Friday, 24 March 2017
U.S. stocks rose in early afternoon trading on Thursday as investors snapped up beaten-down bank stocks ahead of a vote on a healthcare bill that is seen as President Donald Trump's first policy test.
Failure to pass the legislation, called the American Health Care Act, would cast doubt on Trump's ability to deliver other parts of his agenda that need the cooperation of the Republican-controlled Congress, including ambitious plans to overhaul the tax code and invest in infrastructure.
The House vote had been expected by about 7 p.m ET but there were signs the deadline could be pushed back.
"There's been a lot of optimism regarding the Trump administration so this could very well be the first setback," said Erik Davidson, chief investment officer at Wells Fargo Private Bank in San Francisco.
"What the market wants is to get through the healthcare question so that we can move on to tax reform."
The S&P 500 has gained 10 percent since the election, spurred mainly by Trump's campaign promises to enact legislation that are seen as pro-business.
The benchmark index is trading at about 18 times expected forward earnings, compared with a 10-year average of 14, according to Thomson Reuters data.
At 12:45 p.m. ET the Dow Jones Industrial Average .DJI was up 83.9 points, or 0.41 percent, at 20,745.2, the S&P 500 .SPX was up 8.91 points, or 0.37 percent, at 2,357.36.
The Nasdaq Composite .IXIC was up 16.20 points, or 0.28 percent, at 5,837.84.
Ten of the 11 major S&P indexes were higher, with the financial index's .SPSY 1 percent rise leading the advancers.
The sector, which had its worst one-day fall since June on Tuesday, has risen the most since the election.
Bank of America's 1.6 percent rise lifted the S&P, while Goldman Sachs' 1.1 percent increase helped push the Dow higher.
Google-parent Alphabet fell 1.1 percent to $840.09 as more firms pull YouTube ads on fears they may have appeared alongside offensive videos. The stock was the biggest drag on the S&P and the Nasdaq.
Five Below rose 12.1 percent to $42.73 after the retailer's quarterly earnings beat estimates.
Accenture fell 3.8 percent to $121.66 after the consulting and outsourcing services provider's quarterly profit slipped.
Advancing issues outnumbered decliners on the NYSE by 2,266 to 608. On the Nasdaq, 2,011 issues rose and 746 fell.
The S&P 500 index showed 14 new 52-week highs and one new low, while the Nasdaq recorded 43 new highs and 33 new lows.
Reference: Tanya Agrawal
Thursday, 23 March 2017
The dollar edged up from four-month lows against the yen on Thursday, but gains were capped by U.S. President Donald Trump's struggle to push through a healthcare bill.
The U.S. currency has struggled this week as growing doubts over Trump's ability to push through with economic and tax policies triggered broad risk aversion and buffeted equities.
U.S. Treasury yields declined in turn, eroding the dollar's interest allure.
Financial markets' immediate focus is on whether Trump can gather enough support at a vote later in the day to pass a bill to rollback Obamacare, one of his key campaign pledges.
Trump's plan faces resistance from some conservative Republicans who view it as too similar to Obamacare, and from moderates concerned it will hurt some voters.
"The vote on Obamacare is a litmus test for Trump. If he can't push through the bill (on Obamacare), it would further damage stocks. It also raises the risk of his other policies, like tax cuts, being delayed," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.
"So today's vote is of main importance to the currency market."
The dollar was up 0.15 percent at 111.350 yen, enjoying a bit of respite after sliding to a four-month low of 110.735 on Wednesday, when it fell for the seventh straight session.
With global equities buffeted by risk aversion this week -Wall Street on Tuesday suffered its worst day since Trump's election - the dollar has struggled notably against the yen, often sought by investors due to its perceived safe-haven status in times of market tumult.
Its safe-haven status was also seen helping the yen as Tokyo dealt with a political scandal involving Prime Minister Shinzo Abe, facing questions about his ties to a nationalist school involved in a murky land deal.
"If the situation over the prime minister's dealings with the school remains unresolved, the yen could gain further against the dollar," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
The euro was little changed at $1.0792 EUR= after advancing to a seven-week high of $1.0825 overnight.
The common currency has been supported this week on growing expectations of a tightening in European Central Bank monetary policy this year, and on bets that the anti-euro candidate Marine Le Pen will be defeated in the French presidential elections.
The dollar index against a basket of major currencies was up 0.1 percent to 99.751 .DXY after its descent to a seven-week trough of 99.547 the previous day.
The pound was effectively flat at $1.2482 and in reach of a one-month high of $1.2507 scaled on Wednesday.
Sterling briefly dipped on Wednesday following what the police described as a "marauding terrorist attack" in London, but it recovered when there were no reports of other separate incidents.
The Australian dollar was down 0.3 percent at $0.7657.
The Aussie has lost about 0.6 percent this week, after a stellar 2 percent gain last week, as investors sought safe havens such as the yen, bonds and gold.
Also working against the Aussie was a steep fall in the price of iron ore - the country's top export earner.
The S&P and the Nasdaq reversed course to climb higher in afternoon trading on Wednesday, as investors sought bargains a day after the major indexes posted their biggest one-day loss since before the election.
Apple was up about 1 percent and provided the biggest boost to the three major indexes.
However, the Dow was lower, weighed down by a 6.3 percent fall in Nike after the world's largest footwear maker missed quarterly revenue estimates.
"What we're seeing today is buyers being opportunistic and trying to gain entry into the overall market," said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.
"That's why we're seeing tech and industrials stocks, which last a lot on Tuesday, lead today."
Still, the market remained cautious ahead of the first major legislative test of Donald Trump's presidency.
Investors are closely watching the outcome of the healthcare bill, which Republican party leaders are aiming to move in the House as early as Thursday, as a signal to how Trump can push forward his tax cuts and simpler regulation agenda.
Trump has been trying to rally Republican lawmakers behind the plan, which will dismantle Obamacare.
Some investors fear that if the healthcare reform act runs into trouble or takes longer-than-expected to pass, then Trump's tax reform policies may face setbacks.
"The market was giving Trump somewhat of a talk-the-talk leeway," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management in Chicago.
"It was supportive of what the administration was talking about. We're starting to get into a phase where that grace period is coming to an end and what the market wants to see more walk-the-talk as opposed to talk-the-talk."
Oil prices touched four-month lows after data showed U.S. crude inventories rising faster than expected.
The S&P 500 has run up about 10 percent since the election in November, spurred mainly by Trump's agenda of tax cuts and infrastructure spending, but valuations have emerged as a concern.
The benchmark index is trading at about 18 times forward earnings estimates against the long-term average of 15, according to Thomson Reuters data.
At 12:21 p.m. ET (1621 GMT) the Dow Jones Industrial Average .DJI was down 30.94 points, or 0.15 percent, at 20,637.07, the S&P 500 .SPX was up 1.46 points, or 0.06 percent, at 2,345.48.
The Nasdaq Composite .IXIC was up 12.81 points, or 0.22 percent, at 5,806.64.
Five of the 11 major S&P sectors were higher, with the technology index's 0.58 percent gain leading the advancers.
The financial sector .SPSY, which suffered its worst daily drop since June on Tuesday, was down 0.22 percent. Bank of America and Wells Fargo were down about 0.7 percent.
Gold prices rose to a three-week high and the dollar index .DXY, which measures the greenback against a basket of currencies, had touched its lowest level since early February.
Sears Holdings slumped 16.5 percent to $7.60 after the retailer warned on Tuesday about its ability to continue as a going concern after years of losses and declining sales.
Declining issues outnumbered advancers on the NYSE by 1,656 to 1,174. On the Nasdaq, 1,794 issues fell and 947 advanced.
The S&P 500 index showed 10 new 52-week highs and 14 new lows, while the Nasdaq recorded 14 new highs and 69 new lows.
Reference: Tanya Agrawal
Wednesday, 22 March 2017
The euro rose above $1.08 for the first time in six weeks on Tuesday as centrist Emmanuel Macron's performance in a TV debate fuelled expectations he would win the French presidency ahead of far-right rival Marine Le Pen in May.
After four days of trading focused chiefly on expectations for U.S. interest rates and the Trump administration's attitude to trade and a stronger dollar, the euro's gains also sent the dollar index to a six-week low.
A cautious line from Federal Reserve speakers since it raised rates last week has added to signs the Trump team will have to take its time in delivering a promised fiscal boost to the economy.
There has also been an easing of some of the perceived political risks to the euro from populists such as Le Pen, who wants to take France out of the single currency, and speculation the European Central Bank will rein in its ultra-loose monetary policy later this year.
A snap opinion poll after Monday's debate showed Macron, a former economy minister who has never run for public office before, was seen as the most convincing among the top five contenders for the French presidency.
"The euro has been helped by Macron's performance definitely," said Stephen Gallo, head of European FX strategy at Bank of Montreal in London.
"I still want to buy dollars but not here. I think there will be a push higher in euro dollar in the very short run, before we would look for levels to be selling."
The euro rose 0.6 percent to $1.0808 by 1134 GMT. That pushed the index used to measure the dollar's broader strength below 100 for the first time since early February.
The euro was also 0.7 percent higher against the yen.
Sterling, a target for investors this year due to nerves over the UK economy's performance in the face of its planned departure from the European Union, jumped almost 1 percent after higher than expected inflation data.
Signs price rises are beginning to outstrip wage gains bodes ill for household budgets and consumer spending but also fuel expectations that the Bank of England may be forced to raise interest rates to support the pound.
The Bank's meeting last week shocked markets by showing one outgoing policymaker already switching to vote for higher rates and others on the verge of following if inflation and inflation expectations continue to rise.
"With the BoE now indicating it could raise rates much sooner than markets were expecting ... future downside for the pound now looks far more limited, especially as it's the pound's depreciation that has generated much of the inflationary pressures," said Oanda market analyst Craig Erlam.
Sterling rose almost 1 percent to a three-week high of $1.2474 in morning trade in London. It inched up 0.2 percent to 86.73 pence per euro.
Reference: Patrick Graham
Sterling jumped almost 1 percent to its highest level in three weeks on Tuesday, after data showed British inflation in February above the Bank of England's 2 percent target for the first time since the end of 2013.
Consumer prices rose by a stronger-than-expected 2.3 percent in annual terms, beating expectations of a 2.1 percent rise, and up sharply from 1.8 percent in January, the Office for National Statistics said.
Strong consumer spending was behind the UK economy's surprising resilience in the months immediately following Britain's unexpected vote last June to leave the European Union.
However, a plunge in the pound, which has wiped almost a fifth off its value against the dollar since the vote, has driven a rise in domestic inflation. A recent run of consumer data has shown that is beginning to weigh, with Britons less ready to spend on non-essential items.
Sterling, which had already been trading up 0.4 percent at $1.2416 before the data, rose to a high of $1.2472 - its highest since Feb. 27 - after it, up 0.9 percent on the day.
It also hit a two-day high of 86.55 pence per euro.
"The way the market is treating the data is obviously quite conventionally at the moment - that higher inflation implies greater risk of a rate hike ... and that's being taken as an immediate positive for sterling," said RBC Capital Markets currency strategist Adam Cole.
"Longer term I'm not sure that that is a particularly robust relationship when inflation is rising but wages aren't, and the net effect will be to squeeze real incomes and clamp down on consumer spending as a result."
Britain's unemployment rate fell unexpectedly to its lowest in more than a decade in the three months to January, but pay growth - an indicator the BoE is watching closely as it considers its monetary policy - worsened, in an unpromising sign for the economy ahead of its divorce with the EU.
The BoE surprised markets last week when one of its policymakers voted to lift interest rates, in a break with the consensus of keeping rates at a record low.
Some other members of the Bank's monetary policy committee also gave a hawkish tilt to the Bank's rhetoric, saying it would not take much for them to follow suit if inflation continued to shoot up.
"The print at 2.3 percent this morning...(leads) us to believe a rate hike to curb inflation could be on the table sooner than first-thought," said Alex Lydall, head of dealing at Foenix Partners in London.
Reference: Ritvik Carvalho
Tuesday, 21 March 2017
Asian shares hit 21-month highs on Tuesday while the dollar and U.S. bond yields were on the backfoot on the prospect of a less hawkish than previously expected Federal Reserve policy trajectory.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent in its eighth consecutive day of gains with tech-heavy Seoul and Taipei shares hitting two-year highs while Hong Kong's Hang Seng scaled 1-1/2-year highs.
European shares are expected to open slightly higher, with spread-betters seeing a rise of up to 0.1 percent in Britain's FTSE, Germany's DAX and France's CAC.
Japan's Nikkei dropped 0.3 percent, weighed by financial stocks, which were hurt by lower U.S. yields and exporter stocks, which fell on the yen's gains against the dollar.
While Asian shares have been supported by signs of strong global economic growth, concerns about protectionism cast a shadow after financial leaders of the world's biggest economies dropped a pledge to keep global trade free and open, acquiescing to an increasingly protectionist United States.
Wall Street shares drifted lower on Monday as investors worried that President Donald Trump's plan to cut taxes and boost the economy could take longer than earlier expected.
"Any fiscal spending by the Trump administration will not come until August at earliest and probably much later. So any economic benefit of that will show up only next year," said a senior trader at a European bank.
"So the markets are gradually pricing that in, winding back their initial rally after the elections."
Although Trump promised in early February to deliver a "phenomenal" tax plan within a few weeks, no such details have been released yet, with many investors now waiting for detailed budget plan expected in mid-May.
In addition, sentiment was hurt after Federal Bureau of Investigation Director James Comey confirmed for the first time that the bureau is investigating possible ties between Trump's campaign and Russia.
"U.S. stocks valuations are getting really expensive, so I expect the market to be capped for now. That also means Japanese shares are unlikely to gain further," said Tatsushi Maeno, senior strategist at Okasan Asset Management.
Expectations that the Federal Reserve will have to step up rate hikes to counter inflationary pressure from Trump's stimulus are also waning after the Fed dropped no hints of an acceleration in credit tightening last week.
Chicago Federal Reserve President Charles Evans, in one of the first official comments after the Fed raised rates as expected last week, reiterated that message on Monday.
He said that two more interest rate hikes this year were likely, disappointing investors who had anticipated rates to be increased more quickly. Evans's comments helped to bring down the 10-year U.S. Treasuries yield to 2.461 percent, its lowest level in two weeks. It last stood at 2.479 percent.
Lower yields undermined the greenback's allure, softening the dollar to three-week lows near 112.26 yen in early Asian trade.
The euro ticked up to $1.0758, near Friday's six-week high of $1.07825, maintaining its gains made last week after a election defeat for Dutch far-right leader Geert Wilders, which eased broader fears of a populist drift in European politics.
In France, centrist Emmanuel Macron solidified his status as front-runner in the presidential election in a televised debate on Monday.
"At the moment, worries about the election have subsided a bit after the Dutch elections. But I expect the market to become more nervous near the election, given last year's experiences (with Brexit and the U.S. elections)," said Kazushige Kaida, head of foreign exchange at State Street.
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The dollar's index against a basket of six major currencies stood at 100.24, after hitting a six-week low of 100.02 on Monday.
The spectre of slower U.S. rate hikes has been helping high-yielding currencies.
The Australian dollar traded at $0.7706, after hitting a 4-1/2-month high of $0.7748 on Monday. It has risen 2.0 percent since the Fed's policy meeting last week.
The South African rand has gained 4.0 percent since then to a near 1-1/2-year high while the Brazilian real rose 3.2 percent.
Oil prices rose in Asia on expectations that an OPEC-led production cut to prop up the market could be extended.
Prices for front-month Brent crude futures, the international benchmark for oil, gained 0.4 percent to $51.84 per barrel.
OPEC members increasingly favour extending the output curb beyond June to balance the market, sources within the group said, although they added that this would require non-OPEC members such as Russia to also step up their efforts.
Reference: Hideyuki Sano
The Federal Reserve is on track to raise interest rates twice more this year after a policy tightening last week, and it could be more or less aggressive depending on inflation and fiscal policies from the Trump administration, a Fed rate-setter said on Monday.
The public comments from Chicago Fed President Charles Evans were among the first since the U.S. central bank lifted its policy rate a notch last week, as expected. It also forecast roughly two more moves in 2017 in a nod to low unemployment and some inflation pressures.
"Three is entirely possible," Evans, speaking on Fox Business Network TV, said of hikes in 2017. "As I gain more confidence in the outlook I could support three total this year. If inflation began to pick up, that would certainly solidify (that expectation). It could be three, it could be two, it could be four if things really pick up."
Asked about U.S. President Donald Trump's promise to boost the economy to a 4 percent growth rate, from about 2 percent in the last few years, Evans said: "Four percent would be really an outsized number."
While that level of growth could be reached "in any given year," he said it was hard to imagine given the economy is already doing well, the labor market is "very strong," and sectors like automobile sales are at all-time highs.
Evans, who is a voter on the Fed's policy-setting committee this year and supported last week's move, also echoed a comment from Fed Chair Janet Yellen on Wednesday that suggested the central bank could try to push inflation, now at 1.7 percent, above a 2-percent target.
"There is room to get inflation up to 2 percent and in fact going beyond 2 percent a little bit to make sure we get there, and that it's a symmetric inflation objective, so that's ok," Evans said.
Reference: Jonathan Spicer
Monday, 20 March 2017
Asian stocks were mixed on Monday in thin trade, following Wall Street's declines and the G20's decision to drop a pledge to avoid trade protectionism, while the Federal Reserve's less hawkish-than-expected comments continued to weigh on the dollar.
European stocks are set for a subdued start, with financial spreadbetter IG Markets expecting Britain's FTSE 100 to open little changed and Germany's DAX to open 0.3 percent lower.
MSCI's broadest index of Asia-Pacific shares outside Japan added 0.3 percent.
Hong Kong's Hang Seng climbed 0.7 percent. Chinese shares were mixed with the CSI 300 down 0.1 percent while the Shanghai Composite added 0.1 percent.
Australian shares closed down 0.36 percent. South Korea ended the day 0.35 percent lower. Japan is closed for a holiday.
The MSCI emerging markets index added 0.4 percent to hit its highest level in more than two years on Monday.
Investor sentiment towards emerging markets, while cooling, remains positive. Emerging market equity funds had their sixth straight week of inflows in the week ending March 15, but the pace slowed. They had net inflows of $215 million, compared with nearly $1 billion the previous week, according to Thomson Reuters data.
On Friday, Wall Street was flat to negative, dragged lower by bank shares that fell along with Treasury yields.
Financial leaders from the world's biggest economies reiterated their warnings against competitive devaluations and disorderly foreign exchange markets at the meeting in the German town of Baden-Baden over the weekend.
But they failed to agree on a commitment to keep international trade free and open, highlighting a global shift towards protectionism.
On Sunday, German Chancellor Angela Merkel and Japan's Prime Minister Shinzo Abe defended free trade, calling for a trade deal to be reached quickly between Japan and the European Union and distancing themselves from protectionist rhetoric coming from the Trump administration.
"Essentially (the G20 outcome was) a result of the U.S. protectionist stance, something Trump has been very clear on and the market is well aware of this," said James Woods, global investment analyst at Rivkin Securities in Sydney.
"Importantly we saw other leaders such as Shinzo Abe and Angela Merkel come out publicly supporting free trade, and for now the protectionist stance remains constrained to the U.S. It would be more concerning if this began spreading to other countries."
The dollar didn't react to the statements from the meeting, hovering close to its near-three-week low touched on Friday. It traded almost 0.2 percent lower at 112.54 yen, its fourth straight day of declines after the Fed reiterated plans for three rate hikes this year, fewer than the four markets were expecting.
The dollar index, which tracks the greenback against a basket of six trade-weighted peers, slipped 0.1 percent to 100.17, after earlier touching a 5 1/2-week low.
Markets are focussed on a raft of speeches by Federal Reserve officials this week, including Chicago's Charles Evans on Tuesday and Friday, Chair Janet Yellen on Thursday, Dallas's Robert Kaplan and Minneapolis's Neel Kashkari on Friday and New York's William Dudley on Saturday.
The euro climbed 0.2 percent to $1.0763, riding investor relief over the Netherlands election defeat of anti-European Union candidate Geert Wilders that boosted it to a near-six-week peak on Friday.
Attention now turns to the French election, with the first Presidential debate set to take place on Monday. Opinion polls show independent centrist Emmanuel Macron would lead far-right leader Marine Le Pen by a hair in first-round voting, before beating her in the run-off.
In commodities, oil prices continued their downward trend as OPEC supplies remained steady despite touted cuts and rising U.S. drilling contributed to concerns about a supply glut.
U.S. crude dropped almost 1 percent to $48.32 a barrel.
Global benchmark Brent fell 0.6 percent to $51.41.
The weaker dollar boosted gold, which rose 0.5 percent at $1,234.54 an ounce, after touching a two-week high earlier in the session.
Reference: Nichola Saminather
Sunday, 19 March 2017
Financial leaders from the world's biggest economies found common ground on foreign exchange at a G20 meeting on Saturday but failed to agree on trade, highlighting a global shift towards protectionism and setting a cautious tone for financial markets next week.
The Group of 20 powers meeting in the German spa town of Baden-Baden reiterated their long-standing warnings against competitive devaluations and disorderly FX markets, allaying fears that the new U.S. administration might have opened up a chink in the G20's united front on global currency policy.
For markets, no change to G20's stance on FX is welcome news. Having the world's financial and economic powers on the same page should help keep FX volatility low, a cornerstone for stable markets and rising asset prices more broadly.
But failure to agree on a commitment to keep global trade free and open will have negative consequences for financial markets, even if not dramatically so immediately.
"We may open on Monday with modest dollar weakness thanks to the failure to agree on trade, but it would have been a lot worse if there were major changes to the FX language on top of that," Tim Graf, managing director and head of macro strategy EMEA at State Street in London, said.
The dollar has slipped recently even though the Federal Reserve has raised U.S. interest rates, because longer-term bond U.S. yields have eased back. The dollar had its biggest weekly fall for two months last week.
Similarly, the upward momentum on Wall Street has fizzled out this month after a string of record highs, although European markets have continued to advance.
The pullback in longer-term yields despite a rise in shorter-term yields suggests investors think growth and inflation are not strong enough for the Fed to lift rates much further. This so-called "flattening" of the yield curve has weighed on stocks and the dollar.
An initial draft of the G20 communique earlier this month had removed almost all of the boilerplate language on FX from previous communiques. It had removed warnings against "excess volatility" and "disorderly" FX moves as well as a pledge to refrain from "competitive devaluations".
They were all reinstated.
G20 and G7 communiques have long stated that stable and strong growth is best fostered by stable and calm currency markets.
The level of implied volatility in the euro/dollar exchange rate over the next month fell last week to 6.075 percent, its lowest in two and a half years. One-month dollar/yen implied volatility hit its lowest in over a year.
According to economists at JP Morgan, one of the main reasons for the depressed volatility across financial markets currently is because volatility in global growth is now the lowest in at least half a century.
Yet one sentence from last year's G20 communique - the shortest and one of the most important - was omitted: "We will resist all forms of protectionism."
This points to a fundamental disagreement between the U.S. administration and the other 19 participants, particularly the Europeans, who flatly rejected any form of protectionism.
U.S. Treasury secretary Steven Mnuchin said that the previous communique was not necessarily relevant to the current global economic climate from his point of view. He said he favored "free" trade but some agreements might need to be renegotiated.
administration, the implementation of protectionist policies and reality of trade wars are not immediate concerns, analysts say.
"This G20 is not really a big deal for the market, partly because the language on FX was maintained," Kenneth Broux, head of corporate research, FX and rates at Societe Generale, said.
"The disagreement on trade and protectionism is new, but the meeting at a later date between U.S. President Donald Trump and Chinese premier Li could be more pertinent to where trade negotiations are headed," Broux said.
Washington may have signed up to the language on FX, but it is widely believed that it wants a weaker exchange rate. It blames the persistent U.S. trade deficit, manufacturing decline and lack of competitiveness on the dollar's strength.
In January a closely-watched measure of the dollar's trade-weighted value hit a 14-year high. President Trump and some of his key advisors have accused Germany, Japan and China - three of America's biggest trading partners - of exploiting weak exchange rates to their competitive advantage.
Some analysts warn that the U.S. administration will soon bring exchange rates back to the top of its economic policy agenda.
"The U.S. administration's team is not yet in place, so its foreign exchange policy is not yet settled. The signs don't look good ... and we need to be wary of discussions inside the U.S. administration as well as remarks by its key people," Tsuyoshi Ueno, senior economist at NLI Research Institute, said.
Reference: Jamie McGeever
In addition, finance leaders of the world's top economies have agreed to review banking rules, but this does not automatically mean hard-fought financial market regulation will be rolled back, Bundesbank President Jens Weidmann told Reuters on Sunday.
The new U.S. administration has argued that excessive bank regulation is holding back lending and economic growth, raising the prospect that rules could be loosened, putting efforts to finalize a new global banking accord, known as Basel III, at risk.
Answering questions after a two-day meeting of the G20 finance ministers and central bank governors in the German town of Baden-Baden, Weidmann said in written comments:
"At our meeting we agreed to look more closely at the actual impact of the reforms after the comprehensive regulatory efforts in the financial sector."
The G20 members would review whether intended goals had been achieved and whether there were any unintended side effects of the jointly agreed banking rules, Weidmann said.
"But this is something quite different from rolling back the regulation," Weidmann said.
The head of the German central bank said he had doubts that hopes would materialize that economic growth could be stimulated on a broad basis by rolling back financial market regulation.
"The financial crisis has shown us painfully what great overall economic damage can be inflicted through insufficiently regulated financial markets," Weidmann said.
Asked if the G20 gathering in Baden-Baden revealed more conflicts than at previous meetings, Weidmann said: "Especially when differences of opinion exist, a forum such as the G20 proves to be particularly valuable. In this respect I would speak less of conflicts than of an open, helpful exchange of opinions and an intense struggle for a common position."
Weidmann said it was clear that the G20 members still had a lot of discussions about trade and its role for prosperity ahead of them.
But he called it a success of the German G20 presidency that the financial leaders in Baden-Baden adopted a non-binding list of principles to boost the resilience of their economies against future shocks.
Acquiescing to an increasingly protectionist United States, the G20 finance ministers and central bank governors dropped a pledge in the main communique to resist protectionism and keep global trade open.
The failure of the world's financial leaders to keep established language supporting free trade marks a setback for the G20 process and poses a risk for growth of export-driven economies such as host Germany.
Reference: Gernot Heller
Friday, 17 March 2017
Asian stocks advanced on Friday and looked set for their best week since July, while the dollar extended a slide that began after the Federal Reserve indicated it was unlikely to speed up monetary tightening.
Financial spreadbetters predicted a muted start to European stocks after Thursday's strong gains, with Britain's FTSE and Germany's DAX expected to open 0.1 percent lower and France's CAC 40 seen starting the day flat.
The dollar index, which tracks the greenback against a basket of six trade-weighted peers, retreated 0.2 percent to 100.18. It hit a five-week low on Thursday, and is down 1 percent for the week.
The dollar was steady at 113.32 yen but is on track to post a 1.2 percent loss for the week.
While the Fed raised interest rates by 25 basis points on Wednesday as widely expected, it kept its original forecast of three rate hikes this year, disappointing investors who were expecting a bump up to four after a string of upbeat U.S. economic data.
U.S. Treasury yields, which slid after the decision, staged a recovery on Thursday and continued to rise on Friday.
The 10-year yield was at 2.5313 percent, from its last close of 2.524.
"The story in global markets over the past 24 hours has centered on a broad-based tightening of monetary policy conditions (and the perception of future tightening)," Chris Weston, chief market strategist at IG in Melbourne, wrote in a note.
Markets are also keeping an eye on the Group of 20 finance leaders' meeting in Germany this weekend, where topics including protectionism, exchange rates and reforms to boost economic growth are expected to be on the agenda.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent and were on track to end the week with a 3.5 percent gain, its biggest increase since the week ended July 15.
Japan's Nikkei closed down 0.45 percent, ending the week with a 0.4 percent loss.
Chinese stocks slipped 0.6 percent as investors sought more evidence of a sustainable economic recovery, but indexes were set for a 1 percent increase for the week.
Hong Kong's Hang Seng index touched its highest level since August 2015 on Friday. While up only marginally on the day, it was on track for a 3.2 percent gain for the week, its biggest since September.
MSCI's all-country world stock index held near Thursday's all-time high on Friday, on track to end the week 1 percent higher.
Overnight, Wall Street was subdued following strong gains after the Fed's rate decision. The Nasdaq was flat, while the Dow and the S&P 500 posted losses.
But European shares were upbeat following the election victory of Dutch Prime Minister Mark Rutte, who defeated anti-immigration, anti-European Union rival Geert Wilders.
"Shares remain vulnerable to a short-term pull-back as investor sentiment toward them is very bullish and a lot of good news has been factored in – but there is a risk that any pullback may not come until seasonal weakness kicks in around May," Shane Oliver, head of investment strategy at AMP Capital, wrote in a note.
The euro, which touched its highest level in 5-1/2-weeks early on Friday, hovered near that level at $1.0773, after two days of strong gains. It is set to end the week up 0.9 percent.
Sterling was steady at $1.2358. On Thursday, it jumped to a two-week high after a decision by the Bank of England to hold interest rates steady, while hinting it might raise them soon.
In commodities, oil prices rose slightly, supported by a weaker dollar.
U.S. crude climbed almost 0.2 percent to $48.84 a barrel, and looked set to end the week 0.7 percent higher.
It touched its lowest level in 3-1/2 months early this week on concerns about a supply glut in the United States, but data on Wednesday showing a small decline in stockpiles there helped lift prices.
Global benchmark Brent added almost 0.1 percent to $51.77 a barrel, and was headed for a 0.8 percent weekly gain.
Gold edged up 0.1 percent to $1,227.8101 an ounce. It was poised to gain 1.9 percent for the week, its first in three, driven by the Fed's more moderate monetary policy stance.
Reference: Nichola Saminather
A Bank of England policymaker surprised investors by breaking ranks and voting to raise interest rates and some others said it would not take much for them to follow suit, the BoE said on Thursday, signalling a potentially bigger split soon.
Kristin Forbes, who is due to leave the BoE in June, cast the sole vote in favour of raising Bank Rate to 0.5 percent, the first Monetary Policy Committee split since last July.
The other eight MPC members all opted to keep rates at 0.25 percent to help the economy as Britain prepares to leave the European Union.
The majority view showed the BoE remained in no hurry to follow the U.S. Federal Reserve which raised rates on Wednesday.
BoE Governor Mark Carney said last month that Britain's economy faced "twists and turns" on the road to Brexit.
But sterling jumped a full cent against the U.S. dollar to hit its highest level since March 1 on the news that more MPC members might vote for a rate hike soon. The yield on 10-year British government bonds hit their highest level in a month.
"It's definitely a shift," Ross Walker, an economist at RBS said. "It takes us to a point where there will probably be more dissent sooner than expected, unless of course the economy deteriorates more quickly than the Bank set out in February."
Adding to a hawkish shift in some of the Bank's tone, the BoE edged up its forecast for economic growth in the first quarter to 0.6 percent.
No economist taking part in a Reuters poll had predicted that a MPC member would vote to change rates this month.
Before Thursday's meeting, most economists expected no BoE rate hike until 2019, when Britain is due to leave the EU. But some analysts sounded less sure after the announcement.
"With the global data shifting up a gear, it is imperative that UK growth slows discernibly this year in order to prevent a potential rate hike later in the year," JP Morgan economist Allan Monks said, although he said he thought a rate hike in 2017 remained unlikely.
Vatsala Datta, a fixed income strategist at RBC, said investors were pricing a nearly 50 percent chance of a rate hike early next year, up from about 30 percent earlier this week.
Goldman Sachs said it no longer expected the BoE to expand its bond-buying stimulus programme again this year.
SIGNS OF SQUEEZE
Britain's economy surprised the BoE and almost all other economists last year when it withstood the initial shock of the Brexit vote.
Last month, the BoE said it expected the economy to grow by a relatively strong 2.0 percent this year but was likely to slow after that due to uncertainty about the country's future ties with the EU which buys about half of Britain's exports.
This week, most of its policymakers pointed wage growth that was "notably slower" than they had thought and "some signs that the squeeze in households' real income growth was feeding through into spending" as inflation picks up on the back of the post-Brexit vote fall in sterling.
However, among the eight-strong majority, "some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted," the minutes said.
Analysts said Ian McCafferty, who voted for a rate hike in early 2016, was the most likely MPC member to join Forbes. Other candidates included Michael Saunders who sounded upbeat about the economy in a speech he made in January.
Forbes, who is due to return to her career as a U.S. academic after leaving the BoE in June, had previously signalled that she was getting uncomfortable with keeping rates on hold.
Reference: William Schomberg,
Thursday, 16 March 2017
The dollar nursed painful losses in Asia on Thursday while sovereign bonds savored their biggest rally in nine months after the Federal Reserve hiked interest rates, as expected, but signaled no pick-up in the pace of tightening.
The euro got an added bonus when returns showed the anti-EU party of Geert Wilders won fewer seats than expected in Dutch elections, soothing fears that public opinion was swinging inexorably toward a break-up of the union.
The sigh of relief was heard across Asia as investors had feared faster U.S. hikes and more political upheaval in Europe could spook funds out of emerging markets.
"The Fed makes the world safe for risk until June," said CitiFX strategist Steven Englander. "Buy emerging market FX, equities, commodities."
Gold, copper and oil all rallied as the dollar dropped. MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.2 percent to its highest level since mid-2015.
Spread betters pointed to solid opening gains for European bourses, while E-mini futures for the S&P 500 edged up another 0.1 percent.
South Korea's market climbed 0.6 percent, and even Japan's Nikkei managed a slight rise despite the damage done to exporters by a firmer yen.
Shanghai stocks added 0.7 percent with investors seemingly untroubled as China's central bank raised short-term rates for the third time in as many months.
The Dow had ended Wednesday with gains of 0.54 percent, while the S&P 500 added 0.84 percent and the Nasdaq 0.74 percent.
The Fed lifted its funds rate by 25 basis points, as expected, to a range of 0.75 percent to 1.00 percent, but said further increases would only be "gradual."
Crucially, officials stuck to their outlook for two more hikes this year and three more in 2018, when many had expected an accelerated spate of moves.
Rather, the Fed said its inflation target was "symmetric," indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.
That was painful news for bond bears who had built up huge short positions in Treasuries in anticipation of a hawkish Fed.
Yields on two-year notes were down at 1.30 percent, having fallen 8 basis points overnight in the biggest daily drop since June last year.
The drop pulled the rug out from under the dollar, which sank to a three-week low of 100.510 against a basket of currencies.
The euro was taking in the view at $1.0727, having climbed 1.2 percent overnight in its steepest rise since June. The dollar suffered similar losses on the yen to huddle at 113.38.
ALSO IN BUSINESS NEWS
Richard Franulovich, a forex analyst at Westpac, noted history showed a strong positive correlation between the dollar and yields one week after a Fed meeting and the direction and magnitude of the change in policymakers' projected rate increases - termed dots - from meeting to meeting.
"The absence of any overt hawkish guidance from the Fed and their dots should leave the dollar trading on the back foot over the next month," he said.
The yen and the Swiss franc tended to move the most in the first week, he added, but the impact tended to be longer lasting on the Australian and Canadian dollars.
The Aussie currency did indeed rise a rousing 2 percent in the wake of the Fed, but took a slight knock on Thursday when local data showed the country's jobless rate hit a 13-month peak in February.
A protracted bout of weakness for the U.S. dollar would be seen as positive for commodities priced in the currency.
Spot gold was up at $1,225.13 an ounce, after enjoying its biggest daily jump since September.
U.S. crude futures rose 27 cents to $49.13 per barrel, adding to a 2.4 percent gain on Wednesday. Brent firmed 31 cents to $52.12, after rising more than a dollar overnight.
Reference: Wayne Cole
The dollar edged lower on Wednesday, as investors awaited a widely-expected interest rate increase from the Federal Reserve, but grew cautious about the rate outlook this year given lingering uncertainty with the Trump administration's fiscal policy.
Fed fund futures have factored in a 94 percent chance of a rate rise on Wednesday. The focus has now shifted to whether the Fed is set for regular quarterly rate increases.
"There may be disappointment that the 'dot plots' are not going to rise much higher and therefore the language from the Fed may be more dovish than what they let on last week," said Jeremy Cook, head of currency strategy at FX payments company World First in London.
"There is still so much uncertainty toward fiscal policy in the United States," he added.
The so-called "dot plot" refers to the Fed's interest rate projections. Currently, the Fed's "dot plot" calls for three hikes this year.
In late morning trading, the dollar index slipped 0.1 percent to 101.57
Cook said the market needs to see four members of the Federal Open Market Committee shift their outlook higher to get a significant change in the 2017 median "dot plots."
Against the yen, the dollar was flat at 114.74, well below last week's 115.51 peak, its highest since Jan. 19, as expectations built for the rate increase.
The dollar drifted higher earlier after data showed a steady increase in inflation, with the consumer price index posting its biggest year-on-year gain in February in nearly five years.
In the 12 months through February, the CPI accelerated 2.7 percent, the largest year-on-year growth since March 2012.
The Bank of Japan also began a two-day policy meeting on Wednesday. It is expected to hold its policy steady and stress that inflation is nowhere near levels that justify talk of withdrawing its massive stimulus.
Sterling gained to a week's high of $1.2258, rebounding from the previous day's eight-week low hit on worries of a painful and prolonged Brexit. The pound was last up 0.4 percent at $1.2202, although it dipped earlier below $1.22 after UK data showed wage growth slowed in the three months to January.
The euro, meanwhile, rose 0.3 percent to $1.0629, as concern about Wednesday's Dutch parliamentary election was offset by market speculation the European Central Bank may be ready to wind down its stimulus programme.
The Dutch vote, taking place amid a diplomatic row between the Netherlands and Turkey, is being closely watched as a test of populist and anti-immigrant sentiment in Europe, before national elections in France next month and in Germany in September.
Reference: Gertrude Chavez-Dreyfuss
Wednesday, 15 March 2017
Though recent data, particularly out of China, has fuelled a rally in Asian equities since the start of the year, investors are expecting more headwinds for emerging markets due to an increasingly hawkish Fed.
"The positive sentiment towards emerging markets is not sustainable as the interest rate differential advantage in Asia's favour is likely to reduce in the coming months," said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale in Hong Kong.
Having posted its second-biggest daily gain this year in the previous session, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.1 percent near the day's highs in cautious trading.
Japan's benchmark Nikkei average .N225 was down 0.14 percent while stocks in mainland China .SSEC and Korea .KS11 declined 0.13 and 0.2 percent respectively.
Index futures in Europe pointed towards a cautious start.
Asian share markets have had a good start to the week thanks to positive news out of the region's two economic powerhouses, China and India.
Strong data out of China this week have sparked a fresh rally in Hong Kong stocks .HSI, while Indian shares climbed to a record high on Tuesday as investors regarded Prime Minister Narendra Modi's landslide victory in the northern state of Uttar Pradesh as an endorsment for his economic reforms.
While recent economic Chinese data has been supportive, Premier Li said at a press conference that China's economy faces domestic and external risks this year, but added the country has many policy tools to cope with them.
"China's economy had pretty good performance in January and February. March data will be crucial as investors are anxious for any hint on whether the recovery is sustainable," said Linus Yip, strategist at First Shanghai Securities Ltd.
A worrying drop in global oil prices, however, has cast doubt on how much Asian policymakers are likely to raise interest rates this year to maintain their premium over U.S. rates.
Brent crude has lost more than 8 percent in the past five trading sessions despite a 1.2 percent bounce on Wednesday.
U.S. oil prices rose after industry data showed a surprise drawdown in U.S. crude stockpiles. West Texas Intermediate crude CLc1 was up 1.4 percent at $48.40 a barrel.
Policy decisions at the Bank of England and the Japanese central bank along side a Dutch election vote within the next 36 hours were further reasons for investors' cautious stance.
The U.S. dollar edged higher against major rivals ahead of a much anticipated U.S. Federal Reserve rate hike, and most attention will be focussed on what Fed Chair Janet Yellen says about the future path of interest rates.
The dollar index .DXY was flat at 101.69, staying in a well worn recent range.
"Of course, everyone is waiting for the Fed, so we're expecting range-bound trading until we get some clear signals about expectations for the rest of the year," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. Markets are also awaiting a meeting of the Group of 20 finance ministers and central bankers in the German town of Baden-Baden starting on Friday, their first meeting since Donald Trump won the U.S. presidential election.
Gold XAU= rose 0.3 percent to $1200.06 before the Fed decision.
Reference: Saikat Chatterjee
One of the biggest mysteries in global markets so far in the Trump era is the historically low level of volatility that has prevailed despite all the turmoil and uncertainty that analysts warned his victory would unleash.
The best explanation may be the most mundane: the global economy's growth is at its most steady and predictable for decades, since recovering from the financial crisis, trumping any short-term political surprise, even in the White House.
Crucially, the economic recovery and consequent stability hasn't been built on a borrowing binge, suggesting the low volatility climate can continue - with episodic spikes - even should there be more political shocks in store, such as in Dutch, French or German elections this year.
As a result, investors are likely to feel encouraged to continue seeking out riskier assets that offer relatively high returns, thereby supporting the rally that has broadly prevailed since 2009 in markets such as stocks and corporate bonds.
Volatility in global growth is the biggest single driver of financial market volatility, according to JP Morgan. And since recovering from the 2007-09 crisis, growth has been steady and predictable almost to the point of boring.
The recovery has been built on the foundations of steps taken by policymakers since the crash, not least the trillions of dollars of central bank stimulus and the rebuilding of the shattered banking system.
"This is a very stable world economy. It's never been so stable, and this is why the market is so stable and risk premia so low," said Jan Loeys, head of global asset allocation at JP Morgan.
"Markets reflect fundamentals, and if the fundamentals are stable, asset prices will become less volatile," he said.
According to the World Bank, annual global growth since 2011 has hovered in a fairly narrow 2.3 to 3 percent range. The International Monetary Fund's measure pegs it in an even tighter 3.1 to 3.5 percent range since 2012.
And if both institutions' estimates are met, 2017 will be yet another year of growth being stuck within these narrow parameters.
Based on a five-year rolling standard deviation of quarterly global real GDP growth rates, global macro volatility is at around 0.5 percent, says JP Morgan.
The level of borrowing today is far removed from the period leading up to the crisis.
Over the last five years, annual private sector credit growth, excluding financial institutions, has been around 6-8 percent globally, according to JP Morgan. In the five years up to 2008, it had virtually doubled to around 13 percent.
This lack of 'leverage', thanks to governments' and banks' post-crisis caution in over-extending themselves, suggests the "Goldilocks" backdrop of low volatility and rising asset prices can continue.
As a result, many closely-watched measures of market volatility are anchored near their lowest levels on record.
The VIX index .VIX is a measure of implied volatility in U.S. stock markets - Wall Street's so-called "fear index". It's around 12 percent, and has rarely been lower in its 26-year history.
It's a similar picture in Europe where the benchmark index of euro zone market volatility is around 15 percent, which is also one of the lowest points in its history.
Ultra-low volatility and a fairly predictable world economy runs counter to the narrative that Trump's divisive policies on key issues such as immigration and world trade, would send markets into spin.
That hasn't happened, although the media noise on Trump's potentially negative impact on world markets hasn't diminished either.
"If politics weaken growth, volatility will rise," Deutsche Bank's George Saravelos and Rohini Grover wrote in a note on Tuesday. "But so long as the current unusual confluence of strong data but uncertain politics continues, volatility is likely to stay subdued."
Research by equity analysts at U.S. bank Citi shows that stock market volatility around the world is below the 10-year median. It's especially low in France, Britain and the United States, where it is more than 50 percent below the median.
The analysts say this is largely down to the loose monetary policy central banks have implemented since the crisis, which has boosted all assets and dampened volatility everywhere.
They note that volatility tends to fall in a rising market and vice versa. Wall Street has risen more than 250 percent from a March 2009 low, notching a string of fresh record highs in recent weeks.
A more stable fundamental backdrop has helped depress market volatility, the analysts added. Global company earnings volatility has been low throughout the post-crisis recovery - consistently 5 percent or lower over the past five years.
In the past 20 years, there have been only two significant bouts of earnings volatility of 15 percent and higher, or global recessions. They coincided with the market crashes of 2000-02 and 2007-09.
Reference: Jamie McGeever
Tuesday, 14 March 2017
Sterling dropped on Tuesday after Britain's parliament paved the way for Prime Minister Theresa May to launch divorce talks with the European Union, while stocks advanced ahead of an expected U.S. interest rate later in the week.
European stocks were set for a mixed start, with financial spreadbetters expecting Britain's FTSE 100 .FTSE and Germany's DAX .GDAXI to dip in early trade, while France's CAC 40 .FCHI was seen inching up.
The pound GBP=D4 weakened 0.5 percent to $1.2155 after both houses of parliament backed the so-called Brexit bill, opening the door for May to start the clock on the required two-year negotiation period by the end of this month.
The euro EUR=EBS lost almost 0.1 percent to $1.0645, extending Monday's 0.2 percent loss.
On Monday, sterling had jumped 0.36 percent after Scotland's First Minister Nicola Sturgeon demanded a new independent referendum in late 2018 or early 2019, once the terms of the UK's exit from the EU are clearer.
The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent, while Japan's Nikkei .N225 closed down 0.1 percent.
Shares of Toshiba Corp. (6502.T) closed up 0.5 percent after plunging as much as 8.8 percent, their biggest one-day loss in almost a month.
The company said it would "aggressively consider" a sale of most of Westinghouse and announced it had received approval from regulators to extend for a second time the Tuesday deadline for its official third-quarter earnings.
Its statement earlier in the session that it had requested the extension to expand a probe into problems at its U.S. nuclear unit Westinghouse sent the shares tumbling.
Chinese shares reversed early gains after data showed retail sales cooled more than expected in the first two months of the year.
Other China data on Tuesday was more upbeat and positive for the global economy, with investment and industrial output expanding more than expected, but investors feared those signs of strength may not be sustainable.
China has cut this year's economic growth target to about 6.5 percent to give policymakers more room to push through painful reforms to contain financial risks. The economy grew 6.7 percent in 2016, the slowest pace in 26 years.
On Monday, Goldman Sachs upgraded Chinese stocks to "overweight" on better growth prospects and a bullish view on the country's banking sector. Its strategists cited rising producer prices and easing credit stress, and a brighter credit outlook and loan pricing for banks.
Overnight, Wall Street was mixed, with the Dow Jones Industrial Average .DJI down 0.1 percent, while Nasdaq .IXIC rose 0.24 percent and the S&P .SPX was little changed.
With an interest rate hike this week by the Federal Reserve fully priced in, markets are focussed on any clues from the U.S. central bank about the pace of future rises.
"On one hand, the market ponders a surprise hold, in which massive unwinding of positions could take place with the hike already priced in," Jingyi Pan, market strategist at IG in Singapore, wrote in an note.
"On the other hand, concerns have also been paid to an acceleration in the Fed’s path to normalisation, where the likelihood of four Fed hikes has been raised, up from the current projection of three," she said.
"The immediate reaction is likely to be seen in the dollar and upsides towards December’s high on the dollar index may be eyed."
The dollar index .DXY was 0.2 percent higher at 101.49, extending Monday's gains following a bout of profit taking at the end of last week.
The dollar gained 0.1 percent to 114.92 yen JPY=D4, but remains below the seven-week high touched on Friday on expectations of a Fed move at the end of a two-day meeting on Wednesday.
Markets are also awaiting a meeting of the Group of 20 finance ministers and central bankers in the German town of Baden Baden starting on Friday, their first meeting since Donald Trump won the U.S. presidential election.
U.S. Treasury Secretary Steven Mnuchin will be "pushing hard" to advance U.S. interests in his debut G20 meeting, including reaffirming commitments to avoid competitive currency devaluations, a senior Treasury official said on Monday.
In commodities, oil prices dipped after touching a 3-1/2-month low in the previous session as concerns about rising U.S. production offset optimism about supply cuts by the Organization of Petroleum Exporting Countries.
U.S. crude fell 0.1 percent to $48.36 a barrel, while global benchmark Brent was flat at $51.35.
Gold XAU= slipped 0.1 percent to $1,202.52 ahead of the Fed decision.
Reference: Nichola Saminather
U.S. household wealth has hit record levels. U.S. stock prices recently hit all-time highs. Inflation is nearing the Federal Reserve's 2.0 percent goal, and the world economy including the once-sick eurozone has skirted the risk of a deep new downturn.
When Fed Chair Janet Yellen holds her first press conference of 2017 on Wednesday she can arguably declare a victory of sorts with an expected interest rate rise that will leave monetary policy looking increasingly normal.
WATCH: The week ahead - markets brace for Fed and Dutch vote
The rate increase expected on March 15 will be the second in four months, a pace unseen since the peak of the U.S. housing boom in 2006. A rate hike will also bring the Fed's target rate to between 0.75 - 1.00 percentage points, near the bottom of the range within which the Fed operated before the 2007-2009 financial crisis.
"You don't need any intrigue or fundamental shifts in beliefs about the economy to realise why a rate increase might be likely," Johns Hopkins University professor and former Fed adviser Jon Faust said of the central bank's plans.
"The Fed would just as soon be back to normal...Unless something really bad happens they will raise rates in March and that gets them on a path to raise rates more this year."
READ MORE: Bank of Japan seen standing pat, may highlight disparity on growth and prices
U.S. February employment data published on Friday further cleared the way to an interest rate rise, with the economy adding another 235,000 jobs. The unemployment rate held roughly steady at 4.7 percent.
For Faust and others, the conversation is now focused on whether the Fed, when it releases new economic forecasts this week, could even raise its forecast for rate rises also.
The month of March has been cruel to Yellen in the past. At the Fed's March meetings in 2015 and 2016 the central bank downgraded its economic forecasts after inflation expectations plunged two years ago and after last year's meltdown in the benchmark S&P 500 stock index.
A year on, world stock markets have surged and even global economic laggards like Japan and the euro zone are looking better. European Central Bank president Mario Draghi gave his own mission accomplished declaration last week saying that "...our monetary policy has been successful."
If anything, market analysts, economists, and Fed officials tout the possibility of stronger economic growth, resulting from the possible impact of U.S. tax cuts and infrastructure spending, or the run-up in household wealth from rising stock and real estate values.
As a multiple of disposable income, the $92 trillion in net worth recorded among American families at the end of 2016 is the highest on record, JP Morgan economist Michael Feroli noted last week, More comforting for the Fed, markets have not just anticipated the path of interest rate rises by setting prices in markets in line with the number of rate increases for the year that policymakers expect to deliver, but reacted sanguinely to it.
As has been typical of prior monetary policy tightening cycles, the Fed's moves have been felt mostly in short-dated bond yields, with less effect on the mortgage markets or other long-term financing important to economic growth.
That's a relief for a Fed still anxious about events like the 2013 "taper tantrum", when then Fed chair Ben Bernanke said the central bank would begin reducing purchases of bonds, triggering a global bond market selloff.
When Fed officials unexpectedly rallied behind a March interest rate increase in recent weeks, the unusually blunt message was easily accepted. Investor expectations changed and short-term rates rose.
But the overall yield curve, the range of interest rates from short to long term debt maturities, showed little sign investors thought the Fed was becoming worried about inflation.
Yellen has long made job growth the priority, hoping wage growth would follow, while assuming the Fed could always tame inflation if it rose too quickly.
While in recent remarks she has emphasized the risk of rising prices, she has also remained committed to raising rates at only a "gradual" pace in order to leave loose policy in place a while longer.
IHS chief economist Nariman Behravesh said the latest job report may leave the Fed in a sweet spot, able to move ahead with its rate hike plans as employment and modest wage growth continue.
"We can expect to see the recent strength in jobs growth continue for a while longer," Behravesh said. At an annual rate of 2.8 percent, "while...wage growth...is nothing to cheer about, it is not bad either."
Reference: Howard Schneider
Monday, 13 March 2017
An event-packed week for global markets got underway on Monday with stocks steady and the dollar recovering from a three-day fall as investors braced for a potential interest rate hike in the United States, a Dutch election and the first G20 finance ministers' meeting of the Trump era.
Strong U.S. employment data and talk that European Central Bank policymakers had begun thinking about how to raise interest rates as inflation returns saw market participants, particularly in bond and currency markets, start to price in higher borrowing costs.
Buying from the start of European trade on Monday halted three days of losses for the dollar which gained against both the euro and a basket of currencies.
Fed fund futures prices showed investors pricing in more than a 90 percent chance of an increase in U.S. overnight interest rates and the market's attention is now firmly on the scale of tightening further out.
"Improved growth and inflation prospects are allowing developed market central banks to sketch their exits from extreme accommodation at varying speeds," David Folkerts-Landau, group chief economist at Deutsche Bank wrote in a note to clients.
Sterling rose 0.4 percent against the dollar, however, ahead of a vote in Britain's lower house of parliament on legislation that will give the government permission to trigger Britain's exit from the European Union.
"The push and pull between solid growth momentum and political risks look set to continue in the near-term," Folkerts-Landau said.
The world's most powerful finance ministers and central bankers convene in the German spa town of Baden-Baden on March 17-18, their first meeting since Donald Trump's U.S. election victory in November where his protectionist stance on international trade is likely to be a key issue.
Gains in mining stocks and continued corporate deal-making activity helped European shares offset weakness in oil-related shares, with the benchmark STOXX 600 up 0.2 percent in early trades.
The FTSE 100 was up slightly where along with mining blue chips a 1 percent gain for shares of HSBC supported the index.
HSBC shares rose after Europe's biggest bank tapped an outsider, Mark Tucker, for its top job.
In bond markets, euro zone government bond yields pulled back from multi-week highs, as nervous investors turned their focus to this week's Dutch parliamentary elections -- the next key gauge of populism in Europe.
Although the risk of a eurosceptic party coming to power in the Netherlands is small, a strong election performance could renew concerns about the popularity of the far-right in French presidential elections in April and May, said Erin Browne, head of macro investments at UBS O'Connor, a hedge fund manager within UBS Asset Management.
"If you see a eurosceptic party gains a significantly larger share of the vote than current polls suggest that could spill over into concern about the French elections and the National Front doing better in the second round of voting than is currently being predicted," she said.
"That's the risk for markets with a view to the Dutch elections."
A sharp pullback in oil prices which fell to their lowest in three months and are on track for a fifth day of losses also kept investor confidence in check.
The slump in prices has occurred as more rigs are deployed to look for oil in the United States and as crude inventories in the United States, the world's biggest oil consumer, have surged to a record.
Reference: Vikram Subhedar
The euro hit a more than four-week high against the dollar on Friday after a report that the European Central Bank had discussed the possibility of raising interest rates before the end of its quantitative easing program.
Sources told Reuters some ECB policymakers had suggested hiking rates from their current record lows before the end of QE stimulus, but that the discussion was brief, and the idea did not have broad support.
"I have no idea whether the reports are correct or not but it shows where we are," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California.
"It shows that the discussions (at the ECB) are leaning towards, 'How do we get out of QE?' ... There's been a fundamental shift, but it's a fundamental shift that's been gradually sinking in."
Merk noted multiple reports from euro zone countries supporting the premise that the economy is gaining traction. The ECB raised its growth and inflation targets for the euro zone in 2018 following its March meeting Wednesday.
The euro rose more than 1.1 percent against the dollar to a high of $1.0698, its strongest since Feb. 9. It was the euro's largest one-day gain since June 3, 2016. That helped the continental currency to its second consecutive weekly gain against the dollar.
The dollar index .DXY, which tracks the greenback against six major world currencies, fell to its lowest since Feb. 28.
The index fell 0.34 percent for the week, its first weekly loss in five weeks.
The dollar also was weighed down by the February U.S. non-farm payrolls report that showed wages rose less than expected. That tempered expectations for a spate of interest rate increases this year by the Federal Reserve.
"Once again the wage number continues to overshadow," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "And with wages rising in lackluster fashion, that has tempered expectations for the Fed to raise rates at a faster pace this year."
Fed fund futures prices showed investors see a 93 percent chance of an increase in U.S. overnight interest rates this month, according to CME Group's FedWatch tool. But that number was close to 90 percent before the data was released.
The greenback was slightly lower against the yen JPY= after touching a seven-week high of 115.50 yen. The dollar last traded at 114.78 yen. For the week, it fell 0.2 percent, its first weekly fall in four.
Reference: Dion Rabouin and Gertrude Chavez-Dreyfuss
Friday, 10 March 2017
While an imminent hike in U.S. interest rates is putting a downdraft on gold prices, bullion's allure as a safe haven is likely to limit the downside, traders and analysts say, owing to uncertainties in the United States and Europe.
Gold slumped to a 10-month low in mid-December after rates were increased for the first time in a year, but gold investors don't appear to be as jittery ahead of the next Fed meeting and a near-certain rate rise on March 14-15.
The previous slide came also as equity investors cheered the election of U.S. President Donald Trump, but gold has since recovered about 7 percent on a lack of clarity on Trump's policies and worries about upcoming elections in Europe.
"The expectations of rate hikes are already priced into gold unless the expectations grow to four hikes, which we think is unwarranted," said analyst Dominic Schnider of UBS Wealth Management in Hong Kong.
"With a more hawkish Fed, there is no incentive to chase gold. But, the disappointment potential on President Donald Trump is very high. The Congress will not give what he wants."
Higher interest rates make it less attractive to hold non-interest bearing gold, while a firmer U.S. dollar also makes gold more expensive for buyers in other currencies.
Gold has fallen about 5 percent from a three-month peak on Feb. 24 to $1,198 an ounce, but traders say the risks of a sharp technical fall have eased and expect physical demand to emerge in a band from $1,150 to $1,200 an ounce.
"From the fund management industry, some people believe in this political uncertainty trend, and they are buyers of gold," said Hans Brandt, commodity fund manager at Swisscanto Invest.
"Some believe economic growth is picking up, the dollar is getting stronger over the next 3-6 months. Those people are sellers at this level."
LONG POSITIONS RISE
Speculative long positions held by hedge funds and money managers in COMEX gold have nearly tripled this year, suggesting a fresh round of allocations into gold in 2017.
However, the 121,720 lots at Feb. 28 were still less than half of the 286,921 contracts held in July 2016, when speculative fever was at its peak as gold prices hit over 2-year highs at $1,374.91 an ounce.
This lower amassed speculator position reduces the threat of a sharp drop in prices should a flood of speculative positions be unwound, said Commerzbank analyst Carsten Fritsch.
Increasing inflation across a number of major economies will also likely dampen appetite for fixed income investments and support gold, said UBS's Schnider.
"There is interest in physical gold if prices drop below $1,200. People will definitely see value below $1,200 and that will help stabilize the market. So far, ETFs also have looked resilient," Schnider said.
Physical gold holdings in exchange-traded funds have fallen since last week, partly because of a stronger dollar, but at 54.45 million ounces are still nearly 3 percent higher than at the start of February. Holdings are also roughly 6 million ounces or 13 percent above where they were in early March 2016.
Meanwhile, gold is expected to be boosted by political risks stemming from Britain's exit from the EU and upcoming contentious elections elsewhere in Europe.
"The impact of a Fed rate hike will be offset as we go into the French elections. This year, we also have German, Dutch and Italian elections and all have the possibility of surprises," INTL FCStone analyst Edward Meir said.
"We saw very good physical demand when prices came near $1,150. Especially, the German public is very keen on buying. Nobody is talking about interest rates there," said Michael Kempinski, Managing Director, Degussa Precious Metals Asia Pte. Ltd.
"People in Europe face uncertainty every day ... when prices come down, they buy more."
Reference: Sethuraman N R and Arpan Varghese
The European Central Bank pledged on Thursday to keep its aggressive stimulus policy in place at least until the end of the year but signaled a diminishing urgency for more policy action, enough to send the euro and bond yields higher.
ECB President Mario Draghi said the Bank had removed one phrase from his standard introductory statement that pledged it would act "using all the instruments available within its mandate" if needed to achieve its objectives, highlighting an improvement in the outlook.
"That's been removed, basically to signal that there is no longer that sense of urgency in taking further actions ... that was prompted by the risks of deflation. That was the assessment of the Governing Council," Draghi told a news conference.
In another small concession to conservatives, the ECB also allowed a cheap borrowing scheme for banks to expire, though it kept open the possibility of reviving it.
Although the tweaks are essentially the smallest possible changes, that was enough to send the euro EUR= up half a percent and bank shares .SX7E 2.2 percent higher, as expectations firmed that the next move will indeed be a tightening of policy, possibly later this year.
The ECB has faced calls from Germany, Europe's largest economy, to start winding down its 2.3 trillion euro ($2.43 trillion) bond-buying scheme, or at least signal its intention to do so, as growth and inflation rebound.
STIMULUS STILL NEEDED
Still, Draghi maintained a pledge that rates could go even lower if needed, warning that very substantial stimulus was still needed as underlying inflation is weak and growth risks remain tilted to the downside.
"If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the program in terms of size and/or duration," the ECB said in a statement.
Justifying his stance, Draghi presented upgrades in inflation expectations for this year and next but argued they did not alter the overall picture.
"There is no sign yet of a convincing upward trend on underlying inflation," he told reporters, adding that inflation -- which hit the ECB's near 2 percent target last month -- was expected to rise "only gradually" in the medium term.
The ECB now sees headline inflation of 1.7 percent this year compared to an earlier estimate of 1.3 percent, and 1.6 percent next year compared to a previous 1.5 percent estimate. It saw prices rising an unchanged 1.7 percent in 2019.
"Draghi is erecting barriers to higher interest rates, and not without reason," Commerzbank economist Joerg Kraemer said.
"Eurosceptic parties are on the advance in a number of countries," he added.
The ECB is scheduled to cut the pace of its bond purchases by a quarter from next month but continue them at least until year-end, or longer if it thinks inflation is below target.
But nearly a decade after the 19-member currency bloc's woes began, its economy is looking in better shape.
Economic sentiment is at a six-year high, trade is rebounding, services and manufacturing output is rising, and unemployment is at its lowest since 2009. Draghi accordingly announced small upgrades to euro zone growth forecasts, now seen at 1.8 percent this year and 1.7 percent next.
Germany's central bank governor Jens Weidmann and ECB director Yves Mersch have both made the case for ruling out further rate cuts.
German Finance Minister Wolfgang Schaeuble went further on Thursday, saying he was in favour of a "timely start to the exit" from the ECB's loose monetary policy, echoing calls from the German banking association and the Ifo economic institute.
That has left Draghi walking a tightrope, as improvements on the economic front are at risk of being derailed by hazards including the Dutch and French elections and global economic governance under new U.S. President Donald Trump.
Economists in a Reuters poll said the ECB's next move would be either a tweak of its guidance in the second half of this year or a gradual reduction in its asset-buying next year.
"In our view, the main message is that the ECB is feeling better about the outlook and therefore inching towards an eventual exit, without being in a huge rush right now," JPMorgan economist Greg Fuzesi said.
Reference: Francesco Canepa and Balazs Koranyi