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Tuesday, 31 October 2017

Asia gains as South Korea hits record high, dollar sags on White House woes


TOKYO (Reuters) - Asian stocks mostly rose on Tuesday, shaking off downbeat factory readings out of China, while the dollar sagged after investigators probing Russian interference in the 2016 U.S. election charged President Donald Trump’s former campaign manager.

Spreadbetters expected Britain's FTSE to open a shade lower and France's CAC to open flat. The German markets were be shut for a national holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.4 percent.

Strong gains in South Korea and Taiwan, which make up roughly a quarter of the index’s weighting, helped offset weakness in China and Hong Kong.

The KOSPI ended up 1 percent at a record high after Seoul and Beijing agreed to normalize relations that have been strained by a year-long standoff over the deployment of a U.S. anti-missile system in South Korea.

“Shares that have long been pressured by ongoing political disputes between the two countries are reacting positively to the announcement, including Hyundai Motor-related stocks,” said Cho Byung-hyun, a stock analyst at Yuanta Securities.

Tech-heavy Taiwan  added 0.4 percent after Apple (AAPL.O) made big gains overnight.

But Chinese equities wobbled after data showed a sharper-than-expected slowdown in October factory growth.

Beijing’s war on winter air pollution is forcing many northern steel mills, smelters and factories to curtail production, adding to uncertainty amid early signs of a slowdown in the world’s second-largest economy.

China's blue-chip CSI300 index fell 0.2 percent and Hong Kong's Hang Seng .HSI dipped 0.1 percent.

Japan's Nikkei closed flat, capped by weaker U.S. shares and a stronger yen.

Wall Street pulled back from record-high territory on Monday, weighed down by a drop in drugmaker Merck and a report that U.S. lawmakers are discussing a gradual phase-in corporate tax cuts rather than reducing it all at once.

“The report of the gradual corporate tax cut option came when equities were strung high, so it served as a catalyst for markets to adjust,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

“Expectations were for the corporate tax to be cut in one go. But even if the cut is implemented gradually, it still is a reduction and that won’t be bad news in the long term.”

The dollar hovered near a 10-day low of 113.02 yen struck overnight.

The greenback lost about 0.4 percent against the yen overnight on investor caution after former Trump campaign manager Paul Manafort and another aide, Rick Gates, were charged with money laundering on Monday by federal investigators.

“It’s weighing on dollar/yen a little bit. I think there’s a little bit of uncertainty,” said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, adding the yen drew some support as risk sentiment was looking a bit wobbly.

The yen showed little reaction to the Bank of Japan’s decision to stand pat on monetary policy even as it slightly cut its inflation forecast for the current fiscal year, an outcome that had been widely expected.

The U.S. currency was also pressured as Treasury yields slipped on reports that Trump is likely to appoint Federal Reserve Governor Jerome Powell, who is viewed as more dovish than other contenders, as the next head of the Federal Reserve.

The 30-year Treasury bond yield fell to its lowest in a week after Bloomberg quoted Treasury Secretary Steven Mnuchin saying the government does not see a lot of demand for ultra-long bonds.

The dollar index against at basket of six major currencies  steadied at 94.547 after slipping overnight from a three-month high of 95.150.

The euro was little changed at $1.1637. It had pulled back overnight from a three-month low of $1.1574 on Friday.

European markets got a lift on Monday after an opinion poll showing waning support for independence soothed investors’ concerns over a Catalan secession from Spain.

Crude oil prices steadied below their recent peaks after being boosted by expectations OPEC-led production cuts would be extended beyond March.

Brent crude futures LCOc1 was down 0.2 percent at $60.78 a barrel after rising to $61 overnight, the highest since July 2015.

U.S. crude was 0.1 percent lower at $54.09 after touching $54.46, its highest since late February.

Reporting by Shinichi Saoshiro

Central Banking: The Forex Influence and How to Read it


An Educational Article


The role of Central Banks

Central banks are at the heart of the financial system of any given country in that they are the authorities controlling the supply of money, and therefore control how a region’s economy functions. They evolved from the lack of stability in financial market that ruined a lot of economies during the 19th century. The first central bank was the Swedish Riksbank, which was created in the 17th century, with many following in the 18th and 19 century. The U.S. Federal Reserve appeared at the beginning of the 20th century. Over time, the roles of central banks in different countries have developed differently.
The European Central Bank's main duty is to assure price stability, by keeping "inflation rates below, but close to, 2% over the medium term" as measured in their CPI.

The Federal Reserve of the United States has four responsibilities: 1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates 2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. 3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. 4.Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

The Bank of Japan states: "currency and monetary control shall be aimed at contributing to the sound development of the national economy, through the pursuit of price stability."

The Bank of England's mission is to assure stable prices and confidence in the currency through monetary policy and to detect and reduce threats to the financial system as a whole through financial policy
Even if in practice, central banks roles may sound different and even complicated, in pure theory their role is to increase the expansion phase of business cycle and reduce the contraction phase while still assuring future and prospective growth. These targets can be affected through monetary policy conducted by central banks via economic levers like interest rates, open market operations and reserve requirements. In order to conduct them, central banks must hold foreign reserves and gold reserves.

Interest rates are the most important economic lever that a central bank can control. In a classic economy, interest rates are viewed as "the price of money". A high interest rate will attract foreign capital and a low interest rate will tend to force capital to move outside the country in a search for a better income source (higher yields). Forex traders experience this by carry trading. We borrow in Yen, paying a 0.5% annual interest rate and buy, or go long in GBP, EUR, AUD or NZD because those currencies have higher rate of interest, or yield. Lower interest rates will boost lending because it makes the price of borrowing cheaper, giving corporations the ability to grow and giving consumers the "free hand" for spending. Over time this will create inflation and tend to cause interest rates to go up.

The central banks choose their desired interest rate in organized meetings, through voting on the short term interest rate. There are two types of interest rate that we should be aware of, they are; the nominal interest rate, and the discount interest rate from which central banks offer lending to commercial banks. Open market operations (OMO's) are one way a Central Bank controls interest rates. OMO's are simply a buying and selling operation that raises or lowers the money supply, which has an immediate effect on the interest rate and on currency valuation. Each central bank has its favourite way of influencing the interest rate through open market operations, but because of being the simplest and the most influential, we will focus on the Fed's method.

The Fed choose nominal interest rate (named fed fund target rate) through lending and borrowing for collateral securities from 22 banks and bonds dealers (called primary dealers). These operations are nicknamed "Repo" (repurchase operations). Traders should check the open market operations from time to time; they have a significant influence over forex.

Most major central banks, including the FED, ECB, BoE, BoC and others use the 'corridor system' to stabilize the intraday money market conditions. In its simplest form, the 'corridor system' allows central banks to attract deposits and provide liquidity in an unlimited amount for overnight operations. This system allows banks to achieve the target overnight rate without creating volatility by channelling (a corridor) those deposits and withdrawals in a very controlled fashion. The discount window is for short-term Institutional lending, normally week-to-week.

Open market operations are the buying and selling of US Treasuries. These daily transactions control the supply of money. Treasuries are Government Debt that is sold to investors at a set rate of return. About half of the US debt is held by the Federal Reserve, a fact that seems strange to some; the Central Bank owns half the Country's debt. The reason is that the Fed can then control the flow of available Dollars. When Rates are required to go up the Fed buys back the Debt. When Rates need to go down the Fed sells Debt with the $ reserves, money that then goes into the banking system. Rates going up creates a squeeze on the Money Supply and the $ strengthens. Rates going down therefore increases the Money Supply and the $ weakens.

Minimal Reserves are another way of influencing the money supply used by central banks. Commercial banks are required to hold a percent of their liabilities in central banks, in order to avoid over-levering themselves. This is a good measure of reducing money supply or trying to increase money demand. This is arguably the most ineffective and definitely the least used monetary tool. Reserve requirements are the percentage of deposited money that a bank must keep on hand to satisfy withdrawal demands, and was more popular in the early part of the 20th century when the US banking system was far less stable, but that challenge may be coming back to be addressed. In theory raising reserve requirements limits a bank's ability to lend out deposited money, and likely increase the cost of borrowing.

Paying no interest on Reserves, as is the Fed policy, makes U.S. Banks hold no more than they are legally required to do, and with any and all cash surplus then lent to other Banks in times of need, usually underneath the Fed Funds rate (Discount Window), it puts additional and unwanted pressure on the system. This pressure can be very negative, especially when the Central Bank, in this case the Fed, is in a rate changing cycle. Banks borrowing under the Fed Funds sends rates down, at a time that the Fed needs them up to be able to fight inflation. We have witnessed the volatility in the Treasury yields, in the Libor rates, and seen it reflected in the intra-day volatility in the USD/CHF.

That is the problem when the Central Bank has a dual mandate, in reality you can either fight inflation, or you can have growth- but growth at a dear price, as we can see in the Commodity Bubble; the value of any growth produced is stripped away in inflationary costs.

A good example of the reserve Requirement has been seen in how the People's Bank of China tried to reduce inflation by increasing bank minimal reserves requirements nine times. The central bank has also moved five times in five months to increase the reserve requirements. They stepped up the rate of increase with two extra moves in late June that increased the mandatory holdings of dollar reserves, from 15% to 17.5%, of anything that is lent out by commercial banks. The impact has been to peg the Yuan lower, and in that in effect has eased the burden of Chinese exporters struggling with a global economic slow-down.

It is estimated that just under $50B was moved in that year in June alone, and will be added to by the cuts to the amount of foreign debt Chinese banks can hold, once again forcing those banks to be net buyers of dollars. China’s foreign reserves stand at close to $1,800B, and moves in that market will have knock-on effects to all global forex markets.

Monetary policy controls the supply and cost of money and credit. A central bank will increase the supply of money and decrease the cost of borrowing to stimulate an economy and vice versa to slow down an economy. While measuring the cost of borrowing is fairly easy (yield on Treasury bonds), measuring the money supply can be a more daunting task. Most central banks release information on the amount of money currently in circulation. M1 measures the amount of currency, deposits in central banks, and checking deposits. M2 includes M1 and all money in CD's and savings and money market accounts. M3 includes M1 and M2 as well as US denominated Bonds held outside the US. M3 is the broadest measure of the supply of money.

Recently the Federal Reserve decided to stop publishing M3 data, citing the large cost of computing the figure. The move has been widely criticized, as many believe it was initiated to hide the large amount of money the Federal Reserve has been printing in recent years.

Even though a central bank needs to be as independent as possible, governments and politicians still have influence in its aims and targets. Depending on the country, a central bank's president or commission is set by the government which sometimes may have influence on bank's decisions at turning points, like at the peak of business cycle or during elections. The Finance Ministry of Japan is an example of a dominant government body influencing the central bank.

One of the major requirements of the European Union for proposed countries for acceptance, is that the Central Banks are independent from politics. With all this, central banks and government must choose their real economic targets, by trying to choose the best way for their own national economy, and as we have seen recently that can create some huge swings in perceived currency valuations.

Reference: The LFB Trade Team

Dollar steadies after hitting one-week low versus yen; BOJ stands pat


SINGAPORE (Reuters) - The dollar touched a one-week low versus the yen on Tuesday as investors turned cautious following news that investigators probing Russian interference in the U.S. election had charged President Donald Trump’s former campaign manager.

The yen showed limited reaction after the Bank of Japan kept its monetary policy steady on Tuesday as widely expected, even as it slightly cut its inflation forecast for the current fiscal year.

The dollar held steady at 113.17 yen, having slipped to as low as 112.97 yen in early Asian trade, its lowest level since Oct. 20.

Federal investigators probing Russian interference in the 2016 U.S. election charged Trump’s former campaign manager, Paul Manafort, and another aide, Rick Gates, with money laundering on Monday.

Neither Trump nor his campaign was mentioned in the indictment against Manafort and Gates. But the latest developments in the investigation pressured the dollar, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

“It’s weighing on dollar/yen a little bit. I think there’s a little bit of uncertainty,” Innes said.

The dollar also struggled in the wake of reports that Trump was likely to pick Federal Reserve Governor Jerome Powell as the next head of the U.S. central bank.

Powell is seen as being more dovish on monetary policy than other contenders for the post, especially compared to Stanford University economist John Taylor, who has been regarded as another top challenger for the position.

Against a basket of six major currencies, the dollar was steady at 94.583, down from a three-month high of 95.150 scaled on Friday.

The euro eased 0.1 percent to $1.1635, but held above a three-month low of $1.1574 touched on Friday.

Elsewhere, the Australian dollar was weighed down after China’s official factory PMI showed growth in its manufacturing sector cooled more than expected in October.

The Aussie, which is sensitive to Chinese economic data due to Australia's strong trade ties with the Asian giant, was down 0.1 percent on the day at $0.7677. Beijing's crackdown on winter air pollution could curb imports of resources from Australia such as iron ore and coking coal.

Reporting by Masayuki Kitano

Monday, 30 October 2017

Sterling drops to three-week low against dollar on BoE rate view


LONDON (Reuters) - Sterling slipped to a three-week low against a stronger dollar on Friday, as uncertainty over prospects for the British economy dampened bets that a likely Bank of England rate hike next week would signal the start of a sustained tightening cycle.

Though a rise in borrowing costs after the next BoE policy meeting on Nov. 2 is largely priced in by the market, the prospect of a dovish hike, one which will not be followed by further rate rises, has put downward pressure on the pound.

While the United States is in the midst of rolling back years of record-low interest rates, the likely BoE rate hike will be Britain’s first in over a decade.

Though rates are expected to double, the move would only reverse measures taken by the Bank to mitigate against the possible impact of Brexit last year.

“Raising interest rates should always probably be followed by a stronger currency. But that may not be the case next week,” said Edward Hardy, economist at foreign exchange services company WorldFirst.

If the BoE does not vote unanimously on the hike, he added, this will indicate to investors that a sustained cycle of tightened monetary policy would be unlikely to follow.

“It would add to the theory that next week’s hike - if and when it does take place - will be more of a move just to retrace action we saw in the wake of the Brexit vote last year,” Hardy said.

Sterling hit its lowest levels against the dollar since Oct. 9 on Friday at $1.3070 but recovered some ground to trade at $1.3114 but was still down 0.3 percent on the day.

The pound fared better against the euro, hitting highs not seen since the start of the month, as the common currency dipped on a European Central Bank announcement on Thursday that it would begin weaning the euro zone off loose monetary policy.

Further clues about the health of the British economy and outlook for BoE interest rate policy could be provided by two U.K. credit rating reviews, due to be released on Friday by ratings agencies Fitch and Standard & Poor‘s.

Data from British mortgage lender Halifax on Friday showed public confidence in the outlook for house prices has dropped to its lowest in nearly five years, weighed by pessimism about the economy.

Uncertainty over the progress of Brexit negotiations and domestic political divisions also continued to weigh on the pound.

“News emerging about the Scottish First Minister challenging Theresa May to formally say whether the government is pursuing a transition deal adds to the Brexit headache,” said Alvin Tan, currency strategist at Societe Generale.

Reporting by Polina Ivanova

Oil Trading


An Educational Article

BNO: United States Brent Oil Fund ETF
The United States Brent Oil Fund (NYSEARCA: BNO) is an exchange-traded fund (ETF) designed to provide investors with exposure to Brent oil. Brent oil serves as an alternative to the Western Texas Intermediate crude oil benchmark. Brent oil and WTI crude oil have different levels of supply, so Brent oil and WTI crude oil differ in price.

To track the daily price movements and provide exposure to Brent oil, the fund holds front-month ICE futures contracts on Brent crude oil. For example, as of Aug. 3, 2015, BNO holds 1,257 ICE Brent crude oil futures contracts that expired in September 2015 at $49.52, and the total market value of this holding was $62.25 million. The fund also holds various U.S. Treasury securities and cash in U.S. dollars.
BNO's benchmark is Brent Crude Oil PR USD, which is measured by the daily fluctuations in the price of Brent crude oil futures contracts traded on the ICE Futures Exchange.
Characteristics.

The United States Brent Oil Fund is listed on the New York Stock Exchange Arca, and investors, trader and speculators can trade the ETF on multiple platforms. The general partner is United States Commodity Funds LLC, the administrator is Brown Brothers Harriman &; Company and the distributor is ALPS Distributors Inc.

Since the United States Brent Oil ETF must change the composition of its futures contracts as they approach the expiration date, the fund must roll its contracts by selling the near-month Brent crude oil futures contracts and buying the Brent crude oil futures contracts expiring the next month. This makes BNO sensitive to the shape of the Brent crude oil futures curves. If Brent crude oil futures are in contango, it can cause a negative roll yield, which can lead to losses.

Given the average expense ratio of the BNO category of commodities energy is 0.57%, BNO has a high expense ratio of 0.9%. This can be attributed to rolling of futures contracts. The expense ratio does not include broker fees.

Suitability and Recommendations
Since BNO tracks the prices of Brent crude oil, investors should pay attention to the futures prices of Brent crude oil, geopolitical risks, weather-related news, the monthly EIA Short-Term Energy Outlook and the weekly EIA Petroleum Status reports. Investors and potential investors should pay particularly close attention to the fluctuations of the supply of Brent crude oil every week. Like all commodities, Brent crude oil is affected by the levels of supply and demand.
When the supply of Brent crude oil is low, Brent crude oil prices increase, and the opposite is also true.

As of June 29, 2015, based on trailing five-year data, BNO had an alpha (against the MSCI ACWI NR USD Index) of 0.31, a beta (against the MSCI ACWI NR USD Index) of 1.29 and a Sharpe ratio of 0.04. Based on modern portfolio theory (MPT), the BNO's alpha indicates it outperformed the MSCI ACWI NR USD Index by an annualized 0.31%. The fund's beta indicates it is theoretically 29% more volatile than the MSCI ACWI NR USD Index; this may indicate BNO carries less risk. BNO's Sharpe ratio indicates the fund has been providing investors with an adequate return given the amount of risk taken.

BNO is a high-risk, high-reward play and offers enough liquidity for most investors. However, the fund is not suitable for everyone due to its specialized exposure to Brent crude oil. The fund may not be suitable for active day traders due to its low average share volume.

According to MPT, BNO is suitable for value investors, traders and speculators who believe Brent crude oil prices are poised to rebound. Due to the 57.19% drop in BNO over the past year as of July 31, 2015, investors who implement a value investing strategy may view the fund as undervalued and believe the supply of Brent oil will decrease over the next few years, causing BNO to rebound above $40.

Reference: Steven Nickolas

Dollar edges away from highs, Spain crisis pressures euro


TOKYO (Reuters) - The dollar edged away from last week’s three-month highs on Monday, while the euro nursed losses after the European Central Bank and unrest in Spain’s Catalonia led it to post its worst week this year.

The dollar index, which tracks the greenback against a basket of six major rivals, dipped 0.2 percent to 94.775 but remained not far from Friday’s three-month high of 95.150.

The euro inched 0.1 percent higher to $1.1614, after plumbing a three-month low of $1.1574 on Friday, and losing 1.6 percent for the week, its worst performance in 11 months.

On Saturday, sacked Catalonian president Carles Puigdemont called for peaceful “democratic opposition” to the central government’s takeover of the region following its unilateral declaration of independence from Spain.

On Thursday, the ECB said it will extend its bond purchases into September 2018 while reducing its monthly purchases by half to 30 billion euros starting in January. The move led investors to bet that the central bank would not begin hiking rates until 2019.

“The ECB wanted to keep its accommodative policy longer, to achieve its inflation goal,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.

“So the latest downward movement in the euro was expected, and I think it will continue for a while,” he said. “Until the Catalonian situation settles, it will remain a headwind.”

In contrast with the ECB, the U.S. Federal Reserve is expected to resume raising interest rates, perhaps as early as December.   

“The market has already pretty much priced in a December move, so the real key question is how much the markets price in for next year, and that could drive the dollar even higher in the short term if we see more being priced in,” said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

Data on Friday showed that the U.S. economy grew at a 3.0 percent annual rate in the third quarter, faster than the 2.5 percent forecast by economists polled by Reuters.

“The strong Q3 GDP numbers have helped the dollar,” Kotecha said.

Also helping is the speculation that President Donald Trump could appoint as Fed chief someone who favors a faster pace of rate increases than current Chair Janet Yellen, whose term expires in February.

Trump is leaning toward nominating Fed Reserve Governor Jerome Powell to be the next head of the U.S. central bank, two sources familiar with the matter said on Friday. Trump will announce his nominee this week.

Speculators’ net short bets on the U.S. dollar in the week ended Oct. 24 fell to their smallest in nearly three months, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.

Generally positive U.S. data over the past month as well as hawkish rhetoric from Fed officials has boosted expectations for a rate hike later this year.

The Fed will hold a two-day policy meeting on Tuesday and Wednesday at which it is expected to leave rates unchanged.

The dollar edged down 0.1 percent against the yen to 113.58, after notching a three-month high of 114.45 yen on Friday.

At its own two-day meeting ending on Tuesday, the Bank of Japan is set to keep intact a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year Japanese government bond yield around zero percent.

BOJ Governor Haruhiko Kuroda is the leading candidate for a second five-year term when his current one ends in April, the Nikkei business paper reported on Saturday, which would likely mean continuation of the bank’s ultra-easy monetary policy.

Prime Minister Shinzo Abe’s victory in a lower house election this month heightened expectations the BOJ’s ultra-loose policy - a key pillar of his “Abenomics” stimulus policies - will continue, as inflation remains well short of the central bank’s inflation target. Japan’s core consumer prices rose 0.7 percent on year in September.

But data released earlier on Monday suggest Japan’s economic recovery was gaining momentum. Retail sales rose last month at their fastest pace in three months.

Reporting by Lisa Twaronite

As Trump tax comes to floor, failure could spell stocks selloff


NEW YORK (Reuters) - Investors are increasingly pricing in the effect of a corporate tax cut into the shares of U.S. companies, leaving the market primed for a steep sell-off if the Republican-controlled Congress fails to pass one of President Donald Trump’s top priorities.

The benchmark S&P 500 is up nearly 6 percent from its August lows as the Trump administration has rolled out its tax reform proposal, which would cut corporate taxes to 20 percent from the current 35 percent and allow companies to bring back some of the $2.6 trillion in cash currently held offshore at reduced rates.

Bank of America Merrill Lynch said that a positive boost from taxes “had been priced out of stocks” in July but “has been making a solid comeback.”

Yet there are signs that the Trump administration has little room for error as it gets ready to introduce its tax legislation next week. The House of Representatives narrowly passed a budget measure on Thursday necessary for a vote on a tax bill, with Republicans from such high-tax states as New York and New Jersey among the opponents out of concerns that a bill would eliminate the deduction of state and local taxes.

Trump must also stem potential revolts over a proposal to scale back the level of tax-deferred contributions to 401(k) retirement savings plans, which many middle-class Americans rely on for their retirement.

“The nature of the rally over the last two months has been tax-cut led. If we don’t get a cut then the market is going down” several percentage points, said Edward Perkin, chief equity investment officer at Eaton Vance.

Such a decline would be the first significant sell-off of the year, he said, but would not likely be near the 20 percent decline that signifies the start of a bear market.

A collapse in the tax measure would likely send the S&P 500 down 5 percent or more, Goldman Sachs said in an Oct.20 note.

“Tax reform will determine the direction of the S&P 500’s next 100 points,” the report said.

Over the last 30 days, roughly 75 companies - ranging from delivery service United Parcel Service Inc (UPS.N) to hotel operator Hilton Worldwide Holdings Inc have discussed how they would benefit from a corporate tax cut on conference calls with analysts, according to a Reuters analysis of earnings call transcripts, a sign that Wall Street is increasingly focused on the tax bill.

The White House’s plan would boost 2018 S&P 500 adjusted earnings per share by 12 percent, to $156, Goldman Sachs estimates, while leading to an additional $75 billion in stock buybacks.

Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, said that Trump’s clashes over the last week with members of his own party could threaten the tax bill’s success because it could alienate other Republicans. Because Republicans hold only a slim 52-48 seat advantage in the Senate, Trump can afford to lose only two votes.

“When the possibility of a defection of some Republican senators increases, that kind of puts the whole tax reform thing in jeopardy. He needs them all,” Tuz said.

At the same time, the 14.4 percent year-to-date rally in the S&P 500 leaves the index primed for a decline of at least 5 percent, said Barry James, a co-portfolio manager of the $3.1 billion James Balanced Golden Rainbow fund.

The S&P 500 trades at a trailing price-to-earnings ratio of 22.6, and a forward price-to-earnings ratio of 19.5, both well above their historical norms.

“We’re at levels today that are historically very risky for stocks and we’re primed for a correction,” James said. “If there’s not the tax cut that everyone is expecting, then the correction could be a whole lot more serious.”

Reporting by David Randall

Sunday, 29 October 2017

Place your bets for the Brexit rate hike


LONDON (Reuters) - To hear some economists talk, the Bank of England is about to make a big mistake - raise interest rates just as the economy heads into what could be a major storm.

If all goes as scripted, the bank will hike borrowing costs in the coming week for the first time in more than 10 years. But is the country really ready?

The consensus is for rise to 0.5 percent from 0.25 percent.

That 0.25 percent was where the BoE put Bank Rate just over a year ago, shortly after British voters elected to leave the European Union. And there’s the rub: the uncertainty the vote triggered is still there.

A Reuters poll published in the past week showed more than 70 percent of economists believe now is not the time to raise rates -- though slightly more than that said it would happen anyway.

BoE Governor Mark Carney has made it clear a hike is in the offing, if not specifically saying at this coming meeting.

His concern is that low unemployment means Britain’s economy has little spare capacity and, accordingly, faces upward inflation pressure. Added to that are moves by other major central banks to rein in loose monetary policy, which could also push inflation higher by weakening the pound further.

The U.S. Federal Reserve has raised rates four times since late 2015 and is expected to do so again. The European Central Bank is cutting back on its bond buying, albeit gently.

So the BoE needs to concern itself with a pressured pound and high employment driving up inflation that, at 3 percent, is already well above target and the highest in the Group of Seven industrialised nations.

But ranged against that is huge political and economic uncertainty over how Britain’s withdrawal from the EU will play out.

Companies are unclear about what to plan for, ranging from little short-term change to a complete revolution in how they do business.

Consumers too are wary as, while Britain’s economy has by no means not gone over a cliff, it has had some wobbles.

Retail sales, for example, contracted on a monthly basis in September and were up 1.2 percent year-on-year versus 4.1 percent a year earlier.

Preliminary third-quarter growth figures in the past week, meanwhile, were slightly better than expected. But at 1.5 percent year-on-year they are well below pre-Brexit vote levels and significantly lag both the United States and the euro zone.

This had prompted some economists to suggest Carney and the BoE are about to “do a Trichet” -- mirroring then-ECB president Jean-Claude Trichet’s raising of rates in 2008 just as the financial crisis was hitting.

Former BoE policymaker Danny Blanchflower - who voted against the BoE’s last hike in 2007, and has been regularly critical of suggestions to tighten policy since - has been scathing about the idea of a UK hike now.

“Nothing in data whatsoever says there should be a rate rise,” he tweeted.

(NOT) RISING SUN

The BoE is not the only central bank discussing policy. The Bank of Japan will announce its decisions on Tuesday.

Deflation -- Japan’s biggest economic problem for much of the past 20 years -- is over, but inflation is far from entrenched, limping along at just 0.7 percent year-on-year.

The economy too is somewhat off the pace, with the International Monetary Fund predicting 1.5 percent growth this year, though that is an improvement from 2016.

The biggest issue among economists with regard to the BoJ is whether it should reveal its plans to exit its ultra-loose monetary policy.

“We are anticipating few major changes in monetary policy,” Katsunori Kitakura, lead strategist at SuMi TRUST, wrote in a note. “The medium-term outlook for the Japanese economy is largely unchanged since the last policy meeting so the BoJ is likely to maintain the status quo.”

Underlining this, Reuters polls suggest the BoJ won’t start rolling back its monetary stimulus until late next year at the earliest -- the sort of unclouded policy outlook that the BoE’s Carney might arguably have cause to envy before the week is out.

Reporting by Jeremy Gaunt

Thursday, 26 October 2017

Euro heads higher as ECB heads for the exit


LONDON (Reuters) - The euro climbed for a third day and stocks slipped to a month low on Thursday, as traders waited for formal confirmation from the European Central Bank that will take its biggest step yet in unwinding years of loose monetary policy.

Banking stocks were also in focus as Europe’s Deutsche Bank and Barclays  both tumbled after results, and South Africa’s markets lurched lower again after its budget on Wednesday had rattled investors.

In a pre-ECB appetizer, Sweden and Norway’s central banks both kept their interest rates on hold. Their currencies barely budged though as attention remained firmly on a euro camped at a 1-week high of $1.1820 and up 12.5 percent for the year.

The ECB will announce its policy decision at 1145 GMT and hold a news conference at 1230 GMT.

It is expected to say that from the start of next year it will be pumping either 30 or 40 billion euros a month into euro zone bond markets, rather than the current rate of 60 billion a month.

Markets will also be looking at how long it plans to maintain that new rate and for any tweak in language on when it may start actually raising its currently negative interest rates.

“The pace they decrease the bond buying is the important factor, I would say they cut (the purchases) by 20 billion (a month) considering how the market is,” said SEB investment management’s global head of asset allocation, Hans Peterson.

“They need to keep the economy going before taking away the punch bowl.”

European bonds, which like other global fixed income markets have seen a selloff over the last week, remained subdued.

Benchmark German Bund yields hovered at just over 0.47 percent after U.S. Treasury yields had hit a seven-month high of 2.4750 percent overnight.

European shares struck 4-week lows too before they managed to steady.

While bank stocks were the main drag, former mobile phone giant Nokia was the biggest individual faller as weak earning from its now mainstay networks equipment business sent its shares down as much as 14 percent.

SOUTH AFRICA SELLOFF

Elsewhere in currencies, Britain’s sterling built on strong GDP data boost to hit a 9-day high.

The dollar eased 0.2 percent to 113.515 yen JPY= after hitting a three-month top. It was also down 0.1 percent against a broader basket of major currencies.

South Africa's rand ZAR= was the day's big mover again though. It dropped another 1 percent after Wednesday's budget had slashed growth forecasts, ramped up debt projections and reignite fears for its investment grade credit rating.

It left the currency down almost 4 percent and heading for its worst week since the sacking of a respected former finance minister in March.

The Canadian dollar also saw a major shift. It was trying to claw back ground having fallen 1 percent to a three-month low of C$1.2816 per dollar  after the Bank of Canada sounded more cautious than of late in its policy statement.

Among commodities, oil slipped a touch following an unexpected increase in U.S. crude inventories and high U.S. production and exports.

Brent crude was down 15 cents at $58.29 a barrel by 0900 GMT. The global benchmark is not far below its 26-month high of $59.49 hit in late September. U.S. light crude was 15 cents lower at $52.03.

Markets have been supported by comments from Saudi Arabia’s energy minister earlier this week reiterating the kingdom’s determination to end a global supply glut that has weighed on prices for more than three years.

Gold drifted higher, but the main metal market mover was aluminum  which surged to its highest in more than five years as expectations grew that growing demand and cuts to output from China will squeeze supply.

It reached $2,211 a ton, the highest since March 2012.

“New price support has emerged in the form of cost inflation,” analysts at Standard Chartered said.

Reporting by Marc Jones

Euro falls as ECB curbs bond-buying


LONDON (Reuters) - The euro fell half a percent on Thursday as investors took profits after the European Central Bank said it would extend its bond purchases at a reduced rate on Thursday, as widely expected.

The ECB said it would cut asset purchases to 30 billion euro from 60 billion euros starting January while also extending the scheme by 9 months to September.

“The pace of QE tapering is in line with market expectations and euro/dollar is modestly lower but we still have to wait for comments from Draghi,” said Piotr Matys, a currency strategist at Rabobank in London.

The single currency fell 0.6 percent to $1.1740 but was still holding within broad ranges traded in recent weeks.

The dollar rose to the day’s highs against a basket of currencies on a media report that current Fed chair Janet Yellen had pulled out of the race for the next U.S. Federal Reserve chair.

The greenback was trading up 0.4 percent at 94.088 against a basket of currencies.

Simon Derrick, an analyst at BNY Mellon said the ECB decision was in line with what markets were expecting.

Long euro/dollar has been among the best performing currency trades with the pair up nearly 13 percent so far this year though the single currency has come under some pressure in recent weeks on concerns interest rates in the ECB will remain at record lows far longer than in the U.S.

Latest CFTC positioning data shows that net euro longs have retreated from their record highs though still remain near multi-year highs at above $13 billion.

U.S. President Donald Trump is expected to announce his Fed chair candidate before his Asian trip in early November.


Reporting by Saikat Chatterjee

Wednesday, 25 October 2017

UK economy picks up speed, puts BoE rate hike firmly on track


LONDON (Reuters) - Britain’s economy unexpectedly picked up speed in the three months to September, putting the Bank of England firmly on track to raise interest rates next week for the first time a decade.

Output rose 0.4 percent compared with 0.3 percent growth in the quarter to June, the Office for National Statistics said on Wednesday. A Reuters poll of economists had forecast 0.3 percent.

Sterling hit a day’s high against the dollar on the figures, while British government bond and share prices fell as financial markets further adjusted to the prospect of higher interest rates.

Britain performed much better than most economists expected immediately after last year’s vote to leave the European Union, and was one of the fastest-growing major advanced economies in 2016.

But it slipped to the bottom of the pack earlier this year, posting its worst first-half performance since 2012 at a time when its peers have enjoyed robust growth.

Scotiabank economist Alan Clarke called the latest 0.4 percent growth figure “hardly a boom... merely in line with potential”.

Nevertheless, “it removes the last hurdle standing in the way of a rate hike at next week’s meeting,” he said.

A Reuters poll published on Tuesday showed the BoE is widely expected to raise rates to 0.50 percent from 0.25 percent on Nov. 2, due to concerns that the economy cannot grow as fast as it used to without generating excess inflation.

Last month the BoE said Wednesday’s preliminary data was likely to show 0.3 percent growth, though it might be stronger due to improving consumer demand.

FOCUS ON PRODUCTIVITY

A further argument in favor of higher rates might come from solid bank lending figures from industry association UK Finance.

The ONS data showed the vast services industry was behind the bulk of Britain’s economic expansion in the third quarter, but manufacturing also contributed, helped by a rebound in car production.

The reading will also be a small boost for under-pressure finance minister Philip Hammond ahead of his annual budget on Nov. 22. He has limited room for maneuver because of Britain’s poor productivity performance.

“My focus now, and going into the budget, is on boosting productivity so that we can deliver higher-wage jobs and a better standard of living,” he said in a statement after the data.

In year-on-year terms, third-quarter growth was unchanged at 1.5 percent, also slightly stronger than analysts had expected.


Britain’s dominant services sector grew by 0.4 percent in the third quarter, maintaining its momentum from the previous quarter, the ONS said. Industrial output expanded 1.0 percent, its fastest growth in more than a year.

Construction continued to struggle, however, contracting by 0.7 percent on the quarter - its sharpest fall since the third quarter of 2012.

The preliminary estimates of GDP do not include a breakdown of spending, and are heavily based on estimated data.

Reference: Reuters

Dollar lifted by Fed leadership talk, shares tread water


LONDON (Reuters) - The dollar got a lift on Wednesday after a report that Republican senators were leaning towards John Taylor to be the next Federal Reserve chief, while share markets turned flat after a run of highs.

Sterling got a boost after data showed Britain’s economy picked up speed in the third quarter, bolstering the case for the Bank of England to raise UK interest rates next week for the first time in more than a decade.

On Tuesday, a source familiar with the matter said U.S. President Donald Trump had polled Republicans on whether they would prefer Stanford University economist John Taylor or current Fed Governor Jerome Powell to be the next U.S. central bank chief, and more senators preferred Taylor.

That helped send the index that measures the dollar against a basket of peers up 0.3 percent, even though it had gone flat on the day against the yen at 113.92.

The dollar also got support from the yield on the U.S. 10-year Treasury. It was at 2.42 percent having finally broken above the long-standing 2.4 percent barrier this week.

For Fed-focused traders, Taylor is seen as someone who could quicken the pace of interest rate increases compared with Fed Chair Janet Yellen, whose term expires next February.

“Anything that reduces the probability of Yellen being reappointed necessarily means the Fed looks more hawkish than it would otherwise,” said the RBC’s head of currency strategy Adam Cole, in London.

“The general perception is that there’s no one more dovish than Yellen,” he said.

Elsewhere in currencies, the Australian dollar skidded 0.7 percent to $0.7718 , touching its lowest levels since mid-July after weak consumer price figures prompted investors to pare expectations of further tightening from the Reserve Bank of Australia.

The MSCI world equity index .MIWD00000PUS, which tracks shares in 47 countries, was flat as a muted open in Europe counterbalanced earlier gains in Asia.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS ended the session up 0.1 percent as India, South Korea and Indonesia all hit record highs.

But a 0.5 fall for Japan's Nikkei stock index .N225 saw it snap out of a record 16 straight sessions of gains. That had continued after the victory of Prime Minister Shinzo Abe's coalition in Sunday's election fuelled hopes of more cheap money policies designed to keep the yen weak.

Despite Wednesday’s share weakness, Abe’s victory should reassure overseas investors who had been concerned about policy continuity, and therefore “new money should come into the Tokyo market,” said Akio Yoshino, chief economist at Amundi Japan Ltd.

“The strength of corporate earnings should continue to support the Tokyo equity market” in the coming weeks, Yoshino said.

The pan-European STOXX 600 was down 0.1 percent, while euro zone blue chips gained 0.2 percent. France's CAC 40 .FCHI rose 0.1 percent. Britain's FTSE 100 index fell 0.4 percent. .FTSE

Emerging market stocks  rose 0.3 percent.

Euro zone banks were up 0.5 percent, building on the previous session’s gains as investors anticipated Thursday’s European Central Bank meeting for the next catalyst for financials, which benefit from a rising rate environment.

Recent indications from policymakers have fanned speculation it will opt for a reduction in monthly asset purchases to 30 billion euros from January from 60 billion euros at present. Bets are also that it will keep that in place for 6-9 months.

German business confidence unexpectedly rose to a record high in October after falling for two months in a row, a survey showed on Wednesday.

Crude oil futures caught their breath after rising more than 1 percent overnight after top exporter Saudi Arabia said it was determined to end a supply glut. Prices also drew support from forecasts of a further drop in U.S. crude inventories as well as nervousness over tensions in Iraqi Kurdistan.

Brent crude was up 0.2 percent at $58.41 a barrel, while U.S. crude was down 0.3 percent at $52.31.

Spot gold was down 0.2 percent at $1,273.70 an ounce.

Reporting by Ritvik Carvalho

Tuesday, 24 October 2017

Disorderly Brexit risk rises but BoE to raise rates anyway- Poll


LONDON (Reuters) - The likelihood of a disorderly Brexit has crept higher but that won’t deter the Bank of England from raising rates next week for the first time in a decade, even though many economists believe that would be a mistake, a Reuters poll showed on Tuesday.

There is now a 30 percent chance Britain will leave the EU without a trade deal when two-year divorce talks end in March 2019, up from 25 percent in a September poll, according to the median forecast in the latest Reuters survey of economists.

“It is in everybody’s interests that a transitional arrangement is put in place by 2019. Given the EU’s habit of finding a last-minute solution, we believe that a deal will be found. But the risk of failure is non-negligible,” said Peter Dixon at Commerzbank.

British Prime Minister Theresa May won a modest reprieve on Friday when European Union leaders signalled they were ready to move negotiations forward in the coming months.

But she now faces a political balancing act as she tries to meet EU demands for more concrete pledges on Britain’s divorce bill without triggering a backlash from Brexit campaigners at home, some of whom would prefer she walk away from talks.

The overwhelming majority of respondents in the poll, however, said the most likely ultimate outcome was still an EU-UK free trade agreement, possibly with a transitional arrangement.

The second most probable outcome was Britain leaving without a deal and being forced to trade with the continent under basic World Trade Organization rules, the poll showed.

Third was European Economic Area membership, under which Britain would pay to maintain full access to the EU Single Market - but without having any say over its policies.

The least likely option was Britain reversing its decision to leave the European Union, the poll showed.

While the sample of respondents was different and slightly larger than the Reuters poll published on Sept. 1, the overall conclusions about Britain’s likely future trading relationship with the European Union were the same.

There was no noticeable change among those who contributed to both polls although a majority increased their risk forecast.

“Our base case remains that there will eventually be a deal and talks will move on to trade at the December meeting - based on our view that the alternative is so bad a deal must happen - but the next couple of months will be politically very tricky indeed for Theresa May,” said Daniel Vernazza at UniCredit.

European Council President Donald Tusk said on Tuesday it was up to Britain to determine if there would be a good deal or no deal and European Commission President Jean-Claude Juncker said they were not negotiating with London in a hostile way.

WRONG MOVE

Britain’s economy has so far dodged the widely-predicted post-referendum recession but is now lagging, rather than leading, the other Group of Seven industrialised economies in the midst of a resurgence in the global economy.

According to the poll, UK growth will be 0.3 percent per quarter through to the middle of next year, behind projections for 0.5 percent for the EU bloc.

In the aftermath of last year’s decision to leave the EU, the Bank of England cut borrowing costs to a record low of 0.25 percent but it has since turned more hawkish and given strong signals it intends to raise rates soon.

As a result, a large majority of economists polled - 46 out of 64 - said the Bank would put those 25 basis points back on its Bank Rate on Nov. 2 - although about three-quarters of those surveyed also said now was not the right time to do so.

“A rate rise or two won’t crash the economy, but will be negative for household and business spending at the margins,” said Elizabeth Martins at HSBC.

“Given, we don’t see an urgent need to tighten from an inflation perspective, any tightening may come to be seen as unnecessary at best.”


Consumers played a major role in driving economic growth last year but high inflation, largely driven by the fall in sterling since the referendum which has made imports more expensive, means they are more likely to rein in spending.

Average consumer prices rose 3.0 percent in September compared with a year earlier, the fastest increase in more than five years and much steeper than the 2.0 percent the Bank of England would like.

Inflation is not expected to fall back to target anytime soon, with the poll predicting it will average 2.6 percent next year and 2.2 percent in 2019.

However, after an initial November rate rise no action is expected from the central bank next year. For now, it is forecast to add another 25 basis points in 2019.

“They’ll hike now (since they said so), but they’ll be making a mistake, and they’ll recognise that in the coming months, and it’s therefore overwhelmingly likely that they won’t hike again for a long while,” UniCredit’s Vernazza said.

Reference: Reuters team

Dollar inches lower as attention turns to Fed leadership


TOKYO (Reuters) - The dollar edged down on Tuesday, stepping back from recent highs as market attention turns to who will be the next head of the U.S. central bank.

President Donald Trump told reporters on Monday he is “very, very close” to deciding who should chair the Federal Reserve after interviewing five candidates for the position.

These include current Fed Chair Janet Yellen, whose term expires in February, as well as Fed Governor Jerome Powell, Stanford University economist John Taylor, Trump’s chief economic advisor Gary Cohn, and former Fed Governor Kevin Warsh.

“It’s a big question for the markets. It’s one thing to speculate about it, but it’s another to take an FX position,” said Bart Wakabayashi, branch manager for State Street Bank in Tokyo.

“Still, the rumors trigger some selling and buying, on perceptions of who might be more dovish or more hawkish,” he said.

Investors are also following U.S. tax reform developments. The Senate’s approval of a budget resolution on Friday raised hopes that Trump’s tax plans would move forward this year.

The dollar index, which tracks the greenback against a basket of six major rivals, was down 0.2 percent at 93.741, moving away from 94.017, which had been its highest since Oct. 6.

The dollar inched 0.1 percent lower to 113.35 yen, pulling away from a three-month high of 114.10 yen hit in the wake of Sunday’s general election in Japan.

Prime Minister Shinzo Abe’s coalition scored a decisive victory, reassuring investors that his “Abenomics” policies would continue, including the Bank of Japan’s easy monetary policy.

“The risk-on sentiment has stalled for now,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

“The Japanese election result was not so surprising, and was mostly priced in,” he said.

The euro added 0.1 percent to $1.1762, though its gains were seen capped ahead of the European Central Bank’s policy meeting on Thursday, where the authority is expected to signal it will take small steps away from its ultra-easy monetary policy.

Catalonia’s separatist crisis pressured the euro. Madrid has invoked special constitutional powers to dismiss the Catalonian regional government and force elections to counter the independence movement.

A vote in the national Senate to implement direct rule on Catalonia is due on Friday.

The New Zealand dollar, meanwhile, had the rug pulled out from under it after the country’s incoming Labour government laid out its left-leaning policies. It was last down 0.2 percent at $0.6949, within sight of a five-month low of $0.6932 plumbed on Monday.

The policies were seen as unfriendly to foreign investment and immigration, and could weigh on the currency given the country runs a current account deficit.

Reporting by Lisa Twaronite

Monday, 23 October 2017

Dollar hits three-month high vs yen on Abe election victory


LONDON (Reuters) - The dollar touched a three-month high against the yen on Monday, with investors betting that an emphatic election victory for Japan’s ruling party would see a continuation of the ultra-loose “Abenomics” policy that have kept downward pressure on the yen.

Japanese Prime Minister Shinzo Abe’s ruling bloc scored a big win in Sunday’s election, with his Liberal Democratic Party-led (LDP) coalition winning a combined 312 seats, keeping its two-thirds “super majority” in the lower house, according to media reports.

Abe’s victory eased fears that the economic steps implemented under his leadership, including an expansive asset-purchase programme by the Bank of Japan, would be disrupted and would halt the yen’s depreciation against the dollar.

The dollar gained as much as half a percent to reach 114.10 yen after the results, its strongest since July 11. It came off those highs in early dealing in London but was still up 0.3 percent on the day.

“The relatively muted rise in dollar/yen following Abe’s election win is consistent with the fact that this was very much the most expected result,” said BNP Paribas currency strategist Sam Lynton-Brown.

“The outcome should be consistent with the market continuing to price static and dovish policy from the BOJ, even in the context of (BOJ Governor Haruhiko) Kuroda’s term coming to an end in April of next year.”

Some analysts said Abe’s emphatic win increased the chances that Kuroda, who is widely considered a policy dove, would be reappointed when his term ends.

“Overcoming deflation with the BOJ easing is at the crux of the Abe administration’s policies and this will now be allowed to continue indefinitely,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

“It’s relief over the BOJ policies, rather than hopes for fresh fiscal stimulus, that is weakening the yen.”

The greenback had already gained about 0.9 percent against the Japanese currency on Friday, after the U.S. Senate approved a budget blueprint for the 2018 fiscal year, clearing a critical hurdle for Republicans to pursue a tax-cut package without Democratic support.

Against a basket of six major currencies, the dollar touched a 2-1/2-week high, having recorded its best day in a month on Friday.

Another focal point for the dollar was who U.S. President Donald Trump would appoint as the next Federal Reserve chief.

The euro was 0.3 percent lower at $1.1754 , extending losses from Friday when it lost 0.6 percent.

The common currency has drifted lower from a 2-1/2-year peak of $1.2092 scaled on Sept. 8, as hopes for the European Central Bank to take a more hawkish stance have been tempered by speculation that it is not be in a hurry to taper its easy policy.

The ECB holds a policy meeting on Thursday, at which policymakers are seen cutting bond purchases but voting for an extension in stimulus.

Reporting by Jemima Kelly

Big money stays away from booming bitcoin


LONDON (Reuters) - Bitcoin is booming, digital currency hedge funds are sprouting at the rate of two a week and the value of all cryptocurrencies has surged tenfold this year to more than $170 billion.

Yet for all the hype, mainstream institutional investors are steering clear of the nascent market, taking the view that it is too lightly regulated, too volatile and too illiquid to risk investing other people’s money in.

Bitcoin, the biggest and most well-known cryptocurrency, has outperformed all the world’s traditional currencies each year since 2011, except for 2014. But many investors still view it as an opaque, esoteric instrument used by gun-runners and drug-dealers on the Dark Web that should be avoided.

This year, though, a flood of new hedge funds focused on cryptocurrencies has offered institutional investors who might be unfamiliar with the market a potential route into the world of digital currencies.

According to Autonomous NEXT, a financial technology research house, 84 so-called crypto hedge funds have been launched this year, taking the total to 110 with about $2.2 billion in assets altogether.

But the fact most of the funds are relatively small with a limited track record - and that cryptocurrency price swings have been so pronounced - means the world’s pension funds, insurance companies and large mutual funds are staying away.

“While cryptocurrencies are probably here to stay, they are difficult to analyse, wildly volatile and some may be prone to fraud,” said Trevor Greetham at Royal London Asset Management (RLAM), part of the Royal London life insurance company.

“Diversification is a good thing but that doesn’t mean investing in everything just because it’s there. We favour assets with a long track record in producing returns or reducing risks,” said Greetham, who heads RLAM’s multi asset team.

Autonomous NEXT partner Lex Sokolin said there were probably only a couple of funds worth several hundred million dollars with most in the $5 million to $20 million range - well below the threshold most institutional investors would consider.

“For many institutional, discretionary fund managers, those funds wouldn’t get cleared because the big question would be around liquidity,” said James Butterfill, head of investment strategy at ETF Securities in London.

‘BUBBLES, BOOMS AND BUSTS’

One way mainstream money managers could get exposure is by investing in a basket of hedge funds that includes a crypto fund. But the head of hedge funds at a major European bank that invests in more than 100 hedge funds said there were no crypto funds in his portfolio.

“It’s a very controversial proposition,” said the banker, who declined to be named. “It’s unlikely that the most established hedge funds will make big bets on this because you could put your core business at risk.”

Determining the value of bitcoin and other cryptocurrencies is tricky. There are almost 17 million bitcoins in existence now but the total supply is limited to 21 million, and that won’t be reached until the next century.

Bitcoin’s total value, or market capitalisation, is close to $100 billion, bigger than U.S. investment bank Morgan Stanley (MS.N). At the start of the year it was just $15 billion. Ethereum, the second-biggest cryptocurrency, is now worth almost $30 billion.

“If the supply is truly fixed then the price of these securities are determined purely by demand which, in turn, is determined largely by sentiment,” said Ken Dickson, investment director, money markets and FX at Aberdeen Standard Investments.

“This means huge price swings with bubbles, booms and busts. Unless the supply processes of these instruments are reformed then it is unlikely that they will play any part of an investment portfolio,” he said.

Bitcoin has been on a rollercoaster ride this year. After hitting what was then a record high just below $5,000 in early September it lost about a third of its value in less than two weeks. It has since almost doubled in price again, to new highs near $6,000.

Ethereum has been even more erratic. Its price surged almost 50 times from the start of the year to June, before falling back by about a fifth, according to industry website CoinDesk.

That kind of volatility means committees at institutional investment firms looking at the relative risks of asset classes are likely to rule out cryptocurrencies, asset managers said.

“Your risk-budgeting committee will say: you can’t hold a lot of that because of the amount it increases risk in your portfolio,” said Butterfill. “I do expect volatility to decrease over time but risk budget teams tend to look historically.”

EARLY DAYS

For now, those investing in crypto funds are high-net worth individuals, companies managing money for wealthy families, private wealth managers and some venture capital investors.

“It’s clear there’s money piling into these funds,” said Emad Mostaque, co-chief investment officer at the London office of South African hedge fund firm Capricorn Fund Managers. “There’s just not that institutional investor comfort yet.”

Alistair Milne, co-founder of the Mayfair-based Altana Digital Currency Fund, likens investment in crypto funds to the start of the hedge fund boom in the early 1990s, when wealthy individuals were the first to invest in a raft of new funds making high returns.

“It always starts with the high-net worth individuals,” he said. “It wasn’t until 2004-2005 that institutional investors started getting involved in those.”

The new crypto hedge funds take a variety of approaches, betting on new coins issued to raise funds via so-called initial coin offerings (ICOs), price direction or differentials between rates on the many cryptocurrency exchanges.

One new fund, the London-based BitSpread, says its $25 million market-neutral fund - which trades on price differentials alone - gives major investors a way into the market without exposing them to violent price swings.

The fund is up 32 percent so far this year, having managed to exploit the kind of arbitrage possible in a young market where large price gaps exist.

“(Institutional investors) haven’t invested in this ecosystem yet because they haven’t yet found the right vehicle,” said Cedric Jeanson, BitSpread’s founder.

Reporting by Jemima Kelly

Japan shares at two-decade top, yen near three-month low as Abe wins


SYDNEY (Reuters) - Japanese shares jumped on a weaker yen on Monday as an election win for Shinzo Abe’s ruling bloc gave a green light for more policy stimulus, while the euro eased as Spain’s constitutional crisis aggravated concerns about political unity in the region.

The U.S. dollar was the major beneficiary as President Donald Trump and Republicans took a small step toward tax cuts, boosting Wall Street stocks and lifting bond yields.

Japan's Nikkei .N225 raced up 1 percent to its highest since 1996 after Prime Minister Abe looked to have easily won in national elections over the weekend.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS held steady, while Singapore's main index .STI reached its highest in over two years.

Investors assumed Abe’s victory would allow the Bank of Japan to continue with massive monetary easing that depresses bond yields and the yen, even as the U.S. Federal Reserve seems determined to hike rates again in December.

“This should extend the lifespan of ‘Abenomics’, including the BOJ’s mega stimulus,” wrote analysts at the Blackrock Investment Institute.

“We see the outcome as a mild positive for Japanese equities, and as a mild negative for the yen and Japanese government bonds.”

The dollar rose 0.2 percent to 113.74 yen JPY= and briefly touched its highest since mid-July at 114.09. It faces stiff resistance at the July top of 114.49, but a break would open the way to its March peaks around 115.51. Against a basket of currencies, the dollar edged up 0.1 percent.

The yen even slipped against the euro, which was having its own troubles as the Spanish government urged Catalans to accept its decision to dismiss their secessionist leadership and to take control of the restive region.

The nation’s biggest political crisis in decades enters a decisive week as Madrid tries to impose its control, although investors have so far assumed the political strife would not spread to elsewhere in the European Union.

The euro eased only a modest 0.13 percent on Monday to $1.1770, and has strong chart support around $1.1729.

LESS FOR LONGER

The single currency faces another hurdle on Thursday when the European Central Bank holds a policy meeting amid much talk it will cut back the amount of assets it buys every month, but also extend the programme.

“As we have argued for some time now, the length of time the (quantitative easing) programme runs for matters more than monthly size,” said analysts at RBC Capital Markets.

“So while we look for a reduction by at least 30 billion euros in net terms ... we also expect that the ECB will keep the programme open ended.”

Asian share markets caught some tailwind from Wall Street’s record finish on Friday when the passage of a U.S. Senate budget resolution bolstered speculation that President Trump’s tax-cut plan may move forward.

The Dow, ended Friday with gains of 0.71 percent, while the S&P 500 rose 0.51 percent and the Nasdaq, 0.36 percent.

In commodity markets, a firmer dollar nudged gold XAU= down 0.3 percent to $1,276.80 an ounce.

Oil prices edged ahead on supply concerns in the Middle East and as the U.S. market showed further signs of tightening while demand in Asia keeps rising.

Brent crude rose 13 cents to $57.88 a barrel, while U.S. crude futures added 25 cents to $52.09.

Reference: Waybe Cole

Dollar rises vs safe havens after U.S. Senate clears way for tax reform


NEW YORK (Reuters) - The dollar made its biggest daily gain in a month on Friday and posted a weekly increase for the fifth time in six weeks as progress on U.S. tax reforms raised prospects of a fiscal lift to the economy, bolstering investor appetite for risk.

The dollar hit a three-month high against the Japanese yen JPY=, to 113.56 yen, and a five-month high against the Swiss franc CHF=, touching 0.9858 franc. Traders seek the yen and Swiss franc in times of uncertainty and fear, and sell the currencies when they favor riskier assets.

“This is clearly a picture of somewhat of a risk-on rotation today, and it’s ignited some of the animal spirits as we take another step closer to the potential for tax reform coming to fruition,” said Bill Northey, chief investment officer at the Private Client Group at U.S. Bank in Helena, Montana.

“Because from the standpoint of what has the potential to impact economic trajectory and capital markets trajectory, it really is tax reform.”

Senate approval of a budget blueprint on Thursday for the 2018 fiscal year cleared a critical hurdle for Republicans to pursue a tax-cut package without Democratic support.

Investors also have viewed as bullish for the dollar remarks this week from Chair Janet Yellen and other officials of the Federal Reserve that suggest the central bank is moving forward with another rate hike this year.

The dollar briefly fell on news that Trump was considering nominating John Taylor and Jerome Powell to the top two posts at the Fed, one as chair and one as vice-chair, and on news Yellen had lunched at the White House with Trump adviser Gary Cohn. It quickly retraced those losses.

The dollar's strength dragged the euro EUR= down 0.6 percent to $1.1763 ahead of a European Central Bank meeting next week in which policymakers are seen cutting bond purchases but voting for an extension in stimulus.

Enhanced risk appetite also helped boost the euro to its highest against the Swiss franc EURCHF= since January 2015, when the Swiss National Bank scrapped its peg with the euro.

Ahead of national elections in Japan on Sunday, surveys suggest Prime Minister Shinzo Abe’s ruling coalition is on track roughly to match the two-thirds “super majority” it held in parliament’s lower house before the snap vote was called.

The New Zealand dollar NZD= sank to a five-month low on concerns the new Labour coalition will take a harder stance on immigration and foreign investment than the outgoing center-right government.

Reporting by Dion Rabouin

Friday, 20 October 2017

Dollar rises on hopes for tax reforms; kiwi extends losses


SINGAPORE (Reuters) - The dollar rose broadly on Friday, bolstered by increased optimism about the prospects for U.S. tax reforms, while the New Zealand dollar hit five-month lows, hampered by uncertainty over economic policies under a new government.

U.S. President Donald Trump’s drive to overhaul the U.S. tax code cleared a critical hurdle late Thursday when the Senate approved a budget blueprint for the 2018 fiscal year that will pave the way for Republicans to pursue a tax-cut package without Democratic support.

The dollar rose 0.5 percent on the day to 113.14 yen, having risen to as high as 113.315 yen at one point, its strongest level since Oct. 6.

“There’s still a lot of uncertainty around the timing and the exact kind of reforms that we will see, but it has given a bit of momentum behind that,” said Peter Dragicevich, G10 FX strategist for Nomura in Singapore, referring to the approval of the budget blueprint by the U.S. Senate.

The dollar is likely to be supported against the yen in the near-term, Dragicevich said, helped by a widening in U.S.-Japan yield differentials and also since Japan’s general election on Sunday seems unlikely to lead to any surprises for the market.

Recent media forecasts have suggested that Japanese Prime Minister Shinzo Abe’s ruling coalition is on track to roughly match the two-thirds “super majority” it held in parliament’s lower house before the snap election was called.

In a sign of the dollar's broad gains, the euro fell 0.3 percent to $1.1818, while sterling shed 0.4 percent to $1.3107.

The New Zealand dollar sank to a five-month low on concerns the new Labour coalition will take a harder stance on immigration and foreign investment than the outgoing center right government.

The New Zealand dollar fell to as low as $0.6971 at one point, its lowest level since May 22. It was last down 0.6 percent at $0.6989, after having tumbled 1.7 percent on Thursday for its biggest one-day percentage drop in more than a year.

New Zealand Prime Minister-elect Jacinda Ardern said she would spend Friday ironing out issues and ministerial posts with coalition partner New Zealand First, one day after becoming the Pacific nation’s youngest leader in more than 150 years.

Some analysts are focusing on potential changes to New Zealand’s monetary policy framework under the new government.

The Labour Party has said it wants to add employment to the central bank’s mandate, which would mark a big change for the Reserve Bank of New Zealand.

While the Labour party and New Zealand First Party have floated some different ideas regarding monetary policy, the overall direction seems to be a possible preference for a weaker New Zealand dollar, said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.

“The common thread seems to be a preference for New Zealand dollar weakness,” Ino said, adding that monetary policy of New Zealand’s central bank may turn more dovish than before.

Reporting by Masayuki Kitano

Stocks stumble after all-time high, kiwi takes a dive


LONDON (Reuters) - World stocks set a fresh record high before stalling in Europe on Thursday, as the longest winning streak for Japanese stocks since 1998 and the first close above 23,000 for Wall Street’s Dow index helped to offset nerves in Spain.

The Nikkei enjoyed its 13th straight daily rise, helping the MSCI index of global stock markets - now up 17.6 percent for the year - add to its long list of record highs.

It wasn’t all one-way traffic, though.

European shares took their biggest tumble in almost two months after a new batch of third-quarter results brought some disappointments, notably from Anglo-Dutch consumer goods titan Unilever, French advertising group Publicis and Germany’s Kion.

They then took another lurch lower as signals emerged from Spain that Madrid was gearing up to invoke a never-before-used clause to re-impose central rule over the restive region of Catalonia.

The euro trimmed gains that had taken it to a three-day high against the dollar, while Spanish bond markets gave up their early morning gains.

“Everyone is watching this with great interest but it just looks like a standoff,” said Saxo Bank FX strategist John Hardy, saying the situation was something of a ‘catch-22’ for Catalonia.

A declaration of independence would see it lose its prized autonomy ,while calling a regional election could mobilise Catalan voters who would prefer to stay part of Spain.

“But the market is not expressing any real fear over this and I think that is justified,” Hardy added.

The other big currency market move came from the New Zealand dollar. It was sent skidding to its lowest since May after the left-leaning Labour Party won the support of the minor nationalist New Zealand First party to form a ruling coalition.

It ended weeks of political guessing games but fanned concerns that the Labour Party’s hardline policies on immigrants and foreign ownership could hurt investor sentiment.

The New Zealand dollar slid as much as 1.4 percent to $0.7047, which as well as the 4-1/2 month low was also the biggest percentage decline since November 2016.

CHINA FOCUS

Among the other headlines, China’s economic growth cooled slightly to 6.8 percent in the third quarter from a year earlier, from the second quarter’s 6.9 percent.

A modest loss of momentum had been expected as the government reins in the heated property market and cracks down on riskier lending.

Other data showed that China’s industrial output rose a stronger-than-expected 6.6 percent in September, while retail sales also outperformed. Property sales fell though for the first time in over two years.

The Chinese yuan and stocks eased, with Shanghai falling 0.4 percent.

“The GDP reading could weigh negatively on both mainland stocks and currency markets as traders may position for further weakness into year-end, suspecting financial curbs will continue to have a negative impact on growth in China,” said Stephen Innes, head of Asia-Pacific trading at OANDA in Singapore.

The dollar index against a basket of six major currencies was broadly steady at 93.340.

The index ended a four-session winning run overnight on lacklustre U.S. data but briefly resumed its climb after the 10-year Treasury yield spiked 4 basis points with safe-haven bond prices falling on better investor risk appetite.

The dollar was little changed at 112.940 yen after climbing 0.6 percent overnight. The euro nudged up 0.15 percent to $1.1802.

The term of current Fed Chair Janet Yellen’s expires in February and investors are keen to see whom U.S. President Donald Trump will pick as her replacement. The White House said Trump would announce his decision in the “coming days”.

In commodities, Brent crude oil futures dropped 1.2 percent to $57.43 a barrel and U.S. WTI dropped 1.5 percent.

Brent had risen to a three-week high of $58.54 a barrel on Wednesday on worries about tensions in Iraq and Iran, but lost steam after a surprising drop in U.S. refining rates and an unexpected build in fuel stocks signalled slower demand in the world’s top oil consumer.

Reporting by Marc Jones

Thursday, 19 October 2017

Dollar firms to two-week high versus yen, bolstered by rising U.S. yields


TOKYO/SINGAPORE (Reuters) - The dollar hit its highest in about two weeks against the yen on Thursday, supported by this week’s rise in U.S. bond yields, with the market’s attention turning to who will next lead the Federal Reserve and this weekend’s Japanese election.

The dollar index, which tracks the U.S. currency against a basket of six major rivals, was slightly higher on the day at 93.389

The dollar rose as high as 113.095 yen JPY= in early Asian trade, its strongest level since Oct. 6. The dollar last changed hands at 112.97 yen, steady from late U.S. trade on Wednesday.

This week’s rise in U.S. bond yields helped lend support to the greenback. The two-year U.S. Treasury yield rose to its highest since November 2008 on Wednesday on the back of expectations for tighter global monetary policy.

The benchmark U.S. 10-year Treasury yield touched a one-week high of 2.352 percent on Wednesday, and last stood at 2.342 percent, having risen six basis points so far this week.

“In order for expectations of tighter U.S. monetary policy to increase, we will need to see more evidence to confirm that U.S. inflation is rising,” said Kumiko Ishikawa, FX analyst at Sony Financial Holdings in Tokyo.

The dollar’s rise against the yen was likely to be capped by uncertainty ahead of this weekend’s election in Japan.

Most polls show Japanese Prime Minister Shinzo Abe’s coalition on track to secure a roughly two-thirds majority in Sunday’s general election, ushering in continued political and monetary stability.

“To be sure, the chances of an election surprise in Japan are indeed very small. But investors remember last year’s Brexit vote and the U.S. presidential election, so there is greater uneasiness around elections now,” Ishikawa said.

With the Federal Reserve expected to raise interest rates for the third time this year in December, markets are now looking for clarity on who will lead the U.S. central bank after Fed Chair Janet Yellen’s term expires next February.

President Donald Trump will announce his decision on who will be the chair of the Federal Reserve in the “coming days,” White House spokeswoman Sarah Sanders said on Wednesday.

Trump has an interview scheduled on Thursday with current Chair Yellen. She is one of five candidates Trump is considering for the job.

The dollar has gained a boost this week after Stanford University economist John Taylor emerged as a major candidate for the next Fed chair.

“If it turns out to be Taylor, that is likely to trigger selling of (U.S.) bonds, at least initially,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The dollar could edge higher against the yen under that scenario, Okagawa added.

Taylor is known as a proponent of a rule-based monetary policy and according to his formula, known as the Taylor rule, the Fed funds rate needs to be much higher than the current target of 1.0-1.25 percent.

Thus there is speculation that the Fed may start raising interest rates at a faster pace, if Taylor becomes the Fed chief.

The euro edged up percent to $1.1799 EUR=.

One focus for the euro is the European Central Bank’s policy meeting coming up nex0.1t week.

France’s central bank governor called on Wednesday for a reduction in the ECB’s bond purchases towards “their possible end” in light of stronger inflation, while saying monetary policy should stay easy.

Easy monetary policy gives euro zone governments a window of opportunity to enact the reforms needed to boost growth once interest rates have to rise, ECB President Mario Draghi said on Wednesday.

The Australian dollar edged higher after Australian jobs data for September came in stronger than expected.

The Australian dollar rose 0.1 percent to $0.7850 AUD=D3, pulling away from Wednesday's intraday low of $0.7819.

Against the yen, the Australian dollar rose to 88.87 yen AUDJPY=R at one point, its highest level since late September.

Economic data from China was largely in line with expectations. The Australian currency is sensitive to China developments because of the two countries’ massive trade relations.

China’s economic growth slowed slightly as expected in the third quarter as the government’s efforts to rein in the property market and debt risks tempered activity in the world’s second-largest economy.

In other data, China’s industrial output rose a stronger-than-expected 6.6 percent in September from a year earlier, while retail sales also outperformed, though investment growth eased more than expected and property sales fell for the first time in more than two years.

Reference: Lisa Twaronite

Wednesday, 18 October 2017

Asia shares camp near peaks, China's Xi talks reform and stability


SYDNEY (Reuters) - Asian shares consolidated recent gains and currencies kept to tight ranges on Wednesday as the opening of China’s Communist Party conference produced more in the way of aspirational politics than concrete policies.

The twice-a-decade congress is expected to cement the power of President Xi Jinping, who kicked off the week-long event with a wide-ranging speech in which he said the market would be allowed to play a decisive role in allocating resources.

Yet he also said the role of the state in the economy had to be strengthened.

SPONSORED

Investors are keen for clear direction on economic and financial market reform over the next five years, but history suggests these events can be light on detail.

China's blue-chip CSI300 index added 0.5 percent in reaction, while Shanghai stocks rose 0.3 percent.

“Market participants are paying much more attention to the party congress this time, as they are watching if any surprise reforms will emerge amid concerns over economic growth,” said Yan Kaiwen, analyst with China Fortune Securities.

On Tuesday, the United States again declined to name China as a currency manipulator although it remained critical of the Chinese government’s economic policies ahead of a planned visit to Beijing by President Donald Trump.

Recent economic data from the Asian giant has been generally upbeat, fuelling a tide of optimism about global growth that has benefited shares across the region.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was steady near their highest since late 2007, while South Korea .KS11 was just off a record top.

Japan's Nikkei .N225 added 0.2 percent and was trying hard to string together a 12th straight session of gains.

An opinion poll by Kyodo showed Japanese Prime Minister Shinzo Abe’s coalition was on track for a roughly two-thirds majority in Sunday’s general election there.

The bullish mood on equities was evident in the latest fund manager survey from BofA Merrill Lynch.

“For the first time in six years, Goldilocks trumps secular stagnation, with a record high 48 percent of investors surveyed expecting above-trend economic growth and below-trend inflation,” the survey found.

BEARISH ON BONDS

Investors were bearish on bonds with 82 percent of those surveyed expecting yields to rise in the next 12 months and a record 85 percent believing bonds were overvalued.

Yields on two-year U.S. Treasury paper have hit their highest since November 2008 amid speculation President Trump could chose a more hawkish leader to replace Federal Reserve Chair Janet Yellen.


The shift upward in yields lifted the dollar to a one-week top against a basket of currencies and nudged it up 0.1 percent on the yen to 112.29

The euro was holding at $1.1765, still some way above the recent low and major chart support at $1.1667.

Dealers were wary ahead of speeches by several policymakers from the European Central Bank due later on Wednesday, which includes President Mario Draghi.

The biggest mover had been Mexico's peso which boasted its biggest rise in over four months after trade ministers from the United States, Canada and Mexico extended the deadline on a contentious round of talks.

On Wall Street, the Dow had ended Tuesday up a slim 0.18 percent having briefly broken above the 23,000-point mark for the first time on Tuesday, while the S&P 500 .SPX gained 0.07 percent and the Nasdaq  dipped 0.01 percent.

Shares in IBM jumped nearly 5 percent after hours as a shift to newer businesses such as cloud and security services helped it beat Wall Street’s quarterly revenue estimates.

In commodity markets, talk of higher U.S. interest rates kept gold pinned down at XAU= $1,284.81 an ounce.

Oil prices got a boost from a drop in U.S. crude inventories and concerns that tensions in the Middle East could disrupt supplies. Brent crude futures LCOc1 firmed 34 cents to $58.22 per barrel, while U.S. crude gained 18 cents to $52.06.

Reference: Wayne Cole