fall in business confidence caused by Brexit, BCC economist Suren Thiru said. “A rate rise will signal to businesses that a period of monetary policy tightening is upon us,” he said. “That could influence investment intentions over the next couple of years.”

Some economists think the BoE might even have to reverse course and cut rates if its first increase proves too much of a shock to households and businesses, who have grown used to borrowing costs not rising since 2007.

A survey by IHS Markit, conducted before last week’s message from the BoE, showed only 29 percent of British households expected a rate rise over the next six months.

“It is even possible that the economy reacts negatively to a move later this year and the MPC reconsiders its strategy further ahead,” Philip Shaw, an economist with Investec, said.

“Indeed what was already a complex outlook for the British economy and markets has just become cloudier still.”

Reference: Reuters staff

Wednesday, 20 September 2017

Kiwi jumps on election poll, dollar subdued ahead of Fed meeting

LONDON (Reuters) - The kiwi dollar was the largest mover among major currencies on Wednesday, rising to a 1-1/2 month high after a poll showed New Zealand’s ruling National Party has a wide lead over the opposition ahead of a general election at the weekend.

The other big mover in relatively subdued trading in the G10 group of currencies was the Australian dollar, which gained half a percent after comments overnight from Australia’s central bank outlined the constructive growth conditions for its economy.

Support for New Zealand’s National Party jumped 6 points to 46 percent, according to the One News-Colmar Brunton opinion poll, while support for the opposition Labour party slumped by seven points to 37 percent. Labour had surged in recent weeks.

“Obviously, everything is about the elections this weekend,” said Credit Agricole currency strategist Manuel Oliveri in London.

“Polls this morning showing that the National Party is in the lead once again, so that is actually going against Labour which is taken as a negative for the currency.”

The Kiwi dollar was last up 0.6 percent at $0.7356 after its initial surge to $0.7375. The Aussie dollar was up 0.4 percent at $0.8035.

The dollar retreated as investors awaited the outcome of the Federal Reserve meeting later in the day. The index that measures the greenback against a basket of major currencies was 0.1 percent lower in early European trade.

Analysts expect the U.S. central bank to say at the end of its two-day meeting that it will gradually move to reduce the size of its balance sheet starting in October, and also leave the door open for an interest rate hike at their Dec. 12-13 meeting.

“Despite the likely announcement of the Fed’s balance sheet normalisation, we don’t expect today’s FOMC meeting to have a positive impact on USD,” ING strategists wrote in a note to clients.

“If anything, risks to the dollar are skewed to the downside given balance sheet normalisation was already well telegraphed and should be conducted in a very gradual manner; a likely shift lower in the distribution of dots (within the dotted forecast diagram) given the growing division among FOMC members, and the rising dovish camp.”

The U.S. currency inched 0.1 percent lower against its Japanese counterpart to 111.45 yen.

Currency markets gave a muted reaction to Trump’s speech to the U.N. General Assembly on Tuesday, in which he said the United States will be forced to “totally destroy” North Korea unless Pyongyang backs down from its nuclear challenge.

The euro added 0.1 percent to $1.2007, moving closer to its Sept. 8 high of $1.2092, its highest since January 2015.

European Central Bank policymakers disagree on whether to set a definitive end-date for their money-printing programme when they meet in October, raising the chance that they will keep open at least the option of prolonging it again, six sources told Reuters.

The strong euro, with its dampening effect on inflation, is driving a rift among ECB policymakers, according to sources on the ECB’s Governing Council with direct knowledge of its thinking.

Reference: Ritvik Carvalho

Asia stocks steady, dollar treads water as investors count down to Fed

The dollar hovered close to an eight-week high against the yen, buoyed with U.S. Treasury yields having risen to one-month highs before the Fed’s policy announcement.

The greenback was little changed at 111.460 yen after touching 111.880 overnight, its highest since late July.

Currency markets had a muted reaction to Trump’s latest comments on North Korea.

Trump said in a speech to the U.N. General Assembly on Tuesday that the United States will be forced to “totally destroy” North Korea unless Pyongyang backs down from its nuclear challenge.

South Korea's KOSPI .KS11 was down 0.05 percent and the won was up 0.2 percent at 1,128.6 to the dollar.

“Trump’s comments were actually very strong and the won would have moved more if it were not for the overall cautious mood before the Fed’s decision,” said Kim Doo-un, a foreign exchange analyst at Hana Financial Investment Seoul.

For now, broader risk sentiment was yet to be swayed by Trump’s comments.

“The market doesn’t seem to have any strong risk-off sentiment, even after Trump’s comments,” said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

The euro edged up to touch $1.2019, its highest since Sept. 11.

The dollar index .DXY against a basket of six major currencies was little changed at 91.747.

The Mexican peso pulled back slightly after dropping in response to a strong earthquake that struck central Mexico. The currency stood at 17.8165 pesos per dollar after touching 17.8500 overnight, its weakest in two weeks.

The 10-year Treasury note yield stood close to 2.246 percent, the one-month peak set the previous day.

In commodities, oil prices rose after Iraq’s oil minister said OPEC and other crude producers were considering extending or even deepening a supply cut to curb a global glut, while a report showed a smaller-than-expected increase in U.S. inventories.

Brent crude futures were up 0.3 percent at $55.30 a barrel and U.S. crude  rose 0.6 percent to $49.76 a barrel.

Reference: Shinichi Saoshiro

Dollar hovers near eight-week high vs. yen; focus on Fed meeting

SINGAPORE/TOKYO (Reuters) - The dollar held steady at near 8-week highs versus the yen on Tuesday, with investors awaiting the Federal Reserve’s policy statement this week for fresh hints on the possible pace and timing of further U.S. monetary tightening.

The dollar last changed hands at 111.52 yen, trading within sight of Monday’s peak of 111.665 yen, its highest level since July 27.

The greenback has benefited from a recent surge in U.S. bond yields. The U.S. 10-year Treasury yield had reached a one-month high of 2.237 percent on Monday.

That marked a rise of 22 basis points from 10-month lows set on Sept. 8, when U.S. bond yields fell on risk aversion, partly stemming from concerns about U.S.-North Korea tensions.

In Asian trade on Tuesday, the U.S. 10-year Treasury yield slipped 1 basis point on the day to 2.218 percent.

Investors are now preparing for potentially more hawkish statements from the Federal Reserve after its two-day policy meeting ends on Wednesday, especially after the Bank of England surprised investors last week with talk of a possible rate hike.

The Fed is widely expected to announce this week that it will start paring its balance sheet, with the reductions seen likely to start this year.

It is expected to keep rates on hold, but investors will be watching for fresh hints on the chances of another rate rise this year and how many could be expected in 2018.

While the dollar might edge up towards 112 yen ahead of the Fed’s policy statement due on Wednesday, its recent rise against the yen looks a bit over-extended, said Peter Chia, FX strategist for United Overseas Bank in Singapore.

“I would think that with the geopolitical risks always in the background, that will probably temper the upside potential,” he said, referring to the near term outlook for the dollar versus the yen.

The yen showed little reaction to the possibility of Japanese Prime Minister Shinzo Abe calling a snap election for as early as October to take advantage of his improved approval ratings and disarray in the main opposition party.

“Foreign investors usually react instinctively to such themes and there hasn’t been a visible response in currencies thus far,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.

“The ruling Liberal Democratic Party is enjoying a recovery in support and it is hard to imagine a major change taking place. This is likely leading to the lack of reaction or interest from foreign participants.”

The euro edged up 0.1 percent to $1.1968, on track for its fourth straight days of gains, albeit modest ones.

Sterling rose 0.2 percent to $1.3520.

The currency had soared to a 15-month high of $1.3618 on Monday on speculation that the BoE would raise interest rates soon for the first time in nearly a decade. But the pound’s rally was tempered after BoE Governor Mark Carney said any coming interest rate rises would be limited and gradual.

Reference: Shinichi Saoshiro

Tuesday, 19 September 2017

Borrowing bonds may get harder as Fed pares holdings

(Reuters) - The Federal Reserve hopes to pull off the wind-down of its massive balance sheet with minimal market impact, but even a slow withdrawal may increase strains in a crucial section of the bond market.

Any reduction in the U.S. central bank’s balance sheet could make it harder for banks and investors to borrow certain Treasuries in the repurchase agreement market, making it more difficult and expensive to bet on or protect against interest rate increases.

The Fed is widely expected to announce on Wednesday that it will begin paring its $4.5 trillion balance sheet, likely beginning this year.

Banks and investors have benefited from having access to the Fed’s expansive bond inventory for specific issues that can otherwise be hard to come by, but the Fed will soon have fewer bonds to lend.

“There will be no supply buffer in the repo market,” said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York.

The Fed holds $2.4 trillion of Treasuries that it lends out through its reverse repurchase agreement, or repo, facility in exchange for overnight loans.

These loans typically total between $100 billion and $200 billion per day, with demand at month-end and year-end even higher. The operation helps the Fed set a floor on interest rates and provides Treasuries to banks and investors when they are in high demand.

The central bank also lends its inventory to dealers through a security lending operation, where banks can request specific issues that are in high demand by clients including hedge funds.

This operation typically sees between $20 billion and $30 billion in loans per day. On some days, demand for certain issues exceeds the amount of those bonds the Fed holds.

By paring its holdings the Fed may make it harder to acquire highly sought after bonds and reduce liquidity in the funding markets, sparking greater market volatility and making it more expensive to short Treasuries.

The Fed’s wind-down could also create an uptick in the number of loans that are not settled on time, a problem that has worried regulators including the New York Fed in the past.

“It’s a market functioning issue,” said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut. “In the end it could make people less likely to short a security.”

The market is already struggling with a scarcity of benchmark 10-year notes, which can be hard to borrow due to the U.S. Treasury Department’s auction schedule.

The government sells a new issue of the notes every three months, and reopens the issue once a month in the two months after the original sale, making the amount of notes available incrementally larger with each auction.

As investors pour into the new issue, the amount of supply in the first month is often insufficient to meet demand from those wanting to borrow the bond for a short position.

The Fed has eased some of these disruptions by making its holdings available to borrow.

On every day in September except one the central bank has lent out all of its holdings of the current 10-year note issue, which was sold for the first time in August.

On many days, demand to borrow the notes has been several billion dollars higher than the amount of the notes the Fed was able to supply, New York Fed data shows.

While the Fed will initially only make small adjustments to its reinvestment policy, the reduced buying may over time exacerbate this imbalance.

The amount of trade fails, when a market participant does not deliver the bonds it agreed to offer to another market participant, has been elevated this month. There were $153 billion in failed trades on Sept. 5, the most since Dec. 12, according to data from the Depository Trust & Clearing Corp.

And if interest rates rise as the Fed pares its holdings, the effect of the Fed’s pullback may be amplified.

Rising rates can increase the number of investors taking short positions on liquid Treasuries, known as on-the-runs, to protect against or bet on further bond weakness, in turn adding to demand for the already scarce notes.

“We think that a lack of lendable supply of on-the-runs in a rising rate environment will have a much more pronounced effect,” said RBC’s Cloherty.

Other lenders may step in and offer some relief for those looking to short Treasuries. Bond holders that do not currently lend out their holdings could be drawn into the market by more lucrative returns as the Fed shrinks its holdings.

Securities lenders that are already active in the market may also benefit from higher rates as the Fed steps back.

“It’s an opportunity for some people. You’re losing a competitor to lend out the securities so you can theoretically charge more,” said NatWest’s Gwinn.

Reference: Karen Brettell

Asian shares slip as investors await Fed meeting for rate clues

TOKYO (Reuters) - Asian shares slipped on Tuesday, hobbled by uncertainty as traders awaited a Federal Reserve meeting for clues on U.S. monetary policy, though sentiment was supported by record highs on Wall Street.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.2 percent after wobbling between positive and negative territory in early trading.

Futures suggested a lustre start to the European trading day, with the Eurostoxx 50 and FTSE futures both slightly lower, and DAX futures up 0.1 percent

On Wall Street on Monday, the Dow Jones Industrial Average closed at a record high for the fifth straight session, and the S&P 500 .SPX marked its second straight closing record high, as higher U.S. Treasury yields helped lift financial shares.

At a two-day meeting beginning later on Tuesday, the Fed is expected to take another step toward policy normalization and announce plans to begin unwinding its $4.2 trillion portfolio of Treasuries and mortgage-backed securities.

The Fed is expected to hold interest rates steady, with investors looking for clues on its anticipated pace of further tightening later this year and next. The market is pricing in an approximately even chance of a hike in December.

“If the Fed does keep the option for December alive, and reaffirms its view in terms of gradual rate increases, that may be dollar-supportive, given the more benign rate-hike path priced by the market,” said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

“This is likely to give the dollar support going into the end of this week,” he said.

“So we might see Asian currencies fail to make any significant gains, and they may even be on the back foot, if we do see the dollar resume more upside,” Kotecha added.

Japan's Nikkei stock index ended 2 percent higher after touching its highest levels since late June, catching up to global equities gains and a weaker yen as Tokyo markets reopened after a public holiday on Monday.

On Thursday, the Bank of Japan will also hold a regular policy meeting, and is widely expected to maintain the status quo as inflation remains stubbornly weak despite a modest economic recovery.

Prime Minister Shinzo Abe is considering calling a poll for as early as next month to take advantage of his improved approval ratings and disarray in the main opposition party, according to government and ruling party sources.

“There has been concern among foreign investors, about the future of Abenomics and the Abe administration, with clear declines in Abe’s approval ratings earlier this year,” said Stefan Worrall, director of Japan equity sales at Credit Suisse in Tokyo.

“If Abe is cemented in power for another few years, that would be a market-positive event,” he said. “Certainty is preferred to uncertainty, when it comes to market confidence.”

The Nikkei has gained nearly 30 percent since Abe attained political power in late 2012.

South Korean shares .KS11 dipped 0.1 percent, against a backdrop of caution ahead of the Fed meeting as well as continuing tensions on the Korean peninsula.

U.S. Defense Secretary Jim Mattis hinted on Monday about the existence of military options on North Korea that might spare Seoul from a brutal counterattack. But he declined to say what kind of options he was talking about or whether they involved the use of lethal force.

The dollar index, which tracks the greenback against a basket of six major rivals, inched 0.1 percent lower to 91.928 .DXY. The euro was 0.2 percent higher at $1.1980.

The dollar added 0.2 against its Japanese counterpart to 111.81, its highest since late July.

Higher U.S. yields bolstered the greenback, with the benchmark 10-year note yield notching a one-month high of 2.237 percent overnight.

Crude oil prices were unsteady, but stayed near last week’s multimonth highs. Traders braced for a potential stockpile build-up expected later this week, limiting the prospect for further gains.

U.S. crude futures were down 1 cent at $49.90 per barrel, within sight of Thursday’s nearly four-month high of $50.50. Brent crude slipped 0.1 percent to $55.42, not far from an almost five-month high of $55.99 marked on Thursday.

Reference: Lisa Twaronite