Wednesday, 28 February 2018

Costly dollar hedges tarnish U.S. bonds for overseas investors

LONDON (Reuters) - Yields on U.S. government debt are at their highest in over four years, and yet they are failing to attract many European investors due to the uncertain outlook for the dollar and the prohibitive cost of hedging their currency risks.

Expectations of more rate U.S. interest rate hikes and President Donald Trump’s ambitious spending program have pushed the gap between U.S. Treasury yields and their euro zone counterparts to their widest in years.

With the Federal Reserve already tightening U.S. monetary policy but the European Central Bank yet to start, yields on two-year Treasuries are a yawning 275 basis points above those on the equivalent German government bonds.

But hedging costs are eating up all that difference for euro-based investors.

The dollar is entering a second year of depreciation against the major world currencies, and this is starting to deter some existing and would-be international creditors to the U.S. Treasury. As such, it illustrates one potential cost of the Trump administration’s presumed “weak dollar” policy designed to encourage U.S. exports.

Last week, yields on two-year U.S. Treasuries hit a 9-1/2 year high of 2.27 percent - a 100 basis point increase from five months ago - yet this did little to boost the struggling dollar, suggesting overseas investors remained broadly on the sidelines.

The lukewarm attitude from foreign investors was particularly striking as the Fed is expected to increase interest rates at least three times this year while its central bank counterparts in Europe and Japan are still a long way from raising rates from record lows.

More U.S. rate rises would only further widen the gap in short-term rates between the United States and Europe which is already at 30-year highs. However, investors say rate differentials are only one factor when buying U.S. bonds.

An equally important consideration is the hedging costs, which have increased dramatically in recent months and have virtually wiped out the advantage that U.S. bonds offer - on Tuesday two-year Treasuries yielded 2.23 percent compared with a negative 0.52 percent for two-year Bunds .

A Citi analysis showed that the yield pickup while purchasing U.S. bonds on a currency-hedged basis for a European investor had disappeared by the end of last year and such a strategy remained substantially unprofitable in the first two months of 2018.

“Hedging costs are quite considerable so yields have to rise well in excess than current hedging costs and that is one reason why Japanese and European investors are not rushing to buy U.S. bonds despite such attractive yields,” said Shaniel Ramjee, a multi-asset portfolio manager at Pictet Asset Management in London.

Data from fund-tracker EPFR Global showed that average weekly purchases of U.S. bonds by non-U.S. investors have dwindled by nearly a third to $9 billion so far this month, compared with more than $13 billion in 2017.

Eric Brard, head of fixed income at Amundi - one of the biggest investors in Europe with over 1.4 trillion euros of assets under management - said once hedging costs are accounted for, yields are quite close to what is available in European markets.

“So you don’t have a big incentive to go for such a position unless you envision a scenario where you expect a change in the spread between Bunds and U.S. Treasuries,” Brard said.

Peripheral euro zone government bonds, such as those issued by Italy and Spain, offer more attractive yields than German debt.

A Barclays bond index measuring total returns for U.S. Treasury bonds in euro terms .BCUSATSY is already down 4 percent this year after falling 10 percent last year, indicating that purchasing U.S. bonds by European investors is turning out to be a losing proposition.

It was up a cumulative 36 percent in the three years ending 2016.

Equity investors usually leave their international currency exposure unhedged or hedge only a portion of it. However, debt investors tend to hedge their currency exposure completely as bonds are far less volatile than currencies.

Francois Savary, chief investment officer of Prime Partners, a Geneva-based wealth manager, is buying Treasuries only for his U.S. clients as his foreign investors face the hedging costs without any prospect of dollar appreciation.

A gauge measuring three month euro/dollar forward rates EUR3M= has doubled since the last quarter of 2017, indicating hedging costs have increased substantially for European investors.

Japanese buyers of U.S. debt have also suffered, though to a lesser extent. The three-month hedging cost for dollar/yen is about 2.45-2.60 percent, its highest since late 2008. This leaves them with a meager return of 0.3-0.45 percent after hedging costs, a marked turnaround from previous years.

In early 2014, when Japanese investors started buying foreign bonds aggressively, the conditions were more favorable with hedging costs running around 0.1 percent while 10-year U.S. Treasuries yielded around 2.7 pct, giving a chunky return of 2.6 percent.

“The attraction of hedged dollar bonds has diminished significantly,” said Hiroshi Ozeki, chief investment officer at Nippon Life, one of Japan’s largest institutional investors.

“We will continue to buy only some U.S. credit products that have a steady spread and an attractive yield after hedging,” he said. “But we probably will no longer buy U.S. Treasuries with currency hedging.”

Another headache for overseas investors has been the dollar, which has shown no sign of breaking its year-long losing streak. After declining more than 10.5 percent in 2017, it has weakened a further 2.4 percent so far this year.

That problem is more acute for European-based investors as those based in Japan are still harvesting a positive yield after hedging for currency risks.

While that yield has shrunk in recent months, its continuing existence perhaps explains why demand for U.S. bonds at primary auctions has picked up recently. Turmoil on global financial markets has also boosted the safe-haven appeal of such bonds.

At the February refunding, foreigners bought the most 10-year Treasuries since May 2016 and the most 30-year long bonds in three years.

“For the belly of the curve such as the 10-year segment, the hedging costs can be swallowed and the market is very liquid but in the short-end of the curve, hedging is a big deterrent,” said an investment director at a U.S. fund in London.

Reference: Saikat Chatterjee

Asian shares slide as weak China, Japan manufacturing data add to Fed worries

SYDNEY (Reuters) - Asian shares extended losses on Wednesday as weak Chinese and Japanese manufacturing data revived worries about global growth amid anxiety over faster rate rises in the United States.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped more than 1 percent, its biggest daily percentage drop since Feb.9 when world financial markets were battered by concerns U.S. inflation is picking up.

The index is now down nearly 5 percent in February.

Japan’s Nikkei stumbled 1 percent on a slightly firmer yen.

China’s blue-chip CSI300 skidded 0.6 percent while Shanghai’s SSE Composite fell 0.8 percent and Hong Kong’s Hang Seng index declined more than 1 percent.

In an indication of the dour mood, S&P E- Mini futures slipped 0.1 percent while FTSE futures were off 0.6 percent.

Asian markets had opened mildly lower but selling intensified after data showed growth in China’s manufacturing sector in February slowed more than expected to the weakest in over 1-1/2 years.

Growth in China’s services industry also slowed, suggesting the key sector was starting to display signs of fatigue.

The weakness was driven by disruption due to the Lunar New Year holidays and curbs to factory output from tougher pollution rules, but there are worries of a bigger loss in momentum.

Julian Evans-Pritchard, senior China Economist at Capital Economics, said the “the risk is still that the economy fares worse this year than is generally expected.”

Some analysts cautioned the timing of the long holiday may have skewed the activity readings.

In Japan, the world’s third-largest economy, industrial output in January took its biggest tumble since a devastating earthquake in March 2011, highlighting a weakening in demand and a build up of inventory.

Growth in India’s factory activity slowed too in February.

Sentiment across financial markets was already sour after Fed’s Jerome Powell gave an upbeat view of the U.S. economy on Tuesday and said recent data had strengthened his confidence on inflation.

When asked about likely catalysts for more than three rate hikes in 2018, he said each member would write a new “dot plot” rate path ahead of the March meeting and that he wouldn’t want to prejudge that outcome.

Rate futures fell following Powell’s remarks as traders began pricing in about a one-in-three chance of a fourth hike this year.

Fears of faster U.S. rate hikes have caused anxiety that other central banks will start to tighten policy and raise borrowing costs. That would in turn hurt corporate earnings, clouding the outlook for what had been expected to be another solid year of global economic growth.

“Today’s comments appear to open the door for others on the (Fed) Committee to revise their forecast as they see fit, and that Powell himself may be inclined to look for four hikes this year,” JPMorgan economist Michael Feroli said in a note.

The Fed moved three times in 2017 and is seen as certain to do the same or more this year, with the first move expected as early as March.

The dollar held on to gains after rallying against most major currencies on Tuesday.

It hovered near a recent 1-1/2 month top against the Australian dollar and held near a three-week high on the euro at $1.2221.

However, it did not fare well against the Japanese yen, a perceived safe haven. The dollar was last down 0.2 percent at 107.10 yen.

Dollar bulls were wrongfooted after the Bank of Japan announced it would trim the amount of super long Japanese government bonds it offered to purchase at its regular debt-buying operation.

Analysts are predicting a stronger yen this year despite faster U.S. rate rises, although speculators and Japanese retail investors have built huge short positions in yen futures setting the scene for a massive shakeout.

In commodities, oil prices extended declines on weak output data from China and Japan and as an industry data showed an increase in U.S. crude stockpiles.

Brent crude futures fell 40 cents to $66.23 a barrel, while U.S. crude was last down 33 cents at $62.68.

Spot gold eased to $1,317.61 an ounce, not far from Tuesday’s $1,313.26 which was the lowest in three weeks.

Reporting by Swati Pandey

Tuesday, 27 February 2018

Fed's Powell nods to 'gradual' rate increases, close eye on inflation

WASHINGTON (Reuters) - Federal Reserve Chairman Jerome Powell, pledging to “strike a balance” between the risk of an overheating economy and the need to keep growth on track, told U.S. lawmakers on Tuesday that the central bank would stick with gradual interest rate increases despite the added stimulus of tax cuts and government spending.

Fed policymakers anticipate three rate increases this year, and Powell gave no indication in prepared remarks to the House Financial Services Committee that the pace needs to quicken even as the “tailwinds” of government stimulus and a stronger world economy propel the U.S. recovery.

“The [Federal Open Market Committee] will continue to strike a balance between avoiding an overheating economy and bringing ... price inflation to 2 percent on a sustained basis,” Powell said in prepared remarks for his first monetary policy testimony to Congress as Fed chief.

“Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” Powell said, noting recent fiscal policy shifts and the global economic recovery. Still, “inflation remains below our 2 percent longer-run objective. In the (FOMC‘s) view, further gradual rate increases in the federal funds rate will best promote attainment of both of our objectives.”

The testimony sent Powell’s first signal as Fed chief that the massive tax overhaul and government spending plan launched by the Trump administration will not prompt any immediate shift to a faster pace of rate increases. “Gradual” has been the operative word since the Fed began raising rates under Powell’s predecessor, Janet Yellen, in late 2015.

The Fed is expected to approve its first rate increase of 2018 at the next policy meeting in March, when it will also provide fresh economic projections and Powell will hold his first press conference.

“This is a continuation of where this Fed was under Chair Yellen,” said Robert Albertson, principal and chief strategist at Sandler O‘Neill & Partners in New York.

“They are normalizing, they are not tightening ... The surprises, if we are going to see them, are going to be after more data comes out in the next month or two,” and accounts for things like the tax cuts and whether business investment spending continues higher, he said.

Market reaction was muted. U.S. stocks were trading slightly lower while the dollar was stronger against a basket of currencies. Prices of U.S. Treasuries were mixed.

Powell’s appearance before the House panel is his first as Fed chief. He used his prepared remarks to strike notes likely to be welcomed by the Republican majority on the panel - including promises of “transparency” and a nod to the monetary policy rules some of them favor.

“I am committed to clearly explaining what we are doing and why we are doing it,” Powell said.

But in his remarks and in a monetary policy report issued to Congress by the Fed last week he also stuck close to a safe script, mentioning none of the new initiatives that some of his colleagues have pushed for, such as a review of the Fed’s system for managing inflation.

That report acknowledged “valuation pressures” in parts of the economy, and noted the recent return of volatility in stock markets.

Though rising long-term interest rates and recent equity market volatility have tightened financial conditions, Powell said, “we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation.”

Rather, “the robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment,” he said.

Reporting by Howard Schneider

Sterling edges higher but outlook cloudy

LONDON (Reuters) - Sterling edged higher on Tuesday on the back of a struggling dollar though investors remained wary of chasing the British currency higher before a testimony from new Federal Reserve chief Jerome Powell later in the session.

With expectations of a May rate hike mostly priced into financial markets, the dollar’s fortunes has been the dominant driver in recent sterling price action with investors also wary of Brexit-related headlines.

“While the pound’s outlook has improved in recent days thanks to the renewed optimism from the central bank, investors are wary of pushing the British currency higher from these levels unless there is more clarity on the dollar’s outlook,” said Lee Hardman, a currency strategist at MUFG in London.

Powell’s Congressional testimony will be his first public appearance since being sworn in as chairman earlier this month.

Traders will watch closely to see whether the new chief will continue on the gradual monetary rate path pursued by his predecessor Janet Yellen, or whether he will take a more hawkish approach.

Sterling was trading 0.1 percent higher at $1.3978 in early London trading on Tuesday and about 2.5 percent away from a pre-Brexit referendum high of $1.4346 hit late last month.

Against the euro, sterling was broadly flat around 88.24 pence.

Latest positioning data by Commodity Futures Trading Commission on Friday showed that long sterling positions are down substantially to $8.2 billion compared to more than a 3-1/2 year high of nearly $33 billion in late January.

Recent Brexit-related headlines have also added to the general uncertainty around sterling.

Brief respite followed a speech by opposition leader Jeremy Corbyn on Monday in which he said his Labour Party wanted Britain to negotiate a new customs union with the EU to ensure tariff-free trade after Brexit.

But Prime Minister Theresa May has ruled out any customs union with the EU after Brexit because it would prevent Britain from striking new trade deals with fast-growing economies including as China and India.

Reporting by Saikat Chatterjee

Asian shares rise to three-week high ahead of Powell's testimony

TOKYO (Reuters) - Asian shares extended their recovery on Tuesday, hitting a three-week high as U.S. borrowing costs eased ahead of Federal Reserve Chairman Jerome Powell’s highly-anticipated first congressional testimony later in the day.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5 percent, building on its bounce from a two-month low touched on Feb. 9.

It has now recouped more than 60 percent of its losses from a sharp global rout in early February.

Japan’s Nikkei rose 1.0 percent to three-week highs.

On Wall Street, the S&P 500 advanced 1.18 percent on Monday helped by fall in U.S. bond yields.

The 10-year U.S. Treasuries yield eased to 2.864 percent, dropping further from its four-year peak of 2.957 percent touched on Feb 21, driven by month-end buying as well as position adjustments ahead of Powell’s testimony.

Powell’s debut appearance is seen as critical for financial markets at a time when many investors are nervous about the Fed’s policy normalization following years of stimulus after the financial crisis almost a decade ago.

Many investors expect the Fed to raise interest rates three times this year, with some pundits predicting four, if U.S. inflation starts to take off, especially as growth is set to get another boost from the Trump administration’s tax cuts and spending plans.

Yet, there are worries higher dollar bond yields could prompt investors to shift funds to bonds from riskier assets, especially when the valuation of the world’s stocks are quite expensive even after their sell-off earlier this month.

The two-year U.S. Treasuries yield xx percent, well above dividend yield of the S&P 500, which stood at 1.88 percent.

A rise in dollar interest rates could also bode ill for potential borrowers, including U.S. home buyers and many companies that have expanded borrowing for years to take advantage of low dollar funding costs.

“Expectations that Powell will be sensitive to financial markets appear to be running high. But he hasn’t said he will sacrifice policy normalization for the sake of financial markets. I feel there is room for disappointment in markets,” said Hiroko Iwaki, senior bond strategist at Mizuho Securities.

MSCI’s gauge of equity market performance in 47 countries rose 0.2 percent on Tuesday after Monday’s 0.8 percent gain, rising above its Feb. 16 high to hit a three-week top.

Still, it is down 2.2 percent so far this month, suggesting its record 15-month winning streak that began in November 2016 is at risk.

“The combination of low interest, low inflation and strong economic growth, the best combination for markets that also kept market volatilities low, is coming to an end,” said Mutsumi Kagawa, chief global strategist at Rakuten Securities,

He said that while corporate earnings will likely remain strong for a while longer, underpinning stocks, market volatility will be higher.

In the currency markets, the euro traded at $1.2338, up 0.2 percent in Asia but off its three-year high of $1.2556 hit earlier this month.

The dollar traded at 106.98 yen, stabilizing for now above its 15-month low of 105.545 set on Feb 16.

Fed funds rate futures were almost fully pricing in a rate hike at the Fed’s next policy meeting on March 20-21.

Oil prices held firm at three-week highs, supported by supported by signs of stronger demand, robust production curbs led by OPEC and a slight fall in U.S. output.

U.S. West Texas Intermediate futures fetched $64.00, up slightly on Tuesday, after hitting a 20-day high of $64.24 the previous day.

London Brent crude traded flat at $67.47 a barrel, having hit a three-week high of $67.90 the previous day.

Reference: Hideyuki Sano

Sterling cements gains on rate hike bets; customs union hopes

LONDON (Reuters) - Sterling consolidated gains near 10-day highs on Monday as relatively hawkish comments from a central bank official boosted bets that interest rates may rise as early as May while a speech by British opposition leader Jeremy Corbyn helped sentiment.

Dave Ramsden, a deputy governor at the Bank of England who was one of the two policymakers who opposed the BoE’s decision to raise interest rates in November, said in a newspaper interview the central bank may need to raise British interest rates somewhat sooner he expected.

His comments added to the general chorus of optimism emanating from central bank officials in recent days, increasing the odds of a rate hike by May to 70 percent, according to money markets.

“The BOE’s comments have been a big driver for sterling’s gains today and while Corbyn’s comments sound optimistic, we need to see more specifics from them on what they plan to do,” said Derek Halpenny, European head of Global Markets, at MUFG in London.

Sterling held near the day’s highs, up 0.6 percent on the day at $1.4054, while against the euro the pound rose 0.3 percent to 87.79 pence per euro.

Labour Party leader Corbyn said on Monday that he wanted Britain to negotiate a new customs union with the EU to ensure tariff-free trade after Brexit.

As Prime Minister Theresa May tries to strike a divorce deal with the European Union by October, she is facing a rebellion by a small group of pro-Europeans inside her Conservative Party that Labour Party leader Corbyn hopes to use to undermine her authority.

Analysts said Corbyn’s support for a customs union made a so-called “softer” Brexit -- or one in which Britain retains as close as possible ties to the EU after leaving -- more likely, helping reduce Brexit risks that weigh on the pound.

“It’s not a big surprise but this is another one of the members of the BoE changing his view on the need for rate hikes,” Manuel Oliveri, London-based FX strategist at Credit Agricole said. “The predominant driver is the BoE comments.”

Increased expectations of a BOE rate hike in May comes at a time when investors have taken profits into a sterling rally in recent week.

Latest positioning data by Commodity Futures Trading Commission on Friday showed that long sterling positions are down substantially to $8.2 billion compared to more than a 3-1/2 year high of nearly $33 billion in late January.

The British pound peaked at $1.4346 in late-January, a 7.5 percent jump from early December levels. It is now more than 2.5 percent below that high.

Reporting by Tommy Wilkes

Monday, 26 February 2018

Global stocks firm, dollar dips before big week for central banks

LONDON (Reuters) - Global stocks notched further gains on Monday and the dollar stayed on the back foot, as investors bet the new head of the U.S. Federal Reserve will steer a steady course on policy when he addresses lawmakers this week.

MSCI’s index of world stocks .MIWD00000PUS was up 0.3 percent, with the pan-European Stoxx 600 up 0.6 percent.

Asian markets also rose, with Chinese stocks .CSI300 up 1.2 percent after the ruling Communist Party set the stage for President Xi Jinping to stay in office indefinitely.

Much of the market’s focus during the coming week will be on monetary policy, with the heads of the European Central Bank and Bank of England set to give speeches. But they are likely to be overshadowed by Fed chair Jerome Powell.

U.S. stock markets calmed on Friday after the Fed said it saw steady economic growth continuing and no serious risks on the horizon, a trend that looks set to continue on Monday.

Dow Jones futures pointed to the index opening 0.6 percent higher, with S&P 500 futures up 0.4 percent.

Investors also seem to be wagering that Powell will stick to that script at his first appearance before the House on Tuesday, followed by testimony to the Senate on Thursday.

“Given he’s speaking on behalf of the committee it would be a big surprise to see much deviation from recent Fed commentary, but much will probably be made of how he handles the scrutiny,” said Jim Reid, a macro strategist at Deutsche Bank.

The expected lack of policy surprises from Powell saw yields on U.S. 10-year Treasuries back off to 2.86 percent and away from a four-year top of 2.957 percent, dragging down the dollar.

The currency surrendered early gains to dip 0.2 percent against a basket of currencies to 89.68. That followed a 0.8 percent bounce last week.

Sterling GBP= was up 0.5 percent on Monday after Bank of England deputy governor Dave Ramsden said the bank might need to raise interest rates somewhat sooner than he had expected if wage growth picked up early this year.

The pound also benefited from hopes that Britain’s exit from the European Union might be less disruptive than feared, after opposition leader Jeremy Corbyn gave a speech on Monday backing a new customs union with the bloc.

The euro EUR= was 0.3 percent firmer on the back of dollar weakness, though investors largely held back from taking big positions ahead of a national election in Italy and the conclusion of coalition talks in Germany.

ECB President Mario Draghi is also set to appear before the European Parliament later in the day, while BoE governor Mark Carney speaks in Edinburgh on Friday.

In commodities, oil prices steadied after hitting their highest level in nearly three weeks, supported by comments from top exporter Saudi Arabia that it would continue to curb shipments in line with the OPEC-led effort to cut global supplies.

Reporting by Alasdair Pal,

With $116 billion cash, Buffett says Berkshire needs 'huge' deals

NEW YORK (Reuters) - Warren Buffett on Saturday lamented his inability to find big companies to buy and said his goal is to make “one or more huge acquisitions” of non-insurance businesses to bolster results at his conglomerate Berkshire Hathaway Inc.

In his annual letter to Berkshire shareholders, Buffett said finding things to buy at a “sensible purchase price” has become a challenge and is a major reason Berkshire is awash with $116 billion of low-yielding cash and government bonds.

Buffett said a “purchasing frenzy” binge by deal-hungry chief executives employing cheap debt has made that task difficult. Berkshire typically pays all cash for acquisitions.

“Our smiles will broaden when we have redeployed Berkshire’s excess funds into more productive assets,” Buffett wrote. “Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that to happen, we will need to make one or more huge acquisitions.”

The letter was considerably shorter than in recent years, a little over 8,000 words compared with more than 14,000 last year, and did not discuss major Berkshire stock holdings such as Apple Inc and Wells Fargo & Co. Buffett often invests in stocks when he cannot find whole companies to buy.

It was also short on faulting excesses of Wall Street and Washington, and said nothing about Berkshire’s plan to create a healthcare company with Inc and JPMorgan Chase & Co.

At age 87, “he doesn’t want to make any enemies,” said Bill Smead, chief executive of Smead Capital Management in Seattle, a Berkshire investor.

Berkshire also posted a record $44.94 billion annual profit, though $29.1 billion stemmed from the slashing of the U.S. corporate tax rate, which reduced the Omaha, Nebraska-based conglomerate’s deferred tax liabilities. Book value per share, measuring assets minus liabilities, rose 23 percent in 2017.

It has been more than two years since Buffett made a major purchase, the $32.1 billion takeover of aircraft parts maker Precision Castparts Corp, and his advancing age gives him less time to find more of the “elephants” he prefers.

But he has given himself and longtime Vice Chairman Charlie Munger, 94, more freedom to focus on investing and allocating capital.

Neither has signaled any intention of stepping down soon, though Berkshire last month named two additional vice chairmen who could eventually succeed Buffett as chief executive.

Gregory Abel, who had run Berkshire Hathaway Energy, is now overseeing Berkshire’s non-insurance businesses such as the BNSF railroad and Dairy Queen ice cream, all of which employ 330,000 people, while insurance specialist Ajit Jain oversee the Geico auto insurer and other insurance businesses, employing 47,000.

“Berkshire’s blood flows through their veins,” Buffett wrote.

While the Wells Fargo investment has struggled in recent months because of scandals over how it treats customers, Apple has performed better.

Buffett revealed in his letter that Berkshire was sitting at year end on a $7.25 billion paper profit on what has become a 3.3 percent stake in the iPhone maker, worth $28.2 billion.

Some Berkshire stock investments are made by deputies Todd Combs and Ted Weschler, who Buffett said together manage about $25 billion, up from $21 billion a year ago.

Buffett also warned long-term investors including pension funds, college endowments and “savings-minded individuals” that even with U.S. stock prices near record highs, it would be a “terrible mistake” to assume bonds are safer.

“Often, high-grade bonds in an investment portfolio increase its risk,” he wrote.

Fourth-quarter net income quintupled to $32.55 billion, or $19,790 per Class A share, from $6.29 billion, or $3,823 per share, a year earlier.

Operating profit, which Buffett considers a better gauge of performance, fell more than analysts expected in the fourth quarter, and slid 18 percent for the year to $14.46 billion.

Full-year results suffered from Berkshire’s first full-year insurance underwriting loss since 2002, hurt by Hurricanes Harvey, Irma and Maria and wildfires in California.

Even so, insurance float, or premiums collected before claims are paid, and which give Buffett more money to invest, rose 25 percent last year, to $114.5 billion.

Reporting by Trevor Hunnicutt

Asian shares mostly firmer, dollar loses early edge

 SYDNEY (Reuters) - Asian shares made guarded gains on Monday as investors braced for an event-packed week headlined by U.S. inflation data and the first House testimony by the new head of the Federal Reserve.

Spread betters also pointed to a stronger start for Europe and FTSE futures were already 0.5 percent higher.

But sentiment was fragile, with the dollar reversing its early rise and safe-haven bonds firming as E-Mini futures for the S&P 500 turned flat.

MSCI’s broadest index of Asia-Pacific shares outside Japan crept up 0.6 percent, with most bourses in the green.

Japan’s Nikkei led with an increase of 1.3 percent, while Chinese blue chips added 0.7 percent.

China’s ruling Communist Party on Sunday set the stage for President Xi Jinping to stay in office indefinitely, with a proposal to remove a constitutional clause limiting presidential service to just two terms in office.

Investors initially took heart from Friday’s rally on Wall Street which saw the VIX volatility index end at 16.49 percent, far below the 50 percent peak touched at the height of market turmoil in early February.

The mood has calmed partly thanks to expectations the Federal Reserve will stay gradual in its tightening, a measured outlook underlined by the central bank in a governors’ report released on Friday.

Investors also seem to be wagering that Fed Chairman Jerome Powell will stick to that script at his first appearance before the House on Tuesday, followed by testimony to the Senate on Thursday.

“Powell will be highly cognizant of the spike in risk aversion in late January and will be keen not to rock the boat too greatly,” argued Chris Weston, chief market strategist at broker IG.

“Futures markets on Friday were pricing in less implied policy tightening from the Fed in the years ahead, suggesting traders are not expecting Powell to signal a more aggressive response.”

Yields on U.S. 10-year Treasuries had also backed off to 2.85 percent and away from a four-year top of 2.957 percent.

An added wrinkle is that the Fed’s favored measure of inflation, the core personal consumption expenditure (PCE) index, is out early on Thursday.

Markets will be hyper-sensitive to any hint of a pick-up in core inflation given the surprising strength of wages in January and Powell is certain to be questioned on the risks by Senators.

In currency markets, the U.S. dollar surrendered early gains to dip 0.2 percent on a basket of currencies to 89.730. That followed a 0.8 percent bounce last week.

It also retreated on the yen to reach 106.66, failing to hold an early 107.28 top amid selling by Japanese exporters for month-end.

The euro was firmer at $1.2314, just above last week’s trough at $1.2258, with ECB President Mario Draghi set to appear before the European Parliament later in the day.

Dealers were also looking ahead to the outcome of the Italian general election on March 4.

A German Social Democrats’ poll of its members on joining another coalition government with Chancellor Angela Merkel’s conservatives is also due that day, two big political risk events for markets.

In commodities, the lapse in the dollar helped spot gold bounce 0.6 percent to $1,336.94 per ounce.

Oil prices extended gains to hit their highest level in nearly three weeks on Monday, supported by comments from Saudi Arabia that it would continue to curb exports in line with the OPEC-led effort to cut global supplies.

U.S. crude futures added 25 cents to $63.80 a barrel, while Brent futures rose 15 cents to $67.46.

Reference: Wayne Cole

Sunday, 25 February 2018

Markets fret over Federal Reserve's approach under new chair Powell

NEW YORK (Reuters) - Investors are starting to doubt whether they can count on the protective embrace of an accommodative U.S. central bank when markets go haywire.

Federal Reserve chair Jerome Powell has said little about the sharp fall in Wall Street stocks this month, besides offering the platitude at his swearing-in ceremony last week that “we will remain alert to any developing risks to financial stability.”

But the spotlight will be on the new Fed chair next week when he faces questions from both houses of the U.S. Congress in semi-annual testimony starting on Tuesday, and his audience will include investors who unceremoniously greeted his early tenure with one of the fastest 10.0 percent falls in Wall Street stocks in history earlier this month.

“I don’t think it is a coincidence that this occurred at the same time as we saw the passing of the baton between two different Fed chairs,” said Kristina Hooper, global market strategist at Invesco Ltd, an asset management company, adding that former Fed chair Janet Yellen had “lulled” markets into complacency. Powell could be very different from Yellen, she said.

The notion that the Fed would always be there to prop up shell-shocked markets prompted the notion of a Fed “put” option under three prior Fed leaders - Janet Yellen, Ben Bernanke and Alan Greenspan. The term is a reference to the hedging strategy of using a put option to guarantee an investor a sale at a preset price to limit losses.

While the Fed did not buy stocks or sell options in response to the 2007-2009 financial crisis, it did push short-term interest rates to historic lows and bought bonds, driving down yields. Starved for yield in recent years, investors were forced into the stock market, driving up equity valuations, thanks to the Fed’s policies.

“There was definitely a Yellen put, and it remains to be seen whether there will be a Powell put,” said Hooper.

Yellen’s Fed did later raise interest rates though, starting in late 2015, but it did so more slowly than in earlier cycles and it backed off when markets were stressed. In 2015 and 2016, the rate-setting Federal Open Market Committee (FOMC) delivered just one rate hike per year.

The Fed now faces pressure to move more quickly to guard against a possible overheating of the economy, as the Fed’s balance sheet and global interest rates still bear the tidemarks of emergency policies.

The minutes of the Fed’s FOMC meeting on Jan. 30-31, published on Wednesday, showed policymakers expressing the need to keep raising interest rates, with most believing that inflation will rise further. On Friday, the Fed’s semi-annual monetary policy report to Congress, its first under Powell, said the Fed sees steady growth continuing and no serious risks on the horizon that might make the central bank pause its planned pace of rate hikes. “The economic expansion continues to be supported by steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth abroad, and accommodative financial conditions,” the report said.

“This will be one of the more hawkish Feds we have experienced in 20 years,” said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC, a broker-dealer, in a note on Wednesday. A “hawkish” monetary policymaker is more aggressive in warding off inflation.

Higher interest rates could lure cash out of the stock market and into bonds as yields rise. Higher rates could also tighten credit for consumers as well as companies that have struggled to grow their sales as quickly as their profits during this economic recovery.

Some investors have even argued that the Fed’s desire to avoid tripping up markets risks the central bank moving too late to prevent a rise in inflation and a market bubble. The argue that an economy that is overheating would require potentially destabilizing interest rate hikes later.

The Fed needs to slow the economy down a bit for its own good, as so far the Fed’s efforts at tightening financial conditions have not been successful, said Tony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co.

Striking the right balance is not always easy though. In 2008 the Fed was preoccupied with inflation, while subprime mortgage products built up excessive leverage in bank balance sheets, provoking systemic problems in markets that lead to the worst global recession since the 1930s.

In his first months as a Fed governor back in 2012, Powell was among those who pressured then-chair Bernanke for more clarity on his plan to “taper” the central bank’s bond buying. When Bernanke made the plan public, it triggered the so-called “taper tantrum” sell-off in the bond market in the summer of 2013.

Powell appeared to side with the “hawks” again in the summer of 2015 when he argued two interest rate rises might be needed, but the meltdown in the Chinese stock market that year meant he later backtracked and the Fed eventually raised rates only once that year in December.

Over time Powell’s speeches have come to emphasize how the long spell of loose U.S. monetary policy has given the labor market time to recover, allowing the unemployment rate to fall from a high of 10 percent in 2009 to a 17-year low of 4.1 percent in January this year.

“Market participants would rather see the Fed take actions that sustain the expansion, and that means more rate hikes,” said Crescenzi.

It is unlikely the Fed would “view a dip in the stock market - especially the one that was seen recently - as a reason to come to its rescue,” he said.

Reporting by Trevor Hunnicutt

Friday, 23 February 2018

Euro set for second biggest weekly drop since October as risk looms

LONDON (Reuters) - The euro slipped on Friday and is set to post its second biggest weekly loss in nearly four months as investors trim positions before a big week for global currency markets from a European politics perspective.

The outcome of the Italian general election is due on March 4 and the German Social Democrats poll of its members on joining another coalition government with Chancellor Merkel’s conservatives is also due that day, both events which may trigger fresh market volatility.

With recent surveys and the European Central Bank’s minutes of its January policy showing some signs of caution among policymakers about the bloc’s economic prospects with the backdrop of a strong euro, investors are searching fresh catalysts to drive the currency higher.

In a market where long euro bets are at their largest on record, according to CFTC positioning data, any less than optimal results from either of these two major political events may prompt some funds to sell the single currency.

“Apart from the political factors, the dollar’s outlook also appears to be more constructive in the short term thanks to the rising yields,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

Markets are assuming from opinion polls that there will be no clear winner to the Italian polls, with either some loose coalition or a minority government likely to emerge.

Indicating the growing caution among European policymakers, ECB officials rejected even a token change in the bank’s policy message, arguing that it was premature to signal policy normalization given weak inflation, the minutes of its January meeting showed on Thursday.

That caution is also reverberating in the bond markets with U.S. yields rising by more than 50 basis points since early December, more than a 38 basis point in German government debt.

Benchmark Treasury 10-year note yields rose to a four-year high of 2.957 percent on Wednesday before falling back to 2.904 percent on Thursday.

The prospect of the U.S. government boosting debt issuance to fund expanded stimulus and the Federal Reserve hiking interest rates steadily this year are some of the factors that have contributed to the rise in yields.

The dollar index against a basket of six major currencies rose 0.2 percent to 89.873.

The index reached a 10-day high of 90.235 on Thursday, from a three-year trough of 88.253 late last week, before its rally lost a bit of steam. It was on still on track to gain 0.9 percent on the week.

The yen showed little reaction to data which showed Japan’s annual core consumer inflation rate was unchanged in January from the previous month, reinforcing views that the Bank of Japan remains distant from exiting its super loose monetary policy.

Japan’s nationwide core consumer price index, which includes oil products but excludes volatile fresh food costs, rose 0.9 percent in January. The pace remained far from the BOJ’s 2 percent inflation target.

The dollar edged up 0.1 percent to 106.850 yen.

Reporting by Saikat Chatterjee

Asia shares rebound as fidgety U.S. rate fears shift again

SYDNEY (Reuters) - Asian shares rebounded on Friday as comments from a Federal Reserve official eased worries about faster rate rises in the United States, while the dollar ticked higher as investors dipped their toes back into riskier assets.

Indications were mixed for other global equity markets, with E-Mini futures for the S&P 500 up 0.3 percent but London’s FTSE futures slipping 0.2 percent.

Financial markets have fluctuated wildly this month as investors fretted about how fast the Fed might raise rates in the wake of data showing a pick up in U.S. inflation.

Even though broader U.S. price pressures still appear modest for now, markets are fully pricing in three rate hikes this year, one more than was seen just a few months ago. Some analysts even expect four.

That in turn has stoked anxiety that many central banks will start to tighten policy and raise borrowing costs, hurting corporate earnings and clouding the outlook for what had been expected to be another solid year of global economic growth.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.9 percent on Friday to add on to the previous week’s 3.9 percent gain.

It is still down more than 4 percent in February so far, however, after global equity markets were mauled at the start of the month by worries that inflation is picking up.

Japan’s Nikkei rose 0.7 percent.

China’s SSE Composite index and the blue-chip CSI300 both pared early gains after the government seized control of acquisitive financial conglomerate Anbang Insurance, in a dramatic move that underscores Beijing’s intent to crackdown on financial risk.

The gains in Asia followed a sell-off Thursday after minutes of the Fed’s last meeting showed policy makers were confident about the economic outlook. That prompted some investors to boost the chance of faster rate hikes.

St Louis Fed President James Bullard tried to tamp down expectations of four rate hikes in 2018, instead of the widely anticipated three, saying on Thursday policymakers need to be careful not to increase rates too quickly because that could slow the economy.

The Fed had caused a so called “taper tantrum” in May 2013 when it signaled it was time to stop pumping cash into the U.S. economy, a move that created havoc in financial markets particularly Asia.

But analysts are more upbeat about the outlook for the region despite prospects of rising U.S. inflation and rates.

“Financial market volatility has not dented our constructive view on Asia’s growth outlook for this year,” said Khoon Goh Singapore-based Head of Research for ANZ.

“Higher inflation and a larger fiscal deficit in the United States will likely see U.S. bond yields move higher, but improved fundamentals in Asia mean the region is better placed to weather this than in 2013.”

Analysts expect the market to be in a “holding pattern” ahead of a slew of important U.S. January activity data on Tuesday, followed by global surveys on manufacturing activity on Thursday.

The dollar was up 0.1 percent at 106.91 yen amid rapidly shifting views in U.S. monetary policy.

The yen, which tends to benefit during times of heightened volatility or uncertainty, rose almost 1 percent overnight.

The euro dipped to $1.2303 after gaining 0.4 percent the previous day. The common currency has lost more than 0.75 percent so far this week, following its ascent to a three-year top of $1.2556 on Feb. 16.

Oil prices eased from two-week highs, as high U.S. crude exports outweighted lower crude inventories in the world’s biggest consumer of the fuel.

U.S. crude was off 3 cents at $62.74 per barrel and Brent eased 7 cent to $66.32.

Spot gold slipped 0.3 percent to $1328.05 an ounce.

Reporting by Swati Pandey

Thursday, 22 February 2018

FOREX-Dollar higher on Fed minutes; euro unmoved by ECB

LONDON (Reuters) - The dollar inched up to a 10-day high on Thursday after minutes from the U.S. Federal Reserve’s January meeting showed policymakers confident in rising inflation, while the euro was left unmoved by its own central bank’s policy minutes.

European Central Bank policymakers meeting last month felt it was too early to change their communication stance to signal a normalisation of policy, even if confidence was growing that inflation would finally rise back to target, minutes showed on Thursday.

Policymakers also felt they must keep a close eye on the euro’s exchange rate, and they the bank must avoid abrupt adjustment as it moves towards tightening the ultra-loose monetary policy that has been in place for several years.

The euro hit the day’s high of $1.2308 after the minutes but quickly eased back to trade down 0.1 percent on the day at $1.2266 against a broadly stronger euro.

“I couldn’t see anything that was out of line with what we’d expected (in the ECB minutes),” said RBC Capital Markets currency strategist Adam Cole.

“Given that they’ve been mentioning it in the opening statements of the press conferences, which is a rare phenomenon, it should be no surprise for markets that the ECB is concerned about the exchange rate.”

The dollar index, which measures the greenback against a basket of six major currencies, climbed to as high as 90.235, the strongest since Feb. 13, and was last up 0.2 percent at 90.134.

What was widely interpreted as a slightly more upbeat tone in the minutes of the Jan. 30-31 meeting, released on Wednesday, cemented expectations that the Fed will hike rates under its new chief Jerome Powell next month, and that rates will be hiked on at least another two occasions in 2018.

The minutes also showed voting members, as well as the wider group of policymakers, had upgraded their forecasts for the economic outlook since December.

That left the greenback up more than 2 percent from the three-year low it plumbed on Friday, and on track for its first weekly gain of 2018.

“The release of the FOMC (Federal Open Market Committee) minutes has given the dollar a small lift, with confidence expressed that activity and inflation was moving on the right path to merit further gradual rate hikes,” said ING’s head of currency strategy in London, Chris Turner.

“(But) the Fed story has not had much bearing on the dollar over recent quarters, where a recovery in investment opportunities overseas and... concerns about Washington’s dollar policy and twin deficits have driven the dollar lower,” he added. “We think there is a lot more dollar weakness to come.”

Reporting by Jemima Kelly;

Dollar stands tall after Fed minutes back more U.S. rate increases

SINGAPORE (Reuters) - The dollar rose to a one-week high against a basket of major currencies on Thursday, after minutes of the Federal Reserve’s January meeting showed policymakers were more confident of the need to keep raising interest rates.

The dollar index edged up 0.1 percent to 90.099. Earlier, it climbed to 90.166, the highest level since Feb. 13. That lifted it about 2.2 percent from a three-year low near 88.25 plumbed last week.

A more upbeat take on inflation in the minutes of the Fed’s Jan. 30-31 policy meeting bolstered expectations for rate hikes. U.S. short-term interest-rate futures continued to reflect firm expectations that the Fed will raise rates three times this year.

The minutes also showed that voting members as well as the wider group of policymakers had upgraded their forecasts for the economic outlook since December.

Market participants probably interpreted the Fed minutes as leaving open the possibility that the central bank could raise interest rates four times this year, said Hirofumi Suzuki, an economist for Sumitomo Mitsui Banking Corporation in Singapore.

“A March rate hike is probably a done deal, and there seems to be an upgrade of the views on the economic outlook, so I can understand how market participants would think that there is a chance that the pace of rate hikes could increase to four times this year,” Suzuki said.

“But personally, I have doubts as to whether that’s the Fed’s true intent,” Suzuki said, adding that chairman Jerome Powell’s Feb. 28 congressional testimony on monetary policy would be a key near-term focus.

Both U.S. bond yields and the dollar rose after the Fed minutes, with the U.S. 10-year Treasury yield rising to as high as 2.957 percent on Wednesday, the highest in four years.

The dollar, however, lost ground against the yen, falling 0.4 percent to 107.36 yen.

The Japanese currency gained broadly as speculation of a faster pace of U.S. rate hikes soured investors’ risk appetites and dented equities.

The yen, which is supported by Japan’s current account surplus, is a traditional safe haven currency and tends to attract demand during times of uncertainty or waning risk appetite.

The euro hit a low of 131.575 yen, its weakest level since Nov. 23, and was last down 0.5 percent at 131.79 yen.

Against the dollar, the euro touched its lowest level since Feb. 12 at $1.2265 earlier on Thursday, and was last steady on the day at $1.2277.

Political uncertainty ahead of Italy’s national election on March 4 is likely to weigh on the euro in the near-term, said Roy Teo, investment strategist for LGT Bank in Singapore.

A recent widening in the risk reversal spreads for euro/dollar options, as well as moves in yield spreads between Italian and German government bonds, show signs of investor caution ahead of the Italian election, Teo said.

“As we head towards March 4, I think there’s more downside than upside risk in euro/dollar,” he added.

Opinion polls suggest that Italy’s general election will result in a hung parliament.

Reporting by Masayuki Kitano

Asian stocks slip as U.S. rate risk sours sentiment, dollar holds gains

SYDNEY (Reuters) - Most Asian share markets followed S&P 500 futures lower on Thursday as speculation of faster hikes in U.S interest rates soured risk appetite globally.

The dollar held onto most of its overnight gains courtesy of higher Treasury yields, though the sudden shift to safety also spurred demand for the Japanese yen.

E-Mini futures for the S&P 500 ESc1 lost 0.3 percent and FTSE futures slid 0.8 percent.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.8 percent, with most of the region in the red.

Japan's Nikkei .N225 shed 1.1 percent, with office equipment maker Ricoh down more than 5 percent on news it was conducting impairment tests.

Chinese markets were in a better mood, returning from their long holiday break with a gain of 2 percent for the Shanghai blue-chip index.

On Wall Street, the Dow had ended Wednesday down 0.67 percent, while the S&P 500  fell 0.55 percent and the Nasdaq  0.22 percent.

The retreat came after minutes of the Federal Reserve’s last policy meeting showed the usual concerns that inflation might disappoint, but also an expectation of faster economic growth due to fiscal stimulus.

In particular, members agreed that “the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.”

That led investors to narrow the odds on faster hikes with a host of Fed fund futures  hitting contract lows. Three rate rises are now almost fully priced in for this year, compared to two as recently as December.

“Participants saw a more favorable outlook as supporting gradual rate hikes,” noted Barclays analyst Michael Gapen.

“Since then, more stimulus has arrived and there is some tentative, though not conclusive, evidence of stronger wage and inflation data,” he added. “We continue to expect four rate hikes in 2018 and 2019.”

That risk was not welcome in the Treasury market, where yields on 10-year notes touched their highest in four years, and those on two-year paper the highest in nine.

Yields on 10-year debt were last trading at 2.94 percent and creeping ever closer to 3 percent - a huge psychological milestone for bulls and bears alike.

For once, the lift in yields seemed to benefit the U.S. dollar which edged up to 90.123 against a basket of currencies after having rallied 0.3 percent overnight.

The euro slipped to $1.2274 EUR=, from a $1.2359 top on Wednesday and looked in danger of testing its February trough at $1.2204.

The next hurdle will be minutes from the European Central Bank’s last meeting with markets wary in case there is more talk of an eventual winding back on stimulus.

The dollar fared less well on the yen as the Japanese currency caught a safe-haven bid, falling back to 107.32 JPY= from an early 107.68.

The euro skidded to its lowest on the yen in three months at 131.57 EURJPY= and risked cracking major support at its 200-day moving average of 131.12.

Higher bond yields were a deadweight on gold, which pays no return, and left the metal stuck at $1,323.88 an ounce XAU=.

In oil markets, U.S. crude futures fell 61 cents to $61.06 a barrel, while Brent lost 48 cents to trade at $64.94.

Reference: Wayne Cole

Wednesday, 21 February 2018

Wall St. climbs as tech stocks, Amazon gain

(Reuters) - U.S. stocks were higher on Wednesday, with technology shares and Amazon driving gains ahead of minutes of the Federal Reserve’s most recent policy meeting.

The Fed left rates unchanged at the January meeting, but investors will look for its opinion on inflation and interest rates, especially after strong economic data raised concerns of an overheating economy and triggered the recent selloff.

“While the minutes may not generate quite the same response, traders will likely monitor what they say very closely for signs that policy makers are now leaning more towards three-to-four rate hikes this year, rather than two or three,” said Craig Erlam, senior market analyst at online forex broker Oanda.

Investors also took stock of the latest developments in the Broadcom-Qualcomm takeover saga.

Broadcom Corp lowered its takeover offer for chipmaker Qualcomm to account for the latter’s increased offer for NXP Semiconductors NV.Qualcomm shares fell more than 1.5 percent.

LendingClub’s shares fell more than 4 percent after the online lender posted a wider quarterly loss.

By 9:36 a.m. ET, the Dow Jones Industrial Average had gained 0.33 percent to trade at 25,046.48. McDonald's rose 1.5 percent and was the biggest driver of the blue-chip index.

The Nasdaq Composite rose 0.56 percent to 7,274.62 and the S&P 500 was up 0.41 percent at 2,727.5.

Nine of the 11 major S&P sectors were higher, led by a 0.8 percent gain in consumer discretionary shares. Amazon was up 1.3 percent and Netflix 1.7 percent.

The S&P technology index  rose 0.5 percent. The top gainers were Apple, Alphabet  and Facebook. However, the energy index  fell 0.4 percent as oil prices eased due to a rebound in dollar.

The benchmark 10-year U.S. Treasury bond yields are still near four-year highs at 2.8859.

Wall Street’s fear gauge, the CBOE Volatility index .VIX, eased at 19.21, below Friday’s close of 19.46.

Philadelphia Fed President Patrick Harker said he still thinks just two interest rate hikes this year is “likely appropriate,” but signaled he is open to more if needed.

Harker said he expected the U.S. economy to grow 2.5 percent this year before slowing to 2 percent growth next year and to below 2 percent in 2020.

Advancing issues outnumbered decliners on the NYSE by 1,778 to 748. On the Nasdaq, 1,685 issues rose and 656 fell.

Reference: Sruthi Shankar

Sterling dips ahead of crucial earnings data

LONDON (Reuters) - Sterling edged down against the dollar on Wednesday, as traders held their breath ahead of British average earnings data, which if robust will reinforce bets on a Bank of England rate hike in May.

Market have moved to price in around a 70 percent chance of a rate rise in May following a more hawkish than expected BoE policy statement earlier in the month. But economists say any tightening is contingent on solid wage growth, as well as Britain securing a post-Brexit transition deal.

Labour market data due at 0930 GMT is expected to show earnings growing at 2.5 percent.

The pound jumped on Tuesday after a media report that the European Parliament would call for giving Britain “privileged” single market access.

Growing hopes that Britain and the European Union can agree a transition deal, and then terms for the UK that allow it to remain as close as possible to the trading bloc, have helped support sterling this year.

But the British currency was back below $1.40 on Wednesday, trading down 0.2 percent by 0840 at $1.3965.

The pound was flat at 88.20 pence per euro.

“We wouldn’t be surprised if investors were genuinely confused over the short-term direction of travel for sterling given the myriad of different narratives and factors driving the currency right now,” wrote ING currency strategist Viraj Patel in a note to clients.

“Today’s eventful UK calendar is only set to ramp up the short-term noise levels. The latest jobs report will be closely watched following the BoE’s data and Brexit-contingent hawkish signal.”

Reference: reuters

Sterling slips ahead of key wages numbers

LONDON (Reuters) - Sterling fell against the dollar on Tuesday as the U.S. currency rebounded from recent lows, while traders said they were looking to crucial British earnings data due later this week that could help cement bets the central bank will hike rates in May.

Bank of England Governor Mark Carney earlier this month said interest rates needed to rise a bit faster and more than previously expected, and the market now prices in a roughly 80 percent chance of a May hike.

Analysts said the May hike was largely priced into the pound, which is up 3.4 percent against the dollar this year, and for sterling to rally further there would need to be more clarity over Britain’s departure from the European Union, or expectations of more rate hikes.

“We would need to see a significant negative [earnings data] miss to see the market reprice the chances of a May hike,” Morten Helt, a strategist at Danske Bank in Copenhagan, said, referring to data due on Wednesday.

The data is seen as crucial because the BoE has said it signalled that it needs to see rises in wage pressures before it starts to raise rates.

Carney is due to speak to a British parliamentary committee on Tuesday, but analysts said they expected him to stick to the line given earlier in the month as the market had already moved to price in a hike in May.

Helt said he thought the market was underpricing the chances of further rate hikes over the next two years, but it would take time for those expectations to adjust and to be reflected in sterling.

The pound fell 0.3 percent against the dollar to trade at $1.3953 at 0925 GMT. Sterling in January hit its highest level, at $1.4346, since the vote to leave the EU in June, 2016.

Against the euro, the pound was up marginally at 88.495 pence per euro.

Traders will be looking to an EU leaders meeting next month for progress on Britain securing itself a transition deal for when it leaves the EU.

“Shifting opinion polls regarding the merits of Brexit keep a carrot in front of the noses of sterling bulls, because there’s no doubt that any genuine hope of a soft or non-existent Brexit would be good for the currency,” Societe Generale said.

Reporting by Tommy Wilkes

Tuesday, 20 February 2018

Dollar continues recovery from three-year lows

LONDON (Reuters) - The dollar continued its rebound from three-year lows on Tuesday, having recovered 1.5 percent since Friday on the view that the U.S. currency was due a correction after a brutal sell-off in recent weeks.

The greenback has decoupled from U.S. Treasury yields since the start of the year, skidding to its lowest levels since late 2014 against a basket of major currencies despite 10-year Treasuries approaching 3 percent for the first time in four years.

That correlation breakdown has puzzled many investors. Economists have explained it by saying that the reasons for the rise in yields have not so much been driven by expectations for higher interest rates and stronger growth, but worries about runaway inflation that have caused a selloff in both the dollar and Treasuries.

But on Tuesday, the dollar rose just over half a percent against its index to 89.569, as 10-year U.S yields climbed back up to 2.92 percent.

“The dollar finally seems to be getting some support from higher US bond yields,” said ACLS Global strategist Marshall Gittler, adding that he saw further strength in the dollar against the yen in particular.

Any positive impetus from rising U.S. interest rates has been offset by a barrage of bearish factors in recent months.

Initially, the view that other central banks would catch up with the Federal Reserve in tightening policy this year was cited as a reason for the dollar’s underperformance.

Then came comments from U.S. Treasury Secretary Steven Mnuchin who stoked concerns the United States could pursue a weaker dollar policy as its trade deficit rose to highest level in almost a decade.

Mounting worries about the U.S. budget deficit, which is projected to balloon to more than $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts, have also undermined the greenback.

Economists say U.S. President Donald Trump’s tax cuts and spending plans could backfire by overheating an already strong economy, causing an unwanted pick-up in inflation.

Against the yen, the dollar climbed half a percent to 107.09 yen, having bounced back from a 15-month low of 105.545 set on Friday.

Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said there seemed to be some short-covering in the dollar in the wake of its recent fall.

“We’ve got a lot of Fed speakers...this week. I think that could be a reason why we’re seeing some of the short dollar positions pared back,” Innes said.

He added, however, that the dollar could come under pressure if this week’s U.S. government bond auctions were to show sluggish investor demand for U.S. debt.

The euro eased 0.4 percent to $1.2360, backing down from Friday’s three-year high of $1.2556.

Reporting by Jemima Kelly

Global stocks struggle as bond yields, dollar regain traction

LONDON (Reuters) - A six-day rebound in world stocks began to splutter on Tuesday, as bond market borrowing costs regained traction and the dollar kicked firmly away from a three-year low.

Europe’s main bourses saw steady start as lower domestic currencies helped their cause but weakness across Asia where Tokyo saw a 1 percent drop  meant MSCI’s 47-country world share index was 0.2 percent in the red.

The dollar meanwhile continued its rebound from three-year lows, having recovered 1.5 percent since Friday on the view that the U.S. currency was due a correction after a brutal sell-off in recent weeks.

U.S. Treasury 10-year yields - the benchmark for global borrowing costs - were also on the up again and approaching 3 percent for the first time in four years.

“I just advise caution,” said Principal Global Investors’ chief global economist Bob Baur said about stocks as Wall Street futures also pointed lower.

“I‘m not sure whether this (early February sell-off) was the dip to buy, there will probably be a relapse and then another relapse, before maybe around mid-summer stocks make another run up.”

European bond yields pushed up too, with traders also working through the options of who could succeed Mario Draghi as European Central Bank chief next year after Spain’s economy minister was nominated for the bank’s number two job.

One of other recent catalysts for the recent market disturbances, the VIX volatility index - Wall Street’s “fear gauge” - was moving higher again as well, although at just over 20 percent in early European trading it was still well below early February’s peak of above 50.

The dollar’s rebound also meant most emerging market currencies were under pressure.

South Africa’s rand and Turkey’s lira both gave back more of their recent gains, while growing concerns about an alleged fraud at India’s second-largest state-run bank sent the rupee skidding to a near three-month low.

“Punjab National Bank will need to provide for at least a substantial portion of the exposure. As a result, the bank’s profitability will likely come under pressure,” rating agency Moody’s said as it put it on a downgrade warning.

Against the yen, the dollar climbed half a percent to 107.09 yen, having bounced back from a 15-month low of 105.545 set on Friday. The euro eased 0.4 percent to $1.2360, backing down from Friday’s three-year high of $1.2556.

In commodity markets, Oil prices were mixed, with reduced flows from Canada pushing up U.S. crude while Brent sagged $65.45 per barrel on the back of weaker Asian stocks and the dollar’s bounce.

Spot gold slipped 0.4 percent to 1,341.06 an ounce, also corseted by the dollar’s bounce, while industrial metals including copper drifted lower for a second day in a thinner-than-usual trading due to new year holidays in China.

Reporting by Marc Jones

Monday, 19 February 2018

World stocks post best week in 2 years, dollar climbs

NEW YORK (Reuters) - The dollar rose and stocks around the globe rallied for a sixth straight session on Friday to post their best week in more than two years, but a U.S. indictment over alleged Russian meddling in the 2016 presidential election cooled gains on Wall Street.

The 37-page indictment of a Russian internet agency filed by Special Counsel Robert Mueller described a conspiracy with the aim of supporting Donald Trump and sowing discord in the U.S. political system.

Wall Street turned south on news of the indictment but soon rebounded as the fundamental story has not changed, said Ben Phillips, chief investment officer of EventShares, referring to a strong corporate earnings outlook and robust economy.

Analysts continue to underestimate the pace of global growth, which has led more companies to meet or beat analysts’ earnings expectations than in any quarter in 20 years, according to calculations earlier this week by Credit Suisse.

Fourth-quarter results for European companies in the STOXX 600 index are expected to increase 14.6 percent from a year ago, while the blended earnings growth estimate for the S&P 500 is 15 percent, Thomson Reuters I/B/E/S data show.

Since a market rout was sparked two weeks ago on fears of rising inflation and its impact on interest rates, a tug of war has ensued between investors seeking safety in bonds or betting a nine-year bull market in stocks is still alive.

Investors also are concerned about how the Federal Reserve will deal with still-low inflation without killing an economy and inflate asset bubbles, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

“That’s a very difficult spot. The market recognises that challenge and is wondering how the Fed will address it,” he said.

But investors are getting comfortable with the idea that growth is sufficient enough to withstand the expected rate increases the Fed has projected this year as well as signs of rising inflation, Arone said.

MSCI’s index of stock markets across the globe rose 0.26 percent to gain 4.3 percent for the week, the best weekly performance since December 2011.

Stocks were poised for their best week in six years until news of the special counsel indictment pared some gains.

The pan-European FTSE urofirst 300 index  of leading regional shares rose 1.11 percent to 1,491.71.

On Wall Street, the Dow Jones Industrial Average .DJI closed up 19.01 points, or 0.08 percent, to 25,219.38. The S&P 500 gained 1.02 points, or 0.04 percent, to 2,732.22 and the Nasdaq Composite  dropped 16.97 points, or 0.23 percent, to 7,239.47.

Investors are trying to determine whether the market is in an overdue correction or the beginning of something worse, Arone said.

“It looks like this week they’re comfortable about uncertainty and the risks that are associated with it, and stocks are moving higher based on fundamentals,” he said.

U.S. Treasury prices rose as investors bought back bonds after a sell-off earlier in the week as investor jitters over rising inflation raised the possibility the Federal Reserve may hike interest rates at a faster pace than expected this year.

Borrowing costs across the euro area fell, though the prospect of higher inflation and a move toward tighter monetary policy from major central banks weighed on sentiment across world bond markets.

Short-dated bond yields in Germany, the euro zone’s benchmark bond issuer, have risen by about 7 basis points this week and are set for their biggest weekly rise in eight weeks.

Benchmark 10-year U.S. Treasury notes rose 6/32 in price to push their yield down to 2.8713 percent.

The dollar rose on the day but remained on track to post its biggest weekly loss in nine months as negative sentiment offset any support the greenback had from higher Treasury yields.

The dollar index, tracking a basket of major currencies, rose 0.58 percent, with the euro EUR= down 0.81 percent to $1.2404. The Japanese yen JPY= weakened 0.18 percent versus the greenback at 106.33 per dollar.

Oil prices rose, as the rebound in the global equities market and the dollar’s recent weakness supported their recovery from last week’s slide.

U.S. West Texas Intermediate crude for March delivery rose 34 cents to settle at $61.68 a barrel. Brent settled up 51 cents at $64.84.

U.S. April gold futures settled up $0.9, or 0.1 percent, at $1,356.20 per ounce.

Reporting by Herbert Lash

Friday, 16 February 2018

Hackers stole $6 million in attack on SWIFT system, Russian central bank says

MAGNITOGORSK, Russia (Reuters) - Unknown hackers stole 339.5 million rubles ($6 million) in an attack on the SWIFT international payments messaging system in Russia last year, the Russian central bank said on Friday.

The disclosure, buried at the bottom of a central bank report on digital thefts at Russian banks, is the latest in a string of attempted and successful cyber heists using fraudulent wire-transfer requests.

The central bank said it had been sent information about ”one successful attack on the work place of a SWIFT system operator.

“The volume of unsanctioned operations as a result of this attack amounted to 339.5 million rubles,” the bank said.

The central bank declined to provide further details.

A spokeswoman for SWIFT, whose messaging system is used to transfer trillions of dollars each day, said the company does not comment on specific entities.

”When a case of potential fraud is reported to us, we offer our assistance to the affected user to help secure its environment,” said the spokeswoman, Natasha de Teran.

A central bank spokesman quoted Artem Sychev, deputy head of the regulator’s security department, as saying the hackers had withdrawn the money and this was “a common scheme, when they take control of a computer.”

Brussels-based SWIFT said late last year digital heists were becoming increasingly prominent as hackers use more sophisticated tools and techniques to launch new attacks.

In December, hackers tried to steal 55 million rubles from Russian state bank Globex using the SWIFT system, and digital thieves made off with $81 million from Bangladesh Bank in February 2016.

SWIFT has declined to disclose the number of attacks or identify any victims, but details on some cases have become public, including attacks on Taiwan’s Far Eastern International Bank and Nepal’s NIC Asia Bank.

Reference: Jack Stubbs

Dollar falls to three-year low, yen shrugs off Kuroda's BOJ reappointment

TOKYO (Reuters) - The dollar slipped to a three-year low against a basket of currencies on Friday, headed for its biggest weekly loss in two years, as bearish factors offset support the U.S. currency could take from rising Treasury yields.

Extending overnight losses, the dollar’s index against a group of six major currencies lost about 0.4 percent to 88.253 , the lowest since December 2014. The index was on track to lose more than 2 percent on the week in its largest decline since February 2016.

The U.S. currency has been weighed down by a variety of factors this year, including concerns that Washington might pursue a weak dollar strategy and the perceived erosion of its yield advantage as other countries start to scale back easy monetary policy.

Traders also suspect that confidence in the dollar has been eroded by mounting worries over the U.S. budget deficit which is projected to balloon to near $1 trillion in 2019 amid a government spending splurge and large corporate tax cuts.

“There really are no signs of the dollar recovering anytime soon. Participants are bracing for dollar/yen to head towards 105 and the euro to climb past $1.25,” said Shin Kadota, senior strategist at Barclays in Tokyo.

“It’s difficult for the market to see the dollar rebounding, especially as decent U.S. fundamentals seem to be providing no support for the currency,” Kadota said.

Indeed, the dollar failed to gain momentum after data on Wednesday showed U.S. inflation was stronger than expected in January, sending Treasury yields to four-year highs, as investors bet the Federal Reserve could increase interest rates as many as four times this year.

The euro was up 0.4 percent at $1.2553 after reaching a three-year top of $1.2556 and poised to gain 2.4 percent this week.

The Swiss franc reached 0.9190 franc per dollar, its strongest since June 2015.

The dollar was down 0.4 percent at 105.685 yen after slipping to 105.545, its lowest in 15 months. It was on track for a weekly loss of 2.9 percent.

The reappointment of Haruhiko Kuroda as Bank of Japan governor and the nomination of BOJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe as deputy governors had little impact on the yen, although the proposed leadership trio were seen certain to keep the central bank on an ultra-loose policy path.

“There are no significant changes to the current BOJ regime with the governor chosen for another term, and a central banker and a reflationist academic picked as his deputies,” said Shusuke Yamada, chief Japan FX strategist at Bank of America Merrill Lynch.

“This should clear some uncertainty regarding BOJ personnel, but it unlikely to impact the currency market at a time when the dollar is broadly weaker,” Yamada said.

The pound rose 0.25 percent to $1.4134 , having gained about 2 percent on the week.

The Australian dollar added 0.25 percent to $0.7965 .

The Aussie, sensitive to shifts in risk sentiment, had slipped to near 1-1/2-month low of $0.7759 a week ago during a tumble in global equities before bouncing back.

Reporting by Shinichi Saoshiro

Asian shares extend bounce to fifth day, dollar sags to three-year low

TOKYO (Reuters) - Asian shares rose for a fifth straight day on Friday as investor confidence slowly returns after a sharp sell-off earlier in the month, while the dollar continued its descent, hitting a three-year low against a basket of major currencies.

U.S. debt yields rose near multi-year highs. Two-year note yields hit a 9 1/2-year high as bond prices fell on Federal Reserve officials’ signaling that recent volatility in U.S. stocks would not stop them raising interest rates in March.

European shares are expected to rise 0.3 to 0.4 percent at the opening, according to spread-betters.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.4 percent, though many Asian markets were closed on Friday for the Lunar New year.

Japan’s Nikkei rose 1.2 percent, with investors relieved to see the government appoint Bank of Japan Governor Haruhiko Kuroda for another term, suggesting the central bank will be in no rush to dial back its massive stimulus program.

Measured by the MSCI’s broadest gauge of the world’s stocks covering 47 markets, global shares have now reclaimed more than half of the 10.7 percent plunge from a record intraday high on Jan. 29 to a four-month intraday low a week ago.

Investors have been reassured by a fall in the Wall Street Vix index, the “fear gauge” that measures the one-month implied volatility of U.S. stocks.

The index dropped below 20 for the first time since its spike to 2 1/2-year high of 50.3 last week, a jump that caused massive losses among investors who bet equity markets would be stable on a combination of solid economic growth and moderate inflation.

The Vix futures fell back to more normal patterns, from the past several days of so-called backwardation, in which the front-month contract becomes the most expensive.

The return of a more usual curve suggested that the loss-cutting and position unwinding of “volatility short” strategies had run its course for now, easing investors’ nerves.

“I’ve said markets will be unstable until February, and that February will offer a good buying opportunity,” said Eiji Kinouchi, chief technical analyst at Daiwa Securities, noting that U.S investors were likely to book profits in January to take advantage of lower tax on capital gains.

The selling appears to have run its course and the fall in volatilities, both implied and actual, is likely to prompt investors to return to stocks, he said.

The U.S. dollar, on the other hand, slipped below its January low against a basket of major currencies to reach its lowest since late 2014.

The dollar index fell to as low as 88.37, and was on course to lose over 2 percent for the week, its biggest such loss in two years.

There is no strong consensus yet on what is driving the dollar’s persistent weakness, especially in light of rising yields. Some say it simply reflects a return of risk appetite and a shift to higher-yielding currencies, including many emerging market ones.

But others cite concerns that Washington might pursue a weak dollar strategy as well as talk that foreign central banks may be reallocating their reserves out of the dollar.

There are also worries President Donald Trump’s tax cuts and fiscal spending could stoke inflation and erode the value of the dollar.

“His protectionist policies could also fan inflation. Markets appear to have calmed down for now but fundamentally it is different from last year,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

“You could say that right now, rather than stocks rising around the world, it is the dollar falling against almost everything,” he added.

The euro rose to $1.2556, its highest since December 2014. Having risen 2.37 percent so far this week, it could post its biggest weekly gain in nine months.

The dollar dropped to 105.545 yen, its lowest level since November 2016 and down 2.8 percent for the week, which would be the biggest in a year and a half.

The South African rand hit a three-year high of 11.6025 to the dollar on Thursday on hopes the resignation of President Jacob Zuma had paved the way for new leaders to speed up economic growth.

The dollar’s fall came even as U.S. bond yields remained near a multi-year high.

The 10-year U.S. Treasuries yield hit a four-year peak of 2.944 percent on Thursday and last stood at 2.910 percent.

Shorter-dated yields also rose as investors grew convinced that the correction in stock prices in recent weeks would not prevent the Fed from raising interest rates in March and twice more this year.

Cleveland Fed president Loretta Mester said on Tuesday the recent stock market sell-off and jump in volatility will not damage the economy’s overall strong prospects. Mester is being considered a leading candidate for the Fed’s Vice Chair.

The two-year yield rose to as high as 2.213 percent, its highest since Sept 2008, on Thursday and last stood at 2.210 percent.

Oil prices maintained this week’s gains, with U.S crude futures trading at $61.65 per barrel, up 4.1 percent so far this week.

Elsewhere, virtual currency bitcoin recovered the $10,000 mark for the first time in two weeks, gaining more than 70 percent from its near three-month low of $5,920.7, before easing back a tad to $9,925.

Reporting by Hideyuki Sano