Wednesday, 23 May 2018

Dollar edges up ahead of Fed minutes

SINGAPORE (Reuters) - The dollar edged higher versus a basket of currencies on Wednesday, with investors awaiting the minutes of the Federal Reserve’s last policy meeting for hints on the pace of further U.S. monetary tightening.

The dollar index, which measures the currency against a basket of six major peers, rose 0.1 percent to 93.681. On Monday, the index set a five-month high of 94.058.

The increase marked a gain of more than 5 percent from mid-April and was driven by generally upbeat U.S. economic data and expectations the Fed would raise interest rates at least two more times this year.

The yen gained broadly on Wednesday, as investors sought safer assets amid economic concerns after U.S. President Donald Trump tempered optimism over progress made so far in trade talks between the world’s two largest economies. Trump said on Tuesday he was not pleased with recent trade talks between the United States and China.

Further weighing on the prices of riskier assets, Trump also said there was a “substantial chance” his summit with North Korean leader Kim Jong Un will not take place as planned on June 12 amid concerns that Kim is resisting giving up his nuclear weapons.

Against the yen, the dollar fell 0.3 percent to 110.53 yen JPY=, pulling away from a four-month high of 111.395 yen set on Monday.

The safe-haven yen also rose against other currency crosses and surged against the Turkish lira, amid talk of Japanese retail investors selling the lira as stop-loss levels were hit.

The yen tends to rise in times of market turbulence since Japan is the world’s largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis. Investors are now looking to the release on Wednesday of the Fed’s minutes from its most recent meeting, when it kept interest rates steady.

In its post-meeting statement issued in early May, the Fed also said inflation had “moved close” to its target and that “on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.”

“We hope to have a bit more clarity on the inflation outlook from the Fed. The second dimension is basically how tolerant the Fed (policymakers) are of a possible inflation overshoot above 2 percent,” said Heng Koon How, head of markets strategy for UOB in Singapore.

The euro EUR= fell 0.1 percent to $1.1762, edging back in the direction of a six-month low of $1.1717 set on Monday.

In emerging markets, the Turkish lira also sold off more after rating agencies sounded the alarm on Tuesday about plans by President Tayyip Erdogan to tighten his grip on monetary policy.

The lira tumbled to a record low of 4.8450 per U.S. dollar in early Asian trade on Wednesday.

After paring some losses, the lira stood at 4.7700 per dollar, still down roughly 2 percent on the day.

Against the yen, the lira tumbled 2.3 percent to 23.1873 yen.

Reporting by Masayuki Kitano

Tuesday, 22 May 2018

Bank of England rate comments lift sterling to one-week high versus euro

LONDON (Reuters) - Sterling rallied to a one-week high against a broadly firm euro on Tuesday after a top central bank official struck an upbeat note on the outlook for future interest rate increases.

Bank of England policymaker Gertjan Vlieghe told the Treasury Committee in Britain's parliament that policy rates are set to rise 25 to 50 basis points every year over a three-year forecast period, a comment interpreted by currency markets as supportive for the British currency.

“His comments are helping sterling but it is important to remember that everything policymakers say today is conditional on the incoming data and that needs to be kept in mind to correctly assess the policy outlook,” Viraj Patel, an FX strategist at ING Bank in London, said.

Against the dollar, sterling extended gains and rose 0.4 percent to the day’s highs at $1.3492. It climbed 0.2 percent to a one-week high against the euro at 87.60 pence.

Interest rate markets were broadly unchanged by the relatively optimistic comments, with the probability of another quarter point rate hike holding at around 90 percent by the end of the year, the same levels as earlier this week.

Gains were capped before important data on the British economy due out this week, including inflation on Wednesday and the gross domestic product figure on Friday.

These will be scrutinised by investors to gauge whether the BoE might tighten monetary policy as early as August.

Tuesday’s rise in the pound came after concerns over the risks in the post-divorce relationship Britain negotiates with the European Union weighed heavily on the currency last week.

Adding to the uncertainty, lawmakers from Prime Minister Theresa May’s governing Conservative Party is reported to be bracing itself for a snap autumn parliamentary election amid fears that the Brexit deadlock will become insurmountable.

But the biggest reason for sterling’s recent fall has been a drastic shift in expectations of when the BoE will raise rates.

“Until a solution emerges on the Brexit front, a rate hike is the only things that could support sterling temporarily,” Commerzbank strategists said in a note.

“Without it, sterling remains unattractive.”

Reporting by Saikat Chatterjee

Dollar falls from five-month highs, this week's focus on Fed minutes

SINGAPORE (Reuters) - The dollar traded below a five-month high against a basket of currencies on Tuesday, catching its breath after a broad rally inspired by rising U.S. bond yields and relief at an easing of U.S.-China trade tensions.

The dollar’s index against a basket of six major currencies last traded at 93.564, down from a five-month high of 94.058 set on Monday.

The greenback’s surge to that Monday peak had marked a gain of 5.4 percent in about a month, compared to a mid-April trough of 89.229, which was its lowest since late March.

A pull-back in U.S. 10-year Treasury yields from seven-year highs set last week has probably prompted traders to book some profits on their bullish dollar bets, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

“We came a long ultimately we are going to get profit-taking,” Innes said.

He noted that while the dollar’s near-term outlook still looks positive, one factor worth watching was whether business sentiment and the economic outlook in developed countries other than the United States would start to improve.

Optimism about synchronous global economic growth had been one of the factors that had weighed on the dollar earlier this year.

Over the past month, however, the dollar has been bolstered by generally solid U.S. economic data that has backed the Federal Reserve’s monetary policy tightening stance this year, as well as rising U.S. bond yields that bolstered the greenback’s yield appeal.

The prospect of a resolution to the U.S.-China trade tensions has further added to the dollar’s shine.

The U.S. 10-year Treasury yield last stood at 3.0523 percent , down from Friday’s near seven-year high of 3.128 percent.

Against the yen, the dollar eased 0.1 percent to 110.89 yen, down from Monday’s four-month high of 111.395 yen.

There was talk of dollar-selling interest among Japanese exporters at levels around 111.00 yen. Market participants also cited dollar-selling by short-term players during Tuesday’s Asian trade.

Analysts at Maybank said they favoured being long the dollar against the yen for now. “Dips in U.S. Treasury yields could be temporary and a rebound could widen yield differentials between U.S. Treasuries and Japanese government bonds and lift the dollar against the yen,” the Maybank analysts said in a research note.

They added that U.S. 10-year Treasury yields may have limited room to fall for now, with the market awaiting the minutes of the U.S. Federal Reserve’s last policy meeting due to be released on Wednesday. The euro eased 0.1 percent to $1.1784, but remained above Monday’s low of $1.1717, the common currency’s lowest level since around mid-November.

The euro has been affected by concerns over political uncertainty in Italy. This week will bring about a further test for determined euro bulls with the release of “flash” PMI data for May on Wednesday, and markets waiting to see whether the first-quarter slowdown in Europe spilled over to later months.

Reporting by Masayuki Kitano

Asian shares stumble as dollar strengthens, oil surges

SYDNEY (Reuters) - Asian shares skidded on Tuesday as a strong dollar sapped demand for emerging market assets while surging oil prices stoked concerns about a flare-up in inflation and faster U.S. interest rate increases.

Japan’s Nikkei was mostly flat while Australian shares fell 0.9 percent. Chinese shares opened in the red with the blue-chip CSI300 off 0.7 percent.

Liquidity was relatively thin due to holidays in South Korea and Hong Kong.

MSCI’s broadest index of Asia-Pacific shares outside Japan was just a shade higher at 568.4 points, but well below an all-time peak of 617.12 hit in January.

“We are seeing U.S. dollar strength and that is causing money to flow out from emerging markets to the U.S. There is some sort of risk aversion going on,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

“People are cautious about taking exposure in emerging markets.”

Those concerns offset the boost to sentiment from overnight gains on Wall Street over the apparent reconciliation between the United States and China over import duties.

Analysts said investors in the region were worried about the growth outlook, with the U.S. Federal Reserve staying on its policy tightening path.

“Stocks have rallied several times on the belief that trade tensions were easing, only to fall back down as investors took the opposite view,” said James McGlew, executive director of stockbroking at Perth-based Argonaut.

“While the global economy remains robust and first-quarter earnings have been strong, stock markets have mostly traded sideways this year because many investors have started to fear that the pace of the expansion has already peaked.”

The MSCI ex-Japan index is flat so far this year after a super-charged 33.5 percent gain in 2017.

JPMorgan’s Shigemi said investors will now turn their focus to the next Fed meeting on June 13 where it is widely expected to raise rates for a second time this year.

A total of three hikes is almost fully priced-in by the market for 2018 although some investors expect the Fed to be more aggressive.

It was the fear of higher inflation and thus faster Fed rate rises that caused a bond market rout earlier this year, sending yields sharply higher and triggering a share market sell-off.

The dollar hovered near five-month highs against a basket of currencies, boosted by the U.S.-China trade optimism.

The dollar index was last down 0.1 percent at 93.56 from Monday’s top of 94.058.

The euro held at $1.1782, within spitting distance of a more than six-month trough of $1.1715 touched on Monday amid continued political uncertainty in Italy.

Italy’s far-right League and the 5-Star Movement agreed on a candidate to lead their planned coalition government and to implement spending plans seen by some investors as threatening the sustainability of the country’s debt pile.

The Japanese yen steadied near four-month lows at 110.99 per dollar, while sterling eased slightly to $1.3428 ahead of key data that could determine whether the Bank of England raises rates in 2018.

Elsewhere, oil prices soared to their highest since 2014 after Venezuela’s presidential election heightened worries that the country’s oil output could fall further.

The market is also weighing the possibility of additional U.S. sanctions on the country.

U.S. crude added 24 to $72.48 per barrel and Brent rose 17 cents to $79.33.

The combination of higher oil and conciliatory actions on the US-China trade front boosted the Australian dollar, a liquid proxy for risk, to a one-month peak.

As the dollar strengthened, gold prices eased to stay near the lowest since late December at $1,290.5.

Reference: Swati Pandey

Monday, 21 May 2018

Energy may give further impetus to U.S. small-cap stocks

NEW YORK (Reuters) - U.S. small-cap stocks look poised to extend a breakout rally, especially if oil prices advance deeper into levels last seen in 2014 to drive further gains in the small energy companies that have provided leadership in recent week, analysts and investors said.

The Russell 2000 index of small capitalization stocks closed at a record high for a third day in a row on Friday and registered its third week of gains, sharply outperforming large-cap stocks on Wall Street, with all three major indexes posting losses for the week.

The Russell is up 11.1 percent since its Feb. 8 low for the year, while the S&P 500 is up just 5.1 percent since that date.

The S&P 600 small-cap index is also at a record high. Energy shares within the S&P 600 have led recent gains, thanks to a jump in oil prices, which analysts said should boost earnings forecasts for the sector.

The outperformance of small-cap stocks has been driven partly by the December U.S. tax overhaul. The legislation included steep corporate tax cuts that particularly benefited smaller-cap companies, which had been paying higher rates than large-cap companies overall.

Recent trade tensions have also lifted shares of small caps, whose business is largely domestic, along with stronger U.S. economic growth.

Some of those benefits have been reflected in small-cap earnings growth, which has outpaced growth of larger names. First-quarter profit growth for Russell 2000 companies is estimated at 33.8 percent, while earnings for the S&P 500 companies increased 26.2 percent from a year ago, according to Thomson Reuters data.

The S&P 600 energy index is up 31.3 percent for the quarter so far, the best-performing group, followed by health care, up 12.2 percent.

U.S. crude futures edged lower on Friday but remained above $71 a barrel and registered a third straight week of gains, lifted by falling Venezuelan production, strong global demand and looming U.S. sanctions on Iran.

“Even though (energy stocks have) had a good run, estimates will be climbing because analysts are raising their oil forecasts. So even though the stocks go up, they can still look cheap because the earnings estimate is going to go up as fast as the stock,” said Steve DeSanctis, equity strategist at Jefferies in New York, which has been overweight energy since January.

J. Bryant Evans, portfolio manager at Cozad Asset Management in Champaign, Illinois, said he has been buying shares of small-cap energy service providers.

“Some of the smaller energy service providers got banged up so badly when oil went down,” he said. “But the ones who survived have a real opportunity to grow and take market share now that oil is at $70 a barrel.”

Several investors also said they favored financials within the small-cap space, particularly regional banks, which have risen sharply this year compared with bigger banks. The S&P 500 bank index is down 0.3 percent year to date, compared with a 6.2 percent gain in the KBW regional banking index.

The prospect of regulations being reduced further for some smaller banks has been a positive.

Regulations have “been a big headwind in the last couple of years,” said Anthony Saglimbene, global market strategist at Ameriprise Financial in Troy, Michigan. “Easing regulation would benefit small-cap banks.”

The health care group has benefited from merger activity, including Zoetis Inc’s announcement this week to buy Abaxis Inc .

Health care has been the best-performing sector within the S&P 600 so far this year, up 26.8 percent.

Reporting by Caroline Valetkevitch

Sterling down half percent versus resurgent dollar to approach five-month low

LONDON (Reuters) - Sterling fell to its lowest in nearly five months on Monday as the dollar surged and investors prepared for data that could determine whether the Bank of England raises interest rates this year.

A broad rally by the dollar and dwindling expectations that interest rates will rise have caused what had been one of the best-performing major currencies to give up all its 2018 gains.

Sterling slumped half a percent to $1.3392 , its lowest since Dec. 28, as the dollar soared on reports that the United States was putting its trade war with China “on hold”.

Important data on the British economy, including inflation figures on Wednesday and gross domestic product on Friday, will be scrutinised by investors to gauge whether the BoE might tighten monetary policy as early as August.

“Markets have lost faith and conviction over BoE policy tightening, we now place a strong emphasis on UK data to guide market policy expectations,” said ING FX analyst Viraj Patel. “Buckle up, it’s going to be a bumpy ride for the pound this week.”

Risks around the sort of post-divorce relationship Britain can agree with the EU weighed on the pound last week. But the biggest reason for sterling’s fall has been a drastic shift in market expectations of when the BoE will raise rates.

Recent weak economic data mean markets are now not even pricing in a full 25-basis-point hike by the end of 2018. They had expected two 25 bp rises this year.

Concerns over Brexit also continue to dog the pound.

Scottish First Minister Nicola Sturgeon said on Sunday she would consider another vote on independence for Scotland when the British government offers some certainty over Brexit.

Adding to the political uncertainty, lawmakers from Prime Minister Theresa May’s governing Conservative Party reportedly are bracing themselves for a snap autumn parliamentary election amid fears that the Brexit deadlock will become insurmountable.

Analysts at CMC Markets and Commerzbank, in notes to clients, predicted the pound would fall toward the $1.3300 level in the short term.

But Stephen Gallo, European head of FX strategy at BMO Financial Group, said that forthcoming data would show underlying strength in Britain’s economy and the pound would rebound to $1.38 in the next three months.

Reporting by Tom Finn

Stocks rally after Mnuchin says Sino-U.S. trade war "on hold"

TOKYO (Reuters) - Stocks rose on Monday as U.S. Treasury Secretary Steven Mnuchin declared the U.S. trade war with China “on hold” following an agreement to drop their tariff threats that had roiled global markets this year.

U.S. S&P mini futures ESc1 rose 0.60 percent in Asian trade on Monday.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS advanced 0.55 percent in early trade, led by strong gains in greater China. Hong Kong's Hang Seng was up 1.0 percent, Taiwanese shares 1.1 percent and mainland shares 0.4 percent.

Japan's Nikkei gained 0.4 percent.

Mnuchin and U.S. President Donald Trump’s top economic adviser, Larry Kudlow, said the agreement reached by Chinese and American negotiators on Saturday set up a framework for addressing trade imbalances in the future.

“The weekend talk appears to have made progress. While they still need to work out details of a wider trade deal, it is positive for markets that they struck a truce,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

As safe-haven demand for debt fell, U.S. bond prices were under pressure, keeping their yields not far from last week’s peaks.

The 10-year Treasuries yield stood at 3.065 percent, near a seven-year high of 3.128 percent hit on Friday.

“Recent data suggests the U.S. economy is very strong, hardly slowing down in Jan-Mar. The world economy slowed in that quarter but it appears to be rebounding. And recent rises in oil prices are likely to lift inflation expectations further,” said Tomoaki Shishido, senior fixed income analyst at Nomura Securities.

“We expect more selling until the next Fed’s meeting in June,” he said.

In the currency market, higher U.S. yields helped to strengthen the dollar against a wide range of currencies.

The euro dipped 0.1 percent to $1.1756 EUR=, hovering above Friday's five-month low of $1.1750.

The common currency was also hit after two anti-establishment parties pledged to increase spending in a deal to form a new coalition government.

The dollar maintained an uptrend against the yen, rising 0.20 percent to fetch 110.97 yen, JPY=, close to Friday's four-month high of 111.085.

Oil prices held firm near 3-1/2-year highs also on easing trade tensions between the world’s two biggest economies.

The market is keeping an eye on Venezuela, where President Nicolas Maduro appeared to be set for re-election, an outcome that could trigger additional sanctions from the United States and more censure from the European Union and Latin America.

Oil prices have been supported by plummeting Venezuelan production, in addition to a solid global demand and supply concerns stemming from tensions in the Middle East.

U.S. crude futures rose 0.8 percent $71.83 per barrel, near last week’s 3 1/2-year high of $72.30 while Brent crude futures notched up 0.8 percent to $79.10 per barrel. It had risen to $80.50 last week, its highest since November 2014.

Reporting by Hideyuki Sano