Friday, 23 March 2018

Global stocks tumble, bonds and yen gain as trade war fears drive rush to safety

TOKYO (Reuters) - The rumblings of a global trade war shook stock and currency markets on Friday after U.S. President Donald Trump announced long-promised tariffs on Chinese goods and Beijing pledged to fight any such war to the end.

Spreadbetters expected European stocks to open lower, with Britain's FTSE losing 0.9 percent, Germany's DAX falling 1.6 percent and France's CAC  shedding 1.5 percent.

S&P futures were down 0.6 percent, suggesting a weaker open on Wall Street later in the day.

Trump signed a presidential memorandum on Thursday that could impose tariffs on up to $60 billion of imports from China, although they have a 30-day consultation period, raising the chance that final measures could be watered down.

Investors fear that the U.S. measures could escalate into a trade war, with potentially dire consequences for the global economy.

Beijing urged the United States on Friday to “pull back from the brink”.

“China doesn’t hope to be in a trade war, but is not afraid of engaging in one,” the Chinese commerce ministry said in a statement.

China unveiled its own plans on Friday to impose tariffs on up to $3 billion of U.S. imports in retaliation against U.S. tariffs on Chinese steel and aluminium products.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 2.5 percent as stocks across the region dropped. For the week, the index recoiled over 4 percent.

Shanghai shares were down 3.8 percent.

“The economic impact on both China and the U.S. will be determined by what form the tariffs end up taking. The effects are likely to be felt more strongly in the U.S. and will increase both consumer and producer prices,” wrote Hannah Anderson, global market strategist at J.P. Morgan Asset Management.

“The equity market will bear the brunt of the market reaction. Most impacted will be the U.S., Korea, and Taiwan as companies domiciled in these markets make up a significant portion of the global production chain of Chinese exports.”

Japan's Nikkei  dropped 4.5 percent.

Australian stocks lost 1.9 percent, Hong Kong's Hang Seng  was down 3.1 percent, Taiwan shares . slid 1.6 percent and South Korea's KOSPI retreated almost 3 percent.

“A possible trade war between the United States and China is especially serious for the South Korean economy as it could directly or indirectly affect the country’s trade with them as well,” said Se Sang-young, an analyst at Kiwoom Securities.

Setting a downbeat tone for Asia, the Dow .DJI on Thursday shed 2.9 percent, the S&P 500 dropped 2.5 percent and the Nasdaq  fell 2.4 percent.

As equities took a beating, the yen, often sought in times of market turmoil, rallied against the dollar.

The greenback fell roughly 0.5 percent to as low as 104.635 yen JPY=, its weakest since November 2016. The dollar was down more than 1 percent on the week.

“In the longer run, protectionist policies touted by the United States could be watered down, in turn limiting the negative effect on trade and the global economy,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo, referring to the U.S. decision to exempt some countries from steel and aluminium tariffs.

“But until the United States makes such concessions, global stocks will be under pressure and the yen will appreciate, especially if China decides to confront the U.S. measures.”

The euro was 0.3 percent higher at $1.2334 EUR=.

The dollar index against a basket of six major currencies slipped 0.3 percent to 89.615.
It has lost roughly 0.7 percent this week, weighed down by a steady decline in U.S. Treasury yields.

Yield on the benchmark 10-year Treasury fell 7.5 basis points overnight as bond prices rose on jitters gripping the broader financial markets.

The yield fell further on Friday to 2.792 percent, its lowest in six weeks.

The 10-year Japanese government bond yield dipped to a four-month trough of 0.020 percent.

In commodities, oil prices recouped overnight losses after Saudi Arabia said that OPEC and Russian-led production curbs introduced in 2017 will need to be extended into 2019.

U.S. crude futures  were up 1.1 percent at $64.99 per barrel after losing 1.3 percent on Thursday and Brent gained 0.9 percent to $69.53.

Safe-haven spot gold XAU= rose to $1,339.12 an ounce, highest since March 7.

Other commodities did not fare as well amid the trade war fears, with copper on the London Metal Exchange falling to a three-month low of $6,628.00 per tonne.

Iron ore futures on China’s Dalian Commodity Exchange lost more than 5 percent.

Reporting by Shinichi Saoshiro

Dollar hovers above one-month low as market digests rate hike; euro struggles

LONDON (Reuters) - The dollar held near a one-month low against a basket of currencies on Thursday as investors digested the implications of a generally dovish outlook from the U.S. Federal Reserve after it raised interest rates by a quarter point as widely expected.

While markets were quick to interpret the Fed’s forecasts for inflation and growth as signalling that interest rates would rise less quickly than previously expected, some said a tightening in general dollar funding conditions could be dollar positive in the short term.

“We were negative on the dollar last year for a variety of reasons but the latest concerns about the dollar liquidity conditions and the trade war headlines makes us a bit more constructive on the dollar,” said Hans Redeker, global head of currency strategy at Morgan Stanley in London.

While the outbreak of a global trade war is generally seen bad for the greenback, some market watchers say the traders could turn to the global reserve currency for security if the trade skirmish morphs into a broad market selloff.

Though the dollar was 0.1 percent lower against a basket of currencies at 89.710, it was still holding above a one-month low of 89.396 hit in early London trades.

The Fed raised U.S. interest rates by 25 basis points to 1.75 percent on Wednesday and signalled two more hikes for 2018, but dollar bulls were expecting a total of four rate hikes in 2018.

Escalating rhetoric on trade also put pressure on the dollar. China accused the United States of “repeatedly abusing” trade practices as it braced for U.S. tariffs worth as much as $60 billion on Chinese imports, which were due to be announced on Thursday.

A global benchmark for banks to borrow dollars for three months on Thursday rose to its highest level since late 2008, a day after the Federal Reserve as expected lifted key short-term borrowing costs by a quarter point.

Analysts said a rise in dollar funding costs might push the dollar higher if tighter financial conditions translate into a global rush to secure funds.

Its losses were more pronounced against the Japanese yen, against which it was down 0.3 percent at 105.69 yen.

“The Fed hiking rates three times, and even four times, this year won’t be too big of a surprise for the currency market, which fully expects the Fed to continue normalising policy,” said Shin Kadota, senior strategist at Barclays in Tokyo.

“On the other hand, there is still room for the market to price in other central banks normalising policy. The dollar needs a big surprise to be jolted higher, something the Fed meeting did not provide,” Kadota said.

A Bank of England meeting later on Thursday is now in focus, with market participants keeping a close eye on the central bank’s policy views, after robust British wage data cemented expectations that the central bank will raise rates as early as May.

The pound extended its overnight rise to hit a near seven-week high of $1.4171.

Elsewhere, the euro found itself on the back foot after surveys showed euro zone businesses were feeling the heat from a strong currency.

The single currency was trading 0.2 percent lower at $1.2319.

Preliminary purchasing managers index numbers for March showed euro zone businesses had their slowest growth in more than a year as new business took another hit from a stubbornly strong euro.

Reporting by Saikat Chatterjee

Thursday, 22 March 2018

Dollar sags on Fed's rate hike views, pound hits seven-week high before BoE

TOKYO (Reuters) - The dollar struggled against its peers on Thursday after the Federal Reserve indicated it was more likely to raise interest rate three times in 2018 instead of the four that some currency bulls had hoped for.

The Fed raised rates by 25 basis points to 1.75 percent on Wednesday and signalled two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening.

The U.S. central bank also projected three hikes in 2019.

The greenback slipped, however, with investors who had bet on the Fed signalling four rate increases in 2018 instead of the widely anticipated three seen to have taken profits after the announcement.

The dollar index against a basket of six major currencies was 0.3 percent lower at 89.528, after dropping as much as 0.7 percent overnight.

“The Fed hiking rates three times, and even four times, this year won’t be too big of a surprise for the currency market, which fully expects the Fed to continue normalising policy,” said Shin Kadota, senior strategist at Barclays in Tokyo.

“On the other hand, there is still room for the market to price in other central banks normalising policy. The dollar needs a big surprise to be jolted higher, something the Fed meeting did not provide,” Kadota said.

The Bank of England’s meeting later on Thursday is now in focus, with market participants keeping a close eye on the central bank’s policy views after robust British wage data cemented expectations that the central bank will raise rates as early as May.

The pound extended its overnight rally and rose to a near seven-week high of $1.4171.

“Brexit negotiations have moved forward and this is expected to provide the BoE with a lift towards raising rates,” said Takahiro Otsuka, market economist at Mitsubishi UFJ Morgan Stanley Securities. “Today’s policy meeting will provide an opportunity to see if the BoE is prepared to tighten as early as May,”

The European Union on Monday said it had agreed to grant London a status-quo transition after it exits the bloc next year, until the end of 2020.

The dollar was down 0.3 percent at 105.700 yen after slipping about 0.5 percent the previous day.

The euro added 0.2 percent to $1.2363 following a gain of 0.8 percent overnight.

The Australian dollar, which rallied more than 1 percent overnight against a flagging greenback, was down 0.3 percent at $0.7744 .

Reporting by Shinichi Saoshiro

Dollar on defensive after Fed, trade worries hit Asian shares

TOKYO (Reuters) - The U.S. dollar slipped on Thursday after the Federal Reserve did not signal a faster pace of rate hikes this year while worries about a coming announcement on tariffs from U.S. President Donald Trump dented Asian shares.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.1 percent, erasing earlier gains of up to 0.7 pct, which were led by South Korea .KS11 and Taiwan .TWII hitting six-week highs. Japan's Nikkei .N225 gained 0.4 percent.

Wall Street stock indexes ended the day lower, with the S&P 500 losing 0.18 percent and the Nasdaq Composite 0.26 percent.

The U.S. Federal Reserve raised interest rates on Wednesday and forecast two more hikes for 2018 in its first policy meeting under Chairman Jerome Powell.

Given that some investors had expected it to project three more rate hikes, the guidance was perceived by some as less hawkish than anticipated, a positive factor for risk assets in general, though analysts noted the Fed was upbeat on the economy overall.

Fed policymakers notched up rate projections for 2019 and 2020 and also raised the estimated longer-term “neutral” interest rate a touch, suggesting the current tightening cycle could go on longer than previously thought.

“They also forecast three hikes next year and two more in 2020 and clearly revised up the growth forecast as well,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

“So the picture looks different when you look at longer-term projections. That explains the complicated reaction by markets. The prospects of continued rate hikes may cap shares,” he added.

The yield on two-year U.S. notes yield slipped back to 2.299 percent from 9 1/2-year high of 2.366 percent hit on Wednesday while the 10-year yield dipped to 2.872 percent after an initial spike to 2.936 percent.

That pushed the U.S. dollar lower in the currency market, with the dollar index testing this month’s low after suffering its biggest fall in two months on Wednesday.

The euro gained 0.2 percent to $1.2363, extending its recovery from a near three-week low of $1.2240 touched earlier in the week.

The dollar shed 0.4 percent to 105.66 yen, turning down on the week to edge closer to its 16-month low of 105.24 on March 2.

The British pound hit a 1 1/2-month high of $1.4171, building on Wednesday’s one-percent gains.

Strong UK wage data published on Wednesday cemented expectations that the Bank of England will likely signal a May rate hike later in the day at a monetary policy meeting.

Bucking the trend, the Hong Kong dollar HKD=D4 hit a 33-year low of 7.8469 per U.S. dollar, inching closer to the lower end of the Hong Kong Monetary Authority's targeted trading band of 7.75-7.85.

But most market participants do not see this bout of weakness as a threat or attack on Hong Kong’s dollar peg, unlike instances in the past.

With the Fed meeting over, investors are watching Trump, who is due to sign a memo on imposing tariffs on Chinese imports at 1630 GMT on Thursday.

Concerns about a trade war between the world’s two largest economies have kept many investors on guard.

U.S. Trade Representative Robert Lighthizer said on Wednesday the tariffs would target China’s high-technology sector and could also include restrictions on Chinese investments in the United States.

Investors worry such a move could trigger countermeasures by China, possibly causing a vicious cycle of escalating retaliation.

Shares on China's exchanges were lower, the with Shanghai Composite Index slipping 0.8 percent to two-week lows.

“China’s equity market is relatively domestic. We estimate that on average more than 80 percent of revenues are generated in China while only a marginal share comes from the U.S. Still, there would be first-order casualties if trade tensions escalated. In the front line would be firms with significant exposure to the US, mostly in the tech and consumer sectors,” wrote analysts at Societe Generale.

In the energy market, oil prices stood near six-week highs and closed in on a 3-year peak set in late January, helped by a surprise decline in U.S. inventories, strong compliance on OPEC production cuts, and persistent concerns on the nuclear pact with Iran.

U.S. West Texas Intermediate crude futures rose to as high as $65.74 per barrel, not far from its January peak of $66.66, having gained almost five percent so far this week.

In contrast, copper fell to three-month low of $6,702 per tonne the previous day before bouncing back to $6,817.

Reporting by Hideyuki Sano

Wednesday, 21 March 2018

Sterling jumps on strong jobs data; BOE eyed

LONDON (Reuters) - Sterling hit the day’s high after data on Wednesday showed that British workers’ overall pay rose at the fastest pace in nearly 2-1/2 years over the three months to January, boosting chances that the Bank of England will raise interest rates in May.

The Office for National Statistics also said the number of people in work grew by 168,000 in the three months to January. A Reuters poll of economists had pointed to a much smaller rise of 84,000.

“Today’s data may well give policymakers the green light to hike rates again in May,” said James Smith, an economist at ING.

“Now that a deal has been struck on the transition period, which helps cement the Bank’s assumption that the road to Brexit will be ‘smooth’ (for now at least), there are few other obvious barriers to a near-term hike.”

Sterling extended gains after the data to hit the day’s highs at $1.4066, up nearly half a percent. Before the data, sterling was up nearly a quarter of a percent on the day thanks to a struggling dollar.

Bond markets give a 70 percent probability of a rate hike by May and an 84 percent chance of two rate hikes by the end of the year, according to Thomson Reuters data.

Against the euro, sterling also hit the day’s highs and traded up 0.25 percent at 87.25 pence. Britain’s blue chip FTSE 100 index extended losses very slightly, last down 0.4 percent.

British government bond futures fell more than 30 ticks after the data, pushing two-year government bond yields 5 basis points higher on the day to 0.936 percent, their highest since May 2011, according to Tradeweb data.

With long positions in sterling whittled down in recent weeks after hitting a three-year high in late January, more upside room for the British currency is likely if the Bank of England adopts a confident stance at Thursday’s meeting.

Bank of America Merrill Lynch strategists said with May rate hike expectations firmly embedded in the market, any selloff in sterling would present a buying opportunity.

Reporting by Saikat Chatterjee

EU demands 'unilateral' power over UK banks' access after Brexit

BRUSSELS (Reuters) - European Union governments will insist on their “unilateral” control over whether and how British banks can operate in the bloc after Brexit, ministers will agree on Tuesday ahead of their leaders’ summit on Friday.

According to a draft seen by Reuters, ministers preparing the EU’s joint negotiating stance for talks with London on their future ties will say that British financial services companies can benefit from “reviewed and improved equivalence mechanisms”.

That underlines that the City of London’s hopes to continue a much closer relationship similar to their “passport” rights to operate across the bloc will not be met by EU negotiators.

The two sides will start talks on the future trading relationship next month, once EU leaders endorse the negotiating guidelines at Friday’s summit.

The guidelines include language underlining that access for British-registered firms will be subject to ensuring financial stability and the existing legal structures of the EU. They also say the two sides should aim for free trade in services.

The text makes clear that would work on existing “equivalence” rules for Britain’s big financial services industry, allowing non-EU firms to operate in certain sectors where their supervision regime is judged by the EU to be equivalent to that of the bloc itself.

In a sign of how the move to a second phase of talks dealing with future trade will test the unity seen among the other 27 states so far, Luxembourg, home to operations for many London-based fund operators, has been pressing for the EU to be generous to British-registered firms. It argues that hurting London risks driving European business to New York or Asia.

Germany and, especially, France hope, however, to attract British firms away to Frankfurt or Paris and so want to limit London’s access.

The result, diplomats said, was the compromise text which offers “improved” equivalence — the “improved” is largely meaningless, though the note refers to the fact that the EU is reviewing its equivalence rules for a range of countries.

But ramming home a determination to keep financial services rules under its own control, not sharing with London, the note states: “Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union.”

Reporting by Jan Strupczewski

Powell's Fed likely to raise rates, may upgrade 2018 outlook

WASHINGTON (Reuters) - The Federal Reserve is expected to raise interest rates at its first policy meeting under Chairman Jerome Powell and may signal more hikes are coming in response to tax cuts and government spending that could further stoke a robust U.S. economy.

The U.S. central bank projected late last year that it would lift rates three times in 2018, but some investors believe the fiscal stimulus and recent hints of inflation pressures will push policymakers to add an additional increase to the mix.

The Fed is scheduled to issue its latest policy statement at 2 p.m. EDT (1800 GMT). Powell is due to hold a press conference half an hour later.

Fed officials have speculated in recent weeks that the stimulus could drive more Americans into an already tight labor market and lift inflation to the central bank’s 2 percent target, or much above that level if the economy gets too hot.

Yet analysts are split over whether the Fed, which is wary of an early misstep under its new leadership, will raise policy tightening expectations until more price pressures are clearly evident, especially given outside risks to the economy such as a possible global trade war.

“A prudent institution would probably give more weight to the facts, at least for the moment,” Roberto Perli, a former Fed economist who is now a partner at Cornerstone Macro, wrote in a note predicting the Fed would stick with three projected rate increases for this year.

The Fed’s drive to stimulate the world’s largest economy in the wake of the 2007-2009 financial crisis and recession is drawing to a close. It raised its benchmark overnight lending rate three times last year, to a range of 1.25 to 1.50 percent, as joblessness fell and economic growth accelerated. It is expected to raise rates by another 25 basis points on Wednesday.

With futures markets anticipating another increase in June, Powell's Fed could leave its rate outlook unchanged until then to see how the economy absorbs the $1.8 trillion in stimulus expected from the Trump administration tax cuts and planned spending. (Graphic of Fed forecasts:

While recent home sales and retail spending data have been on the weak side, the overall economic picture has brightened this year. Inflation has strengthened after remaining below the Fed’s target for more than five years, and there have been more hints of wage gains.

The central bank is expected on Wednesday to boost its economic growth forecasts for the next few years, and could project that the unemployment rate will fall well below the current 4.1 percent, which is seen as a low but stable level.

The blockbuster U.S. jobs report for February could further convince Powell and his colleagues that the Fed’s stated “gradual” rate hike path could carry on longer than previously thought. A sign of this would be a rise in the Fed’s longer-term, or neutral, expected policy rate, currently at 2.8 percent.

Powell, who took over from former Fed chief Janet Yellen in early February, triggered a brief global market selloff when he told U.S. lawmakers late last month that he had grown more confident in the economic outlook. Yet worries over a new hawkish central bank are likely overblown given Powell’s cautious, consensus-building approach.

Seven of the 15 Fed policymakers who will update their forecasts on Wednesday have recently indicated the fiscal stimulus could boost their expectations for the economy, rate hikes, or for both, according to an analysis of public statements.

New York Fed President William Dudley, one of the most influential policymakers, said four rate increases this year would still be considered “gradual,” noting that fiscal policy is turning “quite stimulative.”

The comments suggested a shift “towards a potentially faster pace of tightening ... particularly with tax cuts now implemented and with an additional fiscal boost from federal spending arriving this year,” Jan Hatzius, chief U.S. economist at Goldman Sachs, wrote in a note predicting that the Fed would signal on Wednesday that rates will rise four times this year.

Reporting by Jonathan Spicer