Monday, 25 June 2018

Take Five - World markets themes for the week ahead

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


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

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

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

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

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

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

Slowdown, default risks to prompt China reserve cut-sources


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

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

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


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

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

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


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

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

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


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

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

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

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

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

Saturday, 23 June 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Tom Finn

Friday, 22 June 2018

Trade and rate worries set FTSE for fifth week of losses

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

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

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

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

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

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

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

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

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

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

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

Reporting by Danilo Masoni

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Tomo Uetake

Thursday, 21 June 2018

Bank of England chief economist votes for rate rise, boosting chance of Aug hike

LONDON (Reuters) - The Bank of England bolstered expectations that it will raise rates for only the second time since the financial crisis at its next meeting in August, after its chief economist unexpectedly joined the minority of policymakers calling for a hike.

The central bank also set out new guidance on when it might start to sell its 435 billion pounds ($574 billion) of British government bonds, saying this could come once rates have reached around 1.5 percent, sooner than previous 2 percent guidance.

Short-dated government bond yields jumped on the news and sterling rallied by more than half a cent against the U.S. dollar on the prospect of tighter monetary policy.

“This all suggests that an August rate hike is ... more likely than not,” ING economist James Smith said. “While the Bank hasn’t offered any firm signals or commitments ... the overall outlook and tone suggests they’d still like to raise rates (if) the data allows.”

Last month the BoE had said it wanted to see signs of stronger growth before it prepared to raise rates, in contrast to the United States where the Federal Reserve has raised rates twice this year and plans to do so twice more.

The BoE’s Monetary Policy Committee (MPC) voted 6-3 this month to keep rates at 0.5 percent, where they have been for most of the past decade, in contrast to economists’ expectations in a Reuters poll for a continued 7-2 split.

Chief economist Andy Haldane joined long-term dissenters Michael Saunders and Ian McCafferty in calling for rates to rise to 0.75 percent, due to concerns that recent pay deals and labour demand could push wages up faster than expected.

This opens the door for a rate rise in August, something expected by most economists in a Reuters poll but which market pricing of one set of rate futures before the meeting viewed as a less than 50 percent probability.

There was only a modest move in this measure after the decision BOEWATCH, possibly reflecting doubts over whether Haldane’s shift in view reflected the direction of other members’ thinking.

The MPC as a whole said its previous view that first-quarter weakness was temporary and linked to unusually poor weather appeared “broadly on track”.

Household spending and sentiment bounced back strongly, and a sharp fall in factory output in April could reflect firms having built up excess stocks during the period of bad weather in the first quarter of the year, the BoE said.

At the end of last year Britain was the slowest-growing economy among the G7 group of rich nations, as businesses held back from investing ahead of Brexit and high inflation triggered by the 2016 referendum eroded households’ disposable income.

Inflation is drifting down from a five-year high of 3.1 percent hit in November, and growth in the first three months of the year was the slowest since 2012, after snow storms worsened existing weaknesses in the economy.

But with unemployment at its lowest since 1975, the BoE says the economy is running near full capacity, and that the longer-term direction for interest rates over the next two to three years is likely to be up.

Economists had expected the BoE to raise rates in May, until a string of weak data and discouraging words from BoE Governor Mark Carney in April quashed those expectations.

Reference: by David Milliken

Global shares edge up, China pulls Asia down, oil subdued pre-OPEC

SYDNEY (Reuters) - Shares crept higher in most major markets on Thursday as a lull in the Sino-U.S. trade tussle and talk of more stimulus in China helped calm nerves, though the nagging trade tensions caused Chinese shares to slip, dragging other Asian markets lower.

Oil prices eased a touch as nerves grew ahead of Friday’s meeting between OPEC and other big producers, including Russia, with growing expectations that the Vienna talks could result in an agreement to increase crude supplies.

European shares are expected to rise, with spread-betters calling a higher opening of 0.4 percent in Britain's FTSE .FTSE and France's CAC 40 .FCHI and 0.3 percent in Germany's DAX .GDAXI.

Japan's Nikkei .N225 added 0.6 percent while futures for the S&P 500 ESc1 rose 0.3 percent as investors waited for new developments on global trade.

Australia’s main index had another strong day, rising 1 percent on fund manager demand before the end of the local financial year next week.

Asian shares, however, struggled to keep early gains on concerns about the trade war.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS had gained as much as 0.5 percent before falls led by Chinese shares pushed it down 0.4 percent.

The CSI300 index of Shanghai and Shenzen shares dropped 0.4 percent .CSI300.

Still, the mere absence of new threats from President Donald Trump on tariffs was enough to stem recent selling in many markets, with investors clinging to the hope that all the bluster was a ploy which would stop short of an outright trade war.

“Many participants see the Trump Administration’s hard line as part of the negotiating strategy,” said Richard Grace, chief currency strategist at CBA.

Markets had also been encouraged by the People’s Bank of China’s move to set firm fixings for its yuan, along with the addition of extra liquidity.

There was also much speculation the central bank would cut bank reserve requirements, thus boosting lending power in the economy.

On Wall Street, resilience in tech stocks helped the Nasdaq to an all-time high, though the moves were modest. While the Dow Jones .DJI fell 0.17 percent, the S&P 500 .SPX gained 0.17 percent and the Nasdaq .IXIC 0.72 percent.

Twenty-First Century Fox Inc climbed 7.5 percent after Walt Disney Co sweetened its offer for some of the company’s assets to $71.3 billion, looking to topple Comcast Corp’s bid.

Receding risk aversion softened safe-havens such as the yen, with the dollar adding 0.31 percent to 110.71 yen JPY=.

The dollar .DXY also firmed 0.3 percent against a basket of currencies to 95.323, hitting an 11-month top. The euro EUR= was down slightly at $1.1552.

Sterling GBP=D4 hit seven-month lows at $1.3140 having made only a fleeting bounce after Prime Minister Theresa May won another crucial Brexit vote in parliament.

The Bank of England holds a policy meeting later in the session but not a single analyst polled by Reuters expects a rate hike, and some are getting cold feet about a rise in August given recent soft economic data.

While the European Central Bank has signalled an end to bond buying it also pledged to keep rates low past next summer, while the Bank of Japan shows no sign of winding back its stimulus.

“It feels like the yellow warning lights are flashing for the global economic system,” noted analysts at Citi. “However, with the ECB and BoJ still pumping in liquidity and keeping rates lower for longer, the chances of a systemic event are low.”

Ahead of Friday’s meeting of oil producers in Vienna, Saudi Arabia is trying to convince fellow OPEC members of the need to raise oil output, according to sources familiar with the talks. Iran on Thursday signalled it could be won over to a small rise in output, potentially paving the way for a deal.

Brent crude futures were down 43 cents at $74.31 a barrel, while U.S. crude was down 23 cents at $65.48.

Reporting by Wayne Cole

Dollar hits fresh 11-month peak as rate divergence bets weigh on euro

LONDON (Reuters) - The dollar rose to a fresh 11-month high and the euro sagged towards its 2018 lows on Thursday as investors increased their bets on a prolonged period of monetary policy divergence between the U.S. and European central banks.

Concerns over an escalation in a U.S.-China trade conflict, underlined by comments from top central bankers on Wednesday, have also boosted the dollar as traders reckon a more serious dispute would be inflationary for the U.S. economy, forcing the Federal Reserve to tighten rates further.

“We are really seeing divergence in monetary policy in the euro zone and the U.S. for many months to come,” said Esther Reichelt, a currencies analyst at Commerzbank in Frankfurt.

“This general sentiment has not been fully priced into the market.”

The dollar index .DXY against a group of six major currencies rose 0.3 percent to 95.406, its highest since mid-July 2017.

Buoying the greenback, long-term Treasury yields also bounced back from three-week lows. Those yields were propped up by remarks from Fed Chairman Jerome Powell, who said on Wednesday that the U.S. central bank should continue with a gradual pace of rate increases.

The euro fell 0.2 percent to $1.1548 EUR=, close to its 11-month weak point of $1.1531 hit last week.

The dollar rose 0.2 percent to 110.6 yen JPY=, moving further ahead from a one-week low of 109.55 struck on Tuesday.

Elsewhere the pound GBP= hit a new 7-month low ahead of the Bank of England policy meeting, at which the central bank is expected to keep rates on hold.

The Swiss National Bank kept its negative interest rate on hold on Thursday, as expected, and the franc was unmoved EURCHF=. Norway’s central bank will also give its policy decision later on Thursday.

The New Zealand dollar retreated to a six-month low of $0.6838 NZD=D3 after domestic data that showed slowing first quarter economic growth boosted expectations that the central bank would keep interest rates low.

The Mexican peso climbed more than 0.8 percent overnight, helped by expectations that the country's central bank will raise interest rates on Thursday. It later gave up some of those gains.

The peso has extended a rebound from 1-1/2-year low it hit last week when it was dented by a broad dollar rally, a deadlock in talks around the NAFTA free trade deal and nervousness ahead of Mexico’s July 1 presidential election.

In contrast, Brazil’s real was flat despite the country’s central bank refraining from tightening monetary policy again on Wednesday.

The real has lost 5 percent this month and brushed its lowest level since March 2016.

The tariff feud between China and the United States has added to woes for emerging markets, already under pressure due to steadily rising U.S. interest rates.

“The decline by emerging market currencies and stocks has been a key risk-off theme over the past few weeks, only offset by positive effects U.S. tax cuts are having on the global economy,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

Additional reporting by Tommy Wilkes and Shinichi Saoshiro

Wednesday, 20 June 2018

FTSE rebounds as trade worries ease, pound weakens further

MILAN (Reuters) - The UK’s top share index rose on Wednesday in a broad-based rebound in Europe as immediate worries over the impact of a trade spat between the U.S. and China eased, although Berkeley (BKGH.L) slumped after warning of a profit fall this year.

The FTSE 100 was up 1 percent at 7,681 by 0815 GMT following three straight session of losses, as the pound weakened on continued worries over Brexit talks, while the domestically focused FTSE 250 .FTMC gained 0.8 percent.

“Calls for a positive start come after a turnaround in sentiment in Asia overnight thanks to investors calming their fears about the current US-China trade tariff dispute,” said Mike van Dulken and Artjom Hatsaturjants at Accendo Markets.

In Asia, equity markets bounced as bargain hunters stepped in and shares in China rose on indications of government support. In Europe, the STOXX 600 regional benchmark was up 0.6 percent.

Materials stocks were the biggest boost, adding 15 points to the FTSE, as copper prices rebounded from a three-week low. Shares in Glencore, Rio Tinto and BHP Billiton rose between 1.5 and 2.7 percent.

The export-oriented index was also supported by gains in big international companies, which in turn found support in a weaker pound. Among them, Imperial Brands rose 3 percent, helped by an upbeat broker note.

Sterling slid to a fresh seven-month low against the dollar as concerns over the latest round of Brexit negotiations sapped demand for the British currency before a central bank meeting on Thursday.

Berkeley fell 4.3 percent after the London-focused house-builder said pre-tax profits would fall 30 percent this year following a better-than-expected “peak” performance in 2017/18.

“We remain impressed by the resilience of Berkeley’s profits in spite of a slower London market. However, we do take the guidance of fading returns seriously and therefore see the shares close fair value,” Liberum analyst Charlie Campbell said.

Ocado was the biggest FTSE gainer, up 5.4 percent, underpinned by a price target upgrade from Peel Hunt which said the online grocer had potential to become a “standard” platform for retail logistics across all sectors.

Reporting by Danilo Masoni

EU to hit U.S. imports from Friday in response to Trump tariffs

BRUSSELS (Reuters) - The European Union will start charging import duties of 25 percent on a range of U.S. products from Friday after Washington imposed tariffs on EU steel and aluminum at the start of June, the European Commission said on Wednesday.

The Commission formally adopted a law putting in place the duties on 2.8 billion euros ($3.2 billion) worth of U.S. goods, including bourbon and motorbikes.

LONDON (Reuters) - The Aussie dollar takes a thumping, soybean prices swing and German carmaker shares are stuck in reverse.

Financial markets have been roiled by fears of an all-out trade war between the United States and China, prompting investors to dump assets at risk from rising tariffs and seek safety in havens such as Japan’s yen and U.S. Treasury bonds.

U.S. President Donald Trump’s promised this week to slap tariffs on $200 billion of Chinese goods, drawing swift threats of retaliation from China.

Below are some of the currencies, stocks and commodities seen most vulnerable to an escalating trade conflict:

Countries with open economies reliant on global trade are most at risk when disputes over international commerce hit.

The Australian dollar ticks those boxes. Australia counts China as its biggest trading partner and its currency is heavily correlated to global growth. Many investors see the currency, known as the Aussie, as a better global trade bellwether than the Canadian dollar, which has been buffeted by negotiations over NAFTA, the North American trade pact.

This week, the Aussie fell to its lowest level in 13 months, and the positioning of options signal more weakness ahead.

Another candidate is Sweden's crown, given the Nordic nation's open economy and big exporting industries. The currency has weakened about 2.5 percent in the last three days to a six-week low against the euro.

“Currencies which are heavily exposed to global growth are going to feel the pressure from any escalation in the trade dispute,” said James Binny, global head of currency at State Street Global Advisors based in London.

Asian currencies such as the Korean won as well as the Singapore and Hong Kong dollars have also weakened this week for similar reasons.

Bank of America Merrill Lynch’s European fund manager survey in June found a record drop in allocations to auto stocks, indicating that investors are jittery about the sector due to Trump’s threat of imposing U.S. tariffs on German carmakers.

European automakers send around $50 billion worth of cars to the United States each year. BMW is the most exposed with up to one fifth of its global sales heading to the U.S. market.

Retaliatory Chinese tariffs on U.S. cars would also hurt European firms as many export to China from their U.S. plants.

As a result, shares in Volkswagen, BMW and Daimler have fallen sharply, taking Europe’s autos index to a seven-month low.

Boeing is the single largest U.S. exporter to China, and its shares, along with those of its European counterpart, have fluctuated as trade tensions have risen.

Europe-based manufacturers that import steel for U.S. factories may also become entangled in the conflict.

There could be some winners, if European manufacturers such as ABB and Siemens win market share in China at the expense of U.S. rivals such as Honeywell.

But higher trade barriers are likely to hurt most economies, leaving even the winners with a smaller market to work with.

China buys about a third of its soybeans from the United States so Beijing’s move to slap 25 percent duties on U.S. soybean imports has made the commodity a key battlefield.

It will raise the cost of soymeal, which is used in China to feed pigs and poultry. China’s most active soymeal futures DSMcv1 rose 4.2 percent on Tuesday.

Soybean prices tend to be affected more by weather than economic factors, but tit-for-tat tariffs might shift trade flows. U.S. CBOT soy futures Sv1 have tumbled to multi-year lows as U.S. suppliers may now lose a chunk of China’s market to Latin American rivals.

Finally, prices for copper CMCU3, a metal widely used in the construction and power industries, have fallen to their lowest since May 31. Copper prices can be expected to tumble further if world growth slides.

Reporting by Saikat Chatterjee, Helen Reid, Danilo Masoni, Pratima Desai, Nigel Hunt and Tommy Wilkes Philip Blenkinsop

Dollar perched at 11-month highs as trade concerns weigh

LONDON (Reuters) - The dollar hit a 11-month high against a basket of its rivals on Wednesday as an escalating trade conflict kept investors from buying higher-yielding currencies and markets braced for growing volatility.

Currency markets had breathed a sigh of relief after Beijing signalled its tolerance of a stronger currency by fixing a stronger daily midpoint than expected. Safe-haven currencies such as the Swiss franc and the Japanese yen were still well-supported, though.

On Wednesday, the dollar edged 0.1 percent higher against a basket of its rivals at 95.30, its highest since mid-July 2017.

“Market volatility remains very low and the headline risks from trade concerns should push that higher,” said Hans Redeker, global head of currency strategy at Morgan Stanley in London.

Led by the U.S. Federal Reserve, global central banks are pulling back from their financial-crisis policies, and market expectations are for volatility to pick up.

Morgan Stanley estimates that FX volatility remains one standard deviation below its long-term average. U.S. bond market volatility was more than 1.5 standard deviations below its long- term average.

A gauge of perceived equity market swings rose to a two-week high of 14.64 vol on Tuesday before pulling back.

The euro slipped a quarter of a percent, with traders wary of pushing it higher before some large option expiries this week. In addition, European Central Bank policymaker Ewald Nowotny said on Wednesday the euro weakness was caused by the growing interest rate differential between the United State and Europe.

Roughly $2 billion of currency options on the euro/dollar are set to expire this week between $1.1550 and $1.1500, dampening any large moves in the cash markets.

Emerging currencies won some reprieve, with the Mexican peso stronger on the day along with the Taiwan dollar and the South African rand

The Australian dollar, considered sensitive to shifts in sentiment towards China, fell to a 13-month low of $0.7347 on Tuesday before pulling back slightly to $0.7391.

The Swiss franc slipped 0.1 percent to 0.9953 franc per dollar, handing back the previous day’s gains.

Before Thursday’s Bank of England policy decision, the pound struggled near a seven-month low of $1.3151.

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Before market opening on Wednesday, the People’s Bank of China lowered the midpoint rate by 0.54 percent to 6.4586 per dollar. Traders said the daily fixing was far stronger than their models suggested, an attempt to stabilise sentiment and prevent the yuan from sinking further.

Markets also turned their focus to Sintra in Portugal, where U.S. Federal Reserve Chair Jerome Powell, European Central Bank President Mario Draghi, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of Australia Governor Philip Lowe are all scheduled to speak at a conference on Wednesday.

Reporting by Saikat Chatterjee

Tuesday, 19 June 2018

Sterling falls to seven-month lows on trade, Brexit concerns

LONDON (Reuters) - Sterling fell to a fresh 2018 low on Tuesday, as concerns about an escalation in the trade dispute between the world’s two biggest economies weighed on risk sentiment.

With all eyes focused on the Bank of England’s policy decision on Thursday, in which it is expected to unveil its monetary policy stance for the rest of the year after a run of mixed data, investors cut bets on the British currency

In early London trading, sterling edged 0.3 percent lower at $1.3204, its lowest since late November.

Perceived safe havens such as the Japanese yen and the Swiss franc got a boost against the dollar, though the greenback was broadly stronger against a basket of currencies after U.S. President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, ratcheting up a trade dispute with Beijing.

Commerzbank strategists said if the trade dispute were to escalate further, the dollar would be the ultimate beneficiary because costlier imports would push inflationary pressures higher, forcing the U.S. Federal Reserve to raise interest rates quicker than expected.

Latest Brexit headlines offered no support.

Prime Minister Theresa May’s Brexit plans were rejected by parliament’s upper chamber on Monday, setting up a confrontation with pro-EU lawmakers later this week which will test her ability to lead a minority government.

LONDON (Reuters) - The Bank of England will be looking to see if Britain’s economy has recovered from a severe winter chill as it weighs the prospects for a future interest rate rise this week.

No economists polled by Reuters expect the BoE to raise rates on Thursday, and some are getting cold feet about their forecasts for a rate rise in August, which would be only the central bank’s second increase since the 2008 financial crisis.

Patchy growth as the economy prepares to leave the European Union in March next year places BoE policy in sharp contrast to the United States, where the Federal Reserve plans to raise rates four times in 2018, and three times in 2019.

“The Monetary Policy Committee will be wary of providing any firm guidance over the likely timing of the next hike as it won’t want to tie its hands,” BNP Paribas economist Luigi Speranza said on Monday.

Goldman Sachs currency strategists said sterling - which is already near a 2018 low - continued to price in too high a chance of an August move.

BoE Governor Mark Carney has said first-quarter weakness looks temporary and expects to rates to rise gradually over the next couple of years, to prevent overheating at a time of above-target inflation and the lowest unemployment since 1975.

But he has been much vaguer about precise timing. A putative May rate rise was thrown off course by an unusually harsh winter - and a possible underlying slowdown - that led to the economy almost stagnating from January to March.

A record proportion of the public in a BoE survey last month had no idea what would happen to rates over the coming year - perhaps reflecting Brexit uncertainty as well as BoE indecision.

Trade concerns exist outside Britain too. The Bundesbank sharply cut its growth forecast for Germany on Friday, partly due to worries that U.S. President Donald Trump may spark a trade war with his tariffs on European and Japanese steel.

If it wishes, the BoE will have ample chance to bring clarity on Thursday, when the MPC will publish a statement at 1100 GMT and Carney is due to give a major speech at 2015 GMT.

But many economists expect the central bank to keep hedging its bets. Since its last meeting, inflation has fallen to a one-year low of 2.4 percent and April industrial output and construction data were strikingly weak.

However, business surveys for May have perked up, pointing to second-quarter growth of 0.3-0.4 percent, according to IHS Markit, a financial data company. This is just about in line with the maximum rate the BoE thinks the economy can sustain without causing too much inflation.

Wage growth has been solid if unspectacular, and May retail sales were strong, reflecting sunny weather, a royal wedding and a partial easing of the inflation pressure that has squeezed British consumer demand since June 2016’s Brexit vote.

Two BoE policymakers - Ian McCafferty, whose term ends in August, and Michael Saunders - are expected to stick with their view, held since March, that rates need to go up now.

The rest of the MPC are likely to conclude that there is little cost in waiting until at least August before deciding whether to raise rates, economists say.

Even then, it could find further reason to delay. A change to the Office for National Statistics’ publication schedule means second-quarter GDP data will not be released until after the BoE’s August rate meeting.

“August would be too much of a gamble and (we) see November as the next best opportunity for a hike, assuming data strengthens more than we expect and that Brexit remains free of major disruption,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said.

Reporting by David Milliken and Saikat Chatterjee

Asia stocks skid to four-month low as Trump raises stakes in China trade war

TOKYO (Reuters) - Asian stocks sank on Tuesday and Shanghai shares plunged to near two-year lows as U.S. President Donald Trump threatened new tariffs on Chinese goods in an escalating tit-for-tat trade war between the world’s two biggest economies.

U.S. and European equity markets looked set to follow Asia into the red. S&P 500 futures were off 1 percent and Dow Jones futures were 1.1 percent lower.

Spreadbetters expected Britain's FTSE to open down 0.3 percent, with Germany's DAX  seen shedding 0.7 percent and France's CAC losing 0.8 percent.

Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning from Beijing of retaliation, as the trade conflict between the world’s two biggest economies quickly escalated.

It was retaliation, Trump said, for China’s decision to raise tariffs on $50 billion in U.S. goods, which came after Trump announced similar tariffs on Chinese goods on Friday.

China warned it will take “qualitative” and “quantitative” measures if the U.S. government publishes an additional list of tariffs on its products.

The trade frictions have unnerved financial markets, with investors and businesses increasingly worried that a full-blown trade battle could derail global growth.

“Trump appears to be employing a similar tactic he used with North Korea, by blustering first in order to gain an advantage in negotiations. The problem is, such a tactic is unlikely to work with China,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.

“A U.S.-China trade spat alone won’t hurt global growth. But there is always potential for Trump to keep increasing his threats which could have broader implications. Increasing trade has helped growth in emerging markets and this could be negatively affected.”

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.5 percent to its lowest since early February, with losses intensifying through the day as the rout deepened in China.

The Shanghai Composite Index .SSEC slumped nearly 5 percent at one point to its lowest level since mid-2016, while Hong Kong's Hang Seng .HSI shed 3 percent.

“China’s economy has already been clouded by a sharp slowdown in fixed asset investment growth due to the government’s deleveraging drive, a problematic property sector, a mounting debt burden and rising credit defaults,” economists at Nomura wrote.

“The rising risk of a disruptive trade conflict makes a bad situation tentatively worse.”

Japan's Nikkei lost 1.8 percent, South Korea's KOSPI retreated 1.3 percent while Australian stocks bucked the trend and added 0.1 percent helped by a depreciating currency and an overnight bounce in commodity prices.

The dollar fell 0.75 percent to 109.715 yen JPY= following Trump's tariff comments. The yen is often sought in times of market turmoil and political tensions.

The euro was steady at $1.1622 EUR=.

China's yuan skidded to a five-month low. The Australian dollar AUD=D4, often seen as a proxy to China-related trades, brushed a one-year low of $0.7381.

In commodities, crude oil markets remained volatile ahead of Friday’s OPEC meeting at a time when Russia and Saudi Arabia are pushing for higher output.

Brent crude futures fell 0.8 percent to $74.76 a barrel after rallying 2.5 percent overnight, while U.S. light crude futures retreated 0.9 percent to $65.27.[O/R]

Lower-risk assets gained on the latest round of trade threats.

Spot gold XAU= was up 0.35 percent at $1,282.26 an ounce.

The 10-year U.S. Treasury note yield touched 2.871 percent, its lowest since June 1.

Reporting by Shinichi Saoshiro

Monday, 18 June 2018

Dollar stays near a seven-month peak, but trade tensions limit gains

TOKYO (Reuters) - The dollar edged up towards a seven-month high on Monday as investors bet the United States and China would avoid a full-blown trade war, although tensions between the two slowed its gains.

The dollar index versus a basket of six major currencies crept up 0.1 percent to 94.862.

The index was close to 95.131, a peak scaled on Friday, thanks to the dollar soaring more than 1 percent last week after the U.S. Federal Reserve gave a hawkish signal on interest rates while the European Central Bank struck a dovish tone.

On top of last week’s Fed, ECB and the Bank of Japan policy meetings, the currency markets also weighed a U.S.-North Korea summit and the renewed trade tensions between the world’s two biggest economies.

The greenback navigated through those events, last of which was a decision by the United States on Friday to enact tariffs on $50 billion in Chinese goods. Soon afterward, China’s official Xinhua news agency said Beijing would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood.

“The reaction by currencies to the trade developments has been mostly limited as the U.S. measure and China’s response were in line with expectations,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

“A further escalation of U.S.-China trade tensions is of course a risk scenario. But the current tariffs, even if implemented, will hardly dent the global economy and the market also has to ponder about a scenario in which the two countries try to defuse tensions.”

The dollar was down 0.2 percent at 110.44 yen, weighed down as risk appetites cooled on the back of falling Tokyo shares.

The Nikkei fell on Monday with sentiment hurt by a combination of trade concerns and a strong earthquake that hit the western Japanese city of Osaka.

Even when natural disasters and regional tensions hit close to home, the yen is often viewed as a safe haven currency, partly because of the resilience provided by Japan’s current account surplus.

Despite the slip, the dollar managed to stay in reach of a three-week high of 110.905 yen brushed on Friday.

The euro fell 0.15 percent to $1.1592, extending losses after sliding 1.3 percent the previous week after the ECB signalled it will keep interest rates at record lows well into next year.

Commodity-linked currencies sagged on the back of sliding crude oil prices.

The Canadian dollar traded at C$1.3184 per dollar after retreating to a one-year low of C$1.3210 on Friday.

The Australian dollar was little changed at $0.7442 after plumbing a five-week low of $0.7426 and the New Zealand dollar lost 0.25 percent to $0.6928 .

Brent crude futures fell to a six-week low of $72.45 a barrel on Monday in the wake of reports that top suppliers Saudi Arabia and Russia would likely increase production at the June 22 OPEC meeting in Vienna.

The OPEC meeting “will be one of this week’s key events due to the way oil prices shape economic and price views and thus impact yields and currencies,” said Koji Fukaya, president at FPG Securities in Tokyo.

Reporting by Shinichi Saoshiro

Asian shares fall as U.S.-China trade spat escalates

TOKYO/SYDNEY (Reuters) - Asian shares fell on Monday after U.S. President Donald Trump cranked up trade tensions by going ahead with tariffs on Chinese imports, prompting Beijing to immediately respond in kind.

Fears of a global trade war added to pressure on oil prices, which extended Friday’s big fall, while the dollar retreated from near 3-week highs against the safe haven yen.

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.4 percent to its lowest level since May 31.

Financial markets in China and Hong Kong were closed for Dragon Boat festival holiday. South Korea’s Kospi index slipped 0.5 percent while Australian shares eased 0.1 percent.

Japan’s Nikkei sank 0.9 percent as worries over growing protectionism overshadowed stronger-than-expected export data.

U.S. E-mini S&P futures were down 0.5 percent in early trade, suggesting a weaker start on Wall Street.

“The on-again off-again possible global trade war is looking to be back on again as the U.S. and China announced tariffs on each other’s imports,” said Nick Twidale, Sydney-based analyst at Rakuten Securities Australia.

“This looks set to be the main theme that investors will focus on...with any further escalation in tension adding to the downside risk.”

Trump announced hefty tariffs on $50 billion of Chinese imports on Friday, laying out a list of more than 800 strategically important imports from China that would be subject to a 25 percent tariff starting on July 6, including cars.

China said it would respond with tariffs “of the same scale and strength” and that any previous trade deals with Trump were “invalid.” The official Xinhua news agency said China would impose 25 percent tariffs on 659 U.S. products, ranging from soybeans and autos to seafood.

China’s retaliation list was increased more than six-fold from a version released in April, but the value was kept at $50 billion, as some high-value items such as commercial aircraft were deleted.

However, many market watchers believe there is still room for compromise, suspecting Trump’s announcement was a negotiating tactic to wring faster concessions from Beijing.

Analysts say the direct impact of the tariffs may be limited, especially for the U.S. economy, which is in strong shape.

But Asia’s other trade-reliant economies and companies plugged into China’s supply chains are worried they will suffer collateral damage if world trade slows down, hurting global growth and dampening business confidence.

Shares of Japanese construction equipment makers Komatsu Ltd and Hitachi Construction Machinery tumbled 3.7 percent and 3.4 percent, respectively. Both are vulnerable to any downturns in Chinese and global capital spending.

“There are trade frictions not only between the U.S. and China but also between the U.S. and its allies. Trump could put more pressure on other countries like Japan and NATO courtiers,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo.

“So far investors have been escaping to high-tech shares and small cap shares. After all, money is still abundant. But investors should be cautious.”

In the currency market, the dollar was supported for now as the euro has lost steam after the European Central Bank had suggested on Thursday it would hold off raising interest rates through the summer of next year.

The euro traded at $1.1587, not far from a two-week low of $1.1543 set on Friday.

The dollar eased to 110.33 yen, having hit a three-week high of 110.905 on Friday.

The Japanese currency stayed resilient following a deadly earthquake that struck Western Japan, including Osaka, the country’s second largest urban area.

The Australian dollar, a liquid hedge for risk, slipped to a six-week trough while its New Zealand cousin fell to the lowest since end-May.

Oil prices were under pressure on fears of increased supply as two big producers - Saudi Arabia and Russia - have indicated they were prepared to increase output.

The Organisation of Petroleum Exporting Countries (OPEC), Russia and other producers are due to meet in the Austrian capital on June 22-23.

U.S. crude futures took an additional hit also as China’s retaliatory tariffs included crude oil.

U.S. crude futures dropped 2.04 percent to $63.76 per barrel, briefly touching their lowest levels since April 10.

Brent fell 1 percent to $72.67.

Reference: Hideyuki Sano, Swati Pandey

Sunday, 17 June 2018

Volcker 'fix' may cause new headaches for Wall Street

WASHINGTON (Reuters) - A proposal to simplify a rule banning banks from proprietary trading, rather than making life easier for Wall Street, could ensnare billions of dollars’ worth of assets not currently caught by the regulation.

This little-noticed wrinkle, if it were to make it into the final rule, could prompt Wall Street firms to overhaul their treasury, trading and merchant banking operations and change their accounting practices, lawyers and executives told Reuters.

On May 30, U.S. regulators unveiled a plan to modify the so-called Volcker Rule introduced following the 2007-2009 financial crisis, aiming to make compliance easier for many firms and relieving small banks altogether.

Wall Street has long complained about the complexity and subjectivity of the rule, which bans banks that accept U.S. taxpayer-insured deposits - such as Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley - from engaging in short-term speculative trading.

Republicans, the business lobby and analysts initially welcomed the proposal as a long overdue move to streamline and clarify the rule, while consumer advocates and progressive Democrats criticized it as a risky Wall Street giveaway.

But after digesting the 494-page consultation, financial industry executives and lawyers said it could actually create new headaches for big banks by banning a swath of trades and long-term investments not currently covered by the rule.

“It’s going to capture trades that wouldn’t be captured by the current regulation and that’s the bogeyman people would want to avoid in this proposal,” said Jacques Schillaci, a banking lawyer at Linklaters LLP who has studied the proposal.

The draft is subject to a 60-day consultation period during which industry participants will lobby for changes, with a final version, which is likely to be substantially revised, expected around January.

One of the most-hated aspects of the Volcker Rule presumes purchases and sales of instruments within 60 days count as proprietary unless the bank can prove they qualify for an exemption, such as market making or hedging.

This part of the rule aims to identify short-term trades that are intended to be speculative in nature, but banks say it is too subjective because it would require second-guessing traders’ intentions.

Regulators have proposed replacing it with a more objective test, based on the accounting treatment of the instruments traded.

Under the new test, trading activity by desks that daily book net realized or unrealized gains and losses exceeding $25 million is only allowed if the bank shows that trading qualifies for the rule’s exemptions.

Since the crisis, however, banks have applied this mark-to-market or “fair value” accounting treatment to a range of longer-term investments to better manage their risk.

As a result, the proposal would bring under the rule the vast majority of equity investments, derivatives and a range of fixed income securities that banks hold for many years but not to maturity.

While some of these investments, such as U.S. treasuries, other government-related securities and some derivatives, would qualify for exemptions, many would end up being prohibited given the relatively low $25 million threshold, the industry experts said.

This could disrupt how bank groups structure their trading desks and manage their strategic investments and risk. The proposal may also prompt banks to elect not to mark-to-market some assets.

Spokespeople for the Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation declined to comment.

A spokesman for the Office of the Comptroller of the Currency said the agency looked forward to reviewing stakeholder comments.

The rewrite of the Volcker Rule comes amid a broader push by President Donald Trump-appointed regulators to boost bank lending and economic growth by relaxing regulations.

Brought into law by the 2010 Dodd Frank Act, the Volcker Rule is one of the most politically sensitive post-crisis rules and any changes will be closely-watched by Democratic critics, who warn tinkering with it could increase risks to the financial system.

But the accounting snag also underscores the hidden risks of rewriting complex financial rules for the banking industry, which could confront a new set of problems - and costs - if the effort does not go as they had hoped.

“Tinkering with these rules, and regulatory change, imposes cost in and of itself,” said Cliff Stanford, a banking regulation lawyer at Alston & Bird.

Regulators have said they are very open to feedback on how to refine the draft and the banking industry will lobby aggressively on this particular issue, the executives and lawyers said.

While the banks may push the regulators to narrow the scope of the new accounting test, expand the current exemptions, or raise the $25 million limit, scrapping the test altogether will be a tough sell.

Regulators see it as a failsafe that prevents firms evading the rule and believe focusing on the accounting treatment is clearer and more enforceable than the current 60-day intent test.

“There isn’t such a thing as a perfect fix for what they’re trying to do with this aspect of the rule,” said Schillaci.

Reporting by Michelle Price and Pete Schroeder

World markets themes for the week ahead

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

A three-day ECB forum on central banking kicks off on Monday in Sintra, Portugal, but under a very different backdrop to last year’s summit. The ECB has warned markets it will end its bond-buying programme by the end of the year, but it has also pledged to keep rates low possibly until after summer 2019. That has cheered bond and stock markets no end, but less so the euro.

Rewind to a year ago when ECB chief Mario Draghi told the folks gathered at Sintra that deflationary forces had been replaced by inflationary ones, putting markets on alert for tweaks in the ultra-loose policy.

Yet with the end of ECB QE now in sight, a taper tantrum along the lines of last year’s appears to have been avoided. Italian bonds have just enjoyed their best week since September 2012. But Sintra speakers will still be listened to because any signs of a European growth setback could complicate the QE exit path. Next Friday’s “flash” euro zone PMI data for June may also provide some insight on this front.

More generally, Sintra is a big central banking shindig — alongside Draghi will be the Bank of Japan’s Kuroda and the U.S. Federal Reserve’s Jerome Powell. All three have had their moment in the spotlight in the past week at their central bank meetings. But another big-name governor — the Bank of England’s Mark Carney — is not scheduled to speak. His bank holds a policy meeting next Thursday, though it is not expected to change interest rates.

ECB to end bond buying but pushes out first rate hike

Euro tumbles as ECB vows to keep rates down

Several things are complicating life for Turkey’s Tayyip Erdogan before the June 24 elections. Hoping to use a beefed-up presidency to tighten his grip on the economy and monetary policy, Erdogan is finding he may not win in the first round after all. What’s more, the AK party could even lose its parliamentary majority.

Second, the lira is heading rapidly back to record lows despite 425 bps in interest rate rises. With the Fed propelling the dollar higher, the lira’s woes might continue. Its weakness will certainly exacerbate double-digit inflation. On economic growth — which Erdogan touts as one of the triumphs of his 15-year tenure — there are warnings.

Data shows Turkish growth running at 7.4 percent, making it one of the world’s fastest-growing economies. But borrowing costs have soared, with the government paying almost 16 percent for 10-year cash in local bond markets, up 500 bps since the end of 2017.

That could hint at a sharp slowdown because the growth bonanza hinges largely on credit, which is expanding around 20 percent year-on-year. Indeed, Turkey’s highly indebted companies and banks may already have run into trouble. For Erdogan, a self-declared “enemy of interest rates”, it could mean accepting more rate rises and slower growth. First though, he needs to win the election — at least in the second round.

Poll shows support for Turkey's Erdogan eroding, vote going to second round

OPEC and its oil allies meet in Vienna on Friday and Saturday next week to review their production agreement. U.S. President Donald Trump has again been blaming the group for rising oil prices - they are up almost 60 percent over the last year - so the political pressure is on to pump more.

The big producers are divided though. While Russia is pushing for a significant output hike, Saudi Arabia favours a modest one. Others like Iran, Iraq and Venezuela want no change at all.

Most oil watchers do expect an increase however, before the end of the year. Negotiations should therefore centre on the scale, timing and phasing of any output boost. Also key will be whether it is agreed by the entire group or implemented by Saudi Arabia and Russia without wider backing.

OPEC and allies could hike output gradually from July - Russia

Higher oil prices set to moderate consumption growth

Brazil, Mexico, Taiwan, Philippines, Thailand and Hungary all have central bank meetings next week and with the dollar crashing through emerging market currencies like a wrecking ball right now, what the banks do and what they say will be important.

Reuters polls show they are all expected to hold fire for now although there is an outside chance that Mexico and the Philippines could pull a surprise hikes. That means it will mostly be about the rhetoric and who might be preparing to move.

Brazil’s markets are pricing 2.5 percentage points worth of hikes between now and this time next year, and Mexico’s see around 75 basis points. Thailand and Taiwan may point to one or two hikes later in the year, and even Hungary’s central bank is expected to ditch its dovish tones in the wake of a sharp fall in the forint.

Currencies in the cross-hairs as Fed hike looms

In June 2017, when U.S. banks cleared the Federal Reserve’s annual stress test, their shares surged as the results unleashed a massive round of stock buybacks and dividend increases. Don’t look for the same outcome next week when the 2018 vintage are released.

The largest U.S. banks have notably underperformed their smaller, regional rivals so far in 2018 and even if some do get more cushion to increase their capital return programs, few analysts believe that will be enough to put them back in the lead.

A flattening yield curve and underwhelming loan growth are among the big culprits weighing on the performance of large banks, and that doesn’t look like it’s changing anytime soon.

The latest Fed data on commercial and industrial loan growth shows smaller banks holding a greater-than-4-percentage-point lead over large banks in that key lending category. Small bank C&I loan growth is up 6.7 percent year over year, while for the biggest banks it is just 2.4 percent.

And the Treasury yield curve - a key indicator of bank net interest margins - has flattened further since the Fed’s latest rate hike. The spread between 2-year and 10-year Treasury yields is below 40 basis points and the narrowest in nearly 11 years.

Reporting by Sujata Rao, Marc Jones, Dhara Ranasinghe, Marius Zaharia, John Kemp, Dan Burns; Editing by Hugh Lawson

Friday, 15 June 2018

Asian shares falter as U.S. readies China tariffs

TOKYO (Reuters) - Asian shares wobbled on Friday as investors braced for U.S. tariffs against China.

Spreadbetters expected a slightly better tone in European equities, forecasting a higher open for Britain's FTSE, Germany's DAX and France's CAC.

U.S. President Donald Trump has made up his mind to impose “pretty significant” tariffs and will unveil a list targeting $50 billion of Chinese goods on Friday, an administration official said. Beijing has warned that it was ready to respond.

While it is not clear when Trump will activate the measures, rising Sino-U.S. trade tensions will put additional pressure on China’s economy, which is starting to show signs of cooling under the weight of a multi-year crackdown on riskier lending.

Analysts said that although the expected announcement would likely not be a total surprise to markets - an initial list was released by Washington a few months ago - it would still make investors concerned that the window for averting a trade war may be closing.

The Asia Pacific MSCI index ex-Japan .MIAPJ0000PUS edged down 0.3 percent and was set for more than a 1 percent weekly loss, with many regional markets shrugging off a strong close on Wall Street.

China stocks led the losses, with the benchmark Shanghai Composite index .SSEC plumbing a 20-month low, as investors worried about the negative economic impact arising from the trade tensions with the United State.

Japan's Nikkei average and Australian shares closed up 0.5 percent and 1.3 percent, respectively.

“The implementation of tariffs on China is one of several fronts that the U.S. is battling on the issue of trade,” said Tai Hui, chief APAC market strategist at JPMorgan Asset Management, referring to the Trump administration’s tough stance toward Canada and Europe.

“This battleground could potentially expand into the auto sector given the U.S. investigation into auto imports. This is likely to weigh on market sentiment over the summer.”

The euro EUR= was headed for its worst weekly loss in 19 months after the ECB signalled on Thursday it will keep interest rates at record lows into at least mid-2019, even as it pledged to end its massive bond purchase scheme by the end of this year.

The common currency shed 1.9 percent to the dollar after the rate comments, in its sharpest daily fall in almost two years since Brexit vote shock in 2016.

In late Asian trade on Friday, the euro eased 0.2 percent to $1.1546, its lowest level since May 30.

The dollar index against a basket of six major peers rose 0.3 percent to 95.111, its highest level since November, after rallying more than 1 percent the previous day.

The 10-year German bund yield also fell to 0.424 percent from around 0.50 percent before the ECB statement.

“The ECB has made it clear that it does not want quick rate hikes, although it now considers progress towards the inflation target as ‘substantial’. Against the background of uncertainties in the world today – such as trade – this makes sense, as does the emphasis on data dependency,” said Stefan Kreuzkamp, chief investment officer at DWS.

On Wall Street, two of the three main indexes closed higher, with technology stocks leading the charge on the benchmark S&P 500.

Helping boost U.S. equities was a Commerce Department report showing retail sales rose more than expected in May, the latest indication of an acceleration in economic growth in the second quarter.

While the Fed and the ECB provided much of the week’s central bank fireworks, the Bank of Japan produced no surprises at the end of a two-day policy meeting on Friday and looked set to continue its massive asset buying programme for some time.

Markets are now tracking BOJ Governor Haruhiko Kuroda’s post-meeting briefing, which began at 0630 GMT, for clues on how long the central bank could hold off on whittling down stimulus given stubbornly weak inflation.

Oil prices were little changed as investors eyed a key OPEC meeting in Vienna. Saudi Arabia and Russia, architects of a producer deal to cut output, have indicated they want production to rise.

West Texas Intermediate crude oil futures were steady at $66.90 per barrel, while Brent was down 0.1 percent at $75.86.

Many markets in Asia were closed on Friday for holidays celebrating the end of Ramadan.

Reporting by Tomo Uetake

European shares rally after ECB pushes back rate hike bets

MILAN/LONDON (Reuters) - European shares jumped on Thursday after the European Central Bank said interest rates would stay at record lows at least through the summer of 2019 as it announced an end to its massive stimulus plan.

Stock benchmarks across Europe enjoyed their best day in 2-1/2 months as they benefited both from a weaker euro and the surprise extension of lower interest rates.

The pan-European STOXX 600 and the euro zone STOXX  jumped 1.4 and 1.3 percent, while the exporter-heavy German index gained 1.7 percent as the euro fell to a session low following the ECB's statement.

Along with France’s CAC 40, they had their strongest gains since April 5.

Edmund Shing, head of equity derivatives at BNP Paribas, said low rates for longer was a boon for equities as it ensured liquidity remained strong.

“One of the key drivers for risk assets has been and continues to be liquidity, beyond all other things. The longer they delay rate hikes the longer liquidity stays decent,” he said.

“The hawks had been guiding for a June hike before the meeting and given the clear guidance the ECB gave today on interest rates, it had to be priced out,” said AFS Group analyst Arne Petimezas.

“It doesn’t seem like we’re at the stage where the hawks are on top of things,” he added.

Interest-rate sensitive sectors such as autos and utilities surged, while the euro zone’s banking stocks, which suffer from low interest rates, fell 0.2 percent, among the only stocks in negative territory.

Germany’s Commerzbank, Spain’s Bankia, and Italy’s Unicredit were the biggest fallers, down 1.2 to 2 percent.

“It’s a disappointment” for banks, said BNP Paribas’ Shing, adding that the ECB’s negative deposit rate costs banks money.

“The faster the deposit rate gets back to 0, the better for banks’ profitability.”

If the ECB succeeds in supporting the economy and productivity, however, this could have positive knock-on effects for banks through boosting demand for financing and alleviating the burden of non-performing loans, he added.

The autos sector rose 1.8 percent, its strongest gains in 2 1/2 months, also boosted by a weak euro.

Rolls-Royce gained 6.5 percent after saying it would save 400 million pounds ($535 million) a year by cutting 4,600 jobs in its latest attempt to simplify the business and generate more cash.

“After spending around four and half years in purdah, an incremental 400 million pounds of FCF (free cash flow) would allow Rolls-Royce to take a significant step toward meeting its financial targets,” Jefferies analysts said.

“That should then mean Rolls-Royce can make an adequate annual return to shareholders through the dividend.”

Danish hearing equipment maker GN Store Nord  was the top gainer on the STOXX, up 12.2 percent after it upped its 2018 sales and profit forecasts for its headset business.

Shares in heavyweight drugmaker GSK rose 2.3 percent. Investors welcomed news its two-drug treatment for HIV met its main goal in late stage studies - a boost after regulators warned of possible birth defects from one of the two drugs.

On the DAX, Volkswagen rose 2.2 percent. It fell in early trading after the carmaker was fined one billion euros over diesel emissions cheating.

($1 = 0.7482 pounds)

Reporting: Danilo Masoni, Helen Reid

Thursday, 14 June 2018

Sterling hits five-day high after UK retail sales smash forecasts

LONDON (Reuters) - Sterling rose to a five-day high on Thursday after British retail sales jumped for a second month in a row in May and far outstripped expectations.

The pound rose to $1.3440 from $1.3405 before the data release, putting the currency up half a percent on the day, buoyed by the data which suggested that the economy was recovering from a sharp slowdown in early 2018.

Sterling also rose versus the euro and was up 0.2 percent at 88 pence.

LONDON (Reuters) - Sterling rose to a five-day high on Thursday after British retail sales jumped for a second month in a row in May and far outstripped expectations.

The pound rose to $1.3440 from $1.3405 before the data release, putting the currency up half a percent on the day, buoyed by the data which suggested that the economy was recovering from a sharp slowdown in early 2018.

Sterling also rose versus the euro and was up 0.2 percent at 88 pence.

WASHINGTON (Reuters) - The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 percent to 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate inflation above its 2 percent target at least through 2020.

“The economy is doing very well,” Fed Chairman Jerome Powell said in a press conference after the rate-setting Federal Open Market Committee released its unanimous policy statement after the end of a two-day meeting.

“Most people who want to find jobs are finding them. Unemployment and inflation are low ... The overall outlook for growth remains favorable.”

He added that continued steady rate increases would nurture the expansion, as the Fed approaches a sort of sweet spot with its employment and inflation goals largely met, the economy withstanding higher borrowing costs and no sign of a spike in inflation.

Traders see fourth Fed interest rate hike this year
The ongoing economic expansion coupled with solid job growth has pushed the Fed to raise rates seven times since late 2015, rendering the language of its previous policy statements outdated.

Policymakers’ fresh economic projections, also issued on Wednesday, indicated a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

They see another three rate increases next year, a pace unchanged from their projections in March.

“The Fed’s path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point. The trajectory of U.S. inflation or the broader U.S. economy would likely need to change materially for the FOMC to deviate from that path,” said Aaron Anderson, senior vice president of research at Fisher Investments.

U.S. Treasury yields rose after the Fed’s decision while U.S. stocks were trading marginally lower and closed down on the day. The dollar pared some losses but was still trading lower against a basket of currencies.

Powell also announced the central bank would start holding news conferences after every policy meeting next year, which means a total of eight in 2019. The Fed chief currently holds four such events each year.

Fed policymakers projected gross domestic product would grow 2.8 percent this year, slightly higher than previously forecast, and dip to 2.4 percent next year, while inflation is seen hitting 2.1 percent this year and remaining there through 2020.

That’s a welcome change from recent years when Fed policymakers fretted about an inflation rate well below target.

The unemployment rate, currently at an 18-year low of 3.8 percent, is expected to fall to 3.6 percent this year, compared to the 3.8 percent that the Fed projected in March.

“The labor market has continued to strengthen ... economic activity has been rising at a solid rate,” the Fed said in its statement. “Household spending has picked up while business fixed investment has continued to grow strongly.”

The Fed’s short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank’s battle in recent years to return monetary policy to a normal footing.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as “accommodative,” with gradual rate increases likely warranted as the economy enters a 10th straight year of growth.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.

The latest rate increase was in line with investors’ expectations ahead of the release of the policy statement. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

The Fed said its policy of further gradual rate increases will be “consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”

In a technical move, the central bank also decided to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

The policy statement bypassed discussion about the tensions over the Trump administration’s trade policies, including a decision two weeks ago to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico.

Individual Fed policymakers have expressed concerns about the economic risks of a broad tit-for-tat tariff retaliation, but have said they would not change their policies or forecasts until those risks are realized.

Reporting by Howard Schneider and Jason Lange

Wall Street wants more female traders, but old perceptions die hard

For The Girls

NEW YORK (Reuters) - As a biomedical engineering student at Duke University, Priya Karani thought she did not have the right skills to break into the heavily male-dominated field of Wall Street trading.

“I was never interested in a career in trading at a bank because I didn’t know it was an option,” Karani said.

A decade later, Karani is a director at Barclays PLC in New York where she trades healthcare derivatives and helps the bank’s effort to attract more women to trading by talking to female college students about her job.

Despite such efforts Karani still represents a small minority since few women apply for jobs in trading, deterred by its decades-old reputation as an “alpha-male territory” and misconceptions about skills it requires.

“Trading is a hard one to crack,” said Jon Regan, a head of global markets for executive search firm Sheffield Haworth. “I don’t think it has changed much, although firms are working hard to improve their gender ratios.”

The firm, which works for many leading investment banks and conducts studies on behalf of its clients, found women generally account for 12 to 15 percent of trading roles, he said.

There are no industry-wide data but the Financial Industry Regulatory Authority, which oversees U.S. brokerages, said women accounted for about 28 percent of individuals registered with it at the end of 2017. Those numbers include not just traders, but also investment advisers.

Banks’ efforts to change that have intensified over the past year with the emergence of the #MeToo movement and growing shareholder calls for disclosures on workforce diversity.

For example, Citigroup Inc and Bank of America Corp released information on diversity and gender pay gap for the first time this year in response to calls from an investment advisory firm.

Since last year, major employers have also been obliged to report gender pay gap data for their British operations, which for banks showed women underrepresented in higher earning roles.

Barclays’ Sophomore Springboard program that Karani supports is one of several initiatives banks have introduced recently to make trading rooms more diverse.

Citigroup Inc does college recruitment focused on informing young women about trading careers and offers them interview coaching, while JPMorgan Chase & Co (JPM.N) has been running an internal program for the past two years called Women Who Trade, which offers networking for female traders of all levels, including potential recruits.

“We are doing a better job at ensuring analyst classes have a better intake (of women),” said Claudia Jury, global co-head of currencies and emerging markets at JPMorgan and a senior sponsor for the program. The bank has hired around 30 women through the program since 2016, it said.

Goldman Sachs Group Inc (GS.N) started its Trader Academy in London last year, offering eight months of mentoring, networking and job shadowing for 16 female college students. The bank plans to expand the program to the Americas this year and Asia soon after.

Goldman has said it wants women to eventually make up half of its overall workforce, but acknowledges trading is far from that goal.

“Having women in particular from a trading perspective has always been a challenge for us,” said Janine Glasenberg, the bank’s head of graduate recruiting in Europe, the Middle East and Africa.

Banks are so keen to improve their diversity ratios that one declined to make young female traders available for interviews out of fear they might get poached by competitors.

Shareholder pressure aside, managers and some studies say hiring more women simply makes business sense.

David Hesketh, chief executive of a London-based startup TradingHub said trading simulations the company ran in 2014 and 2015 for hundreds of interns as part of banks’ recruitment programs showed women made fewer trades and took fewer risks. They would also break the rules less than half as often as men. In all, having more women on a team could translate into savings on brokerage fees, loss provisions and fines.

“That is kind of nuts, if you think some firms are getting fines in the hundreds of millions of dollars,” Hesketh said.

Yet former female traders interviewed by Reuters describe an industry, which has left behind discriminatory attitudes common only a decade ago, but where women remain heavily outnumbered and can sometimes feel like outsiders in a “boys’ club.”

Simmy Grover, who worked as an equity trader at Morgan Stanley in London between 2006 and 2009, recalled how just over a decade ago one investment bank was ready to offer her a job, but just could not imagine her on the trading floor.

“I remember walking into an interview and I was asked why I had applied for trading because I was a woman and I should be applying to sales.”

Grover, now a researcher at the University College London, said she ended up working as a trader elsewhere anyway. While she said she never felt marginalized on the job, she would sometimes get overlooked by brokers hosting social events- typically involving watching a soccer game and a trip to the pub.

Divya Krishnan, who was a trader between 2009 and 2014 as part of Citi’s program for quantitative analysts, said in her time the bank was already trying to help young recruits, offering networking opportunities and linking them up with experienced female traders.

They told them, she recalls, to be confident and avoid apologizing too much, something she said women tended to do.

But like Grover she found it was harder to fit in after hours. “I was never a sports person, but that was always a topic of conversation. I had to learn that,” Krishnan, who now works for fintech startup Motif, said.

While workplace culture is slow to change, banks focus their outreach in colleges on broadening a pool of potential candidates by dispelling the myth that only math wizards or those with finance degrees can succeed in trading.

“We spend a lot of the time encouraging women who have liberal arts backgrounds to look at this business,” said Amanda Magliaro, a managing director and head of global structured finance distribution at Citigroup.

Magliaro, who graduated as a Japanese language major and holds an MBA in finance, said the efforts, including interview coaching for women joining its internship program, were bearing fruit: “It has improved the numbers.”

Headhunters say, however, it will take time before effects of such efforts show up in banks’ gender ratios.

“Firms would like to have more women in trading and other areas, but there aren’t that many women in the pipeline,” said Ross Gregory, a director at recruitment firm Proco Commodities.

Reporting by Anna Irrera

Euro goes up as ECB prepares to wind down

LONDON (Reuters) - The euro rose to its highest in a month but world stocks wilted on Thursday, as the European Central Bank prepared to pull the plug on its 2.55 trillion-euro, three-year stimulus programme.

After the Federal Reserve raised U.S. interest rates for the second time this year and hinted at two more, it was shaping up to be a double-whammy for risk assets that have gained during years of ultra-cheap borrowing conditions.

All sectors on the pan-European STOXX 600 index were in negative territory. Basic resources stocks led the decline with a 1.3 drop following weak data from big metals consumer China.

The dollar had risen after the Fed's move, then faded in Asia and was still falling as the euro pushed above $1.1820 EUR=EBS before the ECB met.

Euro zone government bond yields also edged up with Germany Bund offering 0.49 percent U.S. Treasuries drifted back though to 2.96 percent after briefly topping 3 percent overnight.

“I think its pragmatic for the Fed to take these moves, because if you are not going to make them now, when are you going to take them,” Kully Samra, European managing director at $3 trillion U.S. asset manager Charles Schwab, said.

The ECB had probably been too slow to reduce stimulus, Samara said, though recent weaker data showed Europe still had underlying issues.

In Asia, surprisingly soft Chinese retail sales and investment data had also hit sentiment. China’s central bank left its interest rates on hold, rather than follow the Fed, as it often does.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS lost 1.0 percent. Shares in South Korea and Taiwan fell over one percent.

Japan's Nikkei dropped 0.6 percent. In mainland China, the Shanghai composite index hit a 20-month closing low, shedding 0.4 percent.

Any changes to the ECB’s asset-purchase programme should appear in the ECB policy statement at 1145 GMT. The bank’s chief Mario Draghi then holds a news conference at 1230 GMT.

The biggest complication for the ECB might be the increasingly murky economic outlook. The continent faces a developing trade war with the United States, a populist challenge from Italy’s new government and softening export demand.

Also keeping investors in check were concern about U.S. threats to impose tariffs on $50 billion of Chinese goods. U.S. President Donald Trump will meet with his trade advisers later to decide whether to activate the tariffs, a senior administration official said on Wednesday.

The S&P 500 .SPX and Dow Jones .DJI had both lost 0.4 to 0.5 percent and the Nasdaq Composite dropped 0.11 percent. Futures markets pointed to subdued restart later.

The dollar stood at 110.06 yen JPY= after falling from a three-week high of 110.85 following the Fed's decision. The dollar index, which tracks it again six top currencies, also erased all of this week's gains.

The Australian dollar fell 0.35 percent to $0.7551 AUD=D4 after China's poor economic data, but the yuan showed little reaction, especially after the PBOC opted not to raise its rates.

“There is no urgency for China to maintain its favourable yield differential against the United States as capital outflow and currency stability is no longer the key concern for China at the moment,” said Tommy Xie, an economist at OCBC Bank. “With U.S.-China trade war looming, a slightly weaker yuan may be in China’s favour.”

Some emerging market currencies have been hit hard by worries higher U.S. interest rates could prompt investors to shift funds to the United States. The dip in the dollar on Thursday brought welcome relief.

South Africa's rand rebounded from a six-month low ZAR=D3, the Turkish lira TRY= pulled out of a dive and the Mexican peso MXN=D2 recovered from a 16-month low.

Among commodities, China-sensitive industrial metals sagged but gold and other precious metals made ground.

oil prices were little changed, underpinned by a bigger-than-expected decline in U.S. crude inventories and surprise drawdowns in gasoline and distillates, which indicated strong demand in the world’s top oil consumer.

Brent and U.S. crude futures traded at $76.83 and $66.67 a barrel respectively, to extend their recovery from eight-week lows touched last week.

Reference: Marc Jones