Friday, 18 May 2018

Asia stocks steady as markets eye U.S.-China trade talks, dollar elevated

TOKYO (Reuters) - Asian stocks were steady on Friday amid caution over developments in U.S.-China trade negotiations, while the dollar perched near a five-month peak after the benchmark U.S. Treasury yield hit its highest in seven years.

Spreadbetters expected European stocks to open mixed, with Britain’s FTSE dipping 0.1 percent, Germany’s DAX rising 0.13 percent and France’s CAC little changed.

MSCI’s broadest index of Asia-Pacific shares outside Japan was little changed. The index was headed for a 1 percent loss this week.

Hong Kong’s Hang Seng rose 0.17 percent and Shanghai climbed 0.3 percent as some investors bet Beijing and Washington will reach a deal in the latest round of trade talks.

Japan’s Nikkei rose 0.35 percent, South Korea’s KOSPI was up 0.3 percent and Australian stocks dipped 0.2 percent.

Wall Street ended slightly lower on Thursday as investors grappled with U.S.-China trade tensions after U.S. President Donald Trump said that China “has become very spoiled on trade”.

But helping ease some of the tension, Beijing has offered Trump a package of proposed purchases of American goods and other measures aimed at reducing the U.S. trade deficit with China by some $200 billion a year, U.S. officials familiar with the proposal said.

A second round of talks between senior Trump administration officials and their Chinese counterparts started on Thursday, focused on cutting China’s U.S. trade surplus and improving intellectual property protections.

“President Trump does not do the actual trade negotiations, which are done by officials from both sides,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.

“China should be well accustomed to Trump’s ways by now. Judging from how the talks are proceeding so far, there is a greater chance of the negotiations ending in some sort of a compromise instead of falling through, and such an outcome would bode well for risk sentiment,” he said.

In currencies, the dollar index against a basket of six major currencies was steady at 93.471 after rising to a five-month peak of 93.632 on Thursday.

The index has gained about 1 percent this week, buoyed by the surge in U.S. Treasury yields, with the 10-year U.S. Treasury note yield hitting a seven-year peak of 3.128 percent.

The euro was up 0.1 percent at $1.1805, but not far off a five-month trough of $1.1763 brushed on Wednesday. The currency has fallen nearly 1.2 percent this week, largely pressured by Italian political uncertainty.

Reports this week that Italian populist parties likely to form the country’s next government may ask the European Central Bank for debt forgiveness have raised concerns about Italy abandoning fiscal discipline.

The dollar extended an overnight rally and rose to 111.005 yen, its highest since late January. The greenback has gained about 1.4 percent against its Japanese peer this week.

Emerging market currencies have also lost ground against the dollar this week as the rise in U.S. yields showed little signs of slowing.

The Turkish lira fell to a record low against the dollar this week, the Brazilian real plumbed a two-year low while Mexico’s peso has shed more than 5 percent this month.

A retreat by Indonesia’s rupiah to a 2-1/2-year low prompted the central bank to tighten monetary policy on Thursday for the first time since 2014 to support the currency.

“Perhaps the most unnerving aspect of the recent rupiah weakness has been the sheer speed in which the currency markets have turned against some emerging market countries,” wrote Sean Darby, chief global equity strategist at Jefferies.

“However, policy credibility is the most important tool and the fact that the Indonesian central bank has begun to tighten ought to alleviate some of the FX pressures.”

In commodities, Brent crude oil futures were 16 cents higher at $79.46 a barrel after rising to $80.50 on Thursday, their highest since November 2014.

Brent has risen 3 percent this week and is headed for a sixth week of gains.

A rapid slide in oil supply from Venezuela, concern that U.S. sanctions will disrupt exports from Iran, and falling global inventories have all combined to push oil prices up nearly 20 percent in 2018.

Inflation concerns, strong U.S. economic indicators and worries over increasing debt supply have pushed Treasury yields higher this week.

Reporting by Shinichi Saoshiro

Dollar hits four-month high vs. yen, buoyed by rising U.S. yields

SINGAPORE (Reuters) - The dollar edged higher against the yen on Friday and set a fresh four-month high, buoyed by a further rise in U.S. Treasury yields that suggests a more upbeat outlook for the world’s largest economy and possibly more rate hikes.

U.S. benchmark 10-year yields hit a high of 3.128 percent in early Asian trade on Friday, the highest in nearly seven years.

The U.S. 10-year bond yield has climbed about 15 basis points this week, putting it on track for its biggest weekly rise in more than three months.

The rising yields reflect continued optimism about the U.S. economy and expectations of growing price pressures, reinforcing expectations that the Federal Reserve would raise borrowing rates at least two more times this year and lifting the greenback.

“Moves in U.S. yields remain the focus. If they rise further the dollar could strengthen on the back of that and pull the dollar higher against the yen,” said Shinichiro Kadota, senior strategist at Barclays in Tokyo.

The dollar touched a high of 111.005 yen, its strongest level since Jan. 23, and last changed hands at 110.92 yen, up 0.1 percent on the day.

The dollar’s index against a basket of six major currencies stood at 93.467, trading within sight of a five-month high of 93.632 set earlier this week.

The euro inched up 0.1 percent to $1.1806. On Wednesday it had set a five-month low of $1.1763 as it came under pressure on concerns about the demands of populist parties likely to form Italy’s next government.

Italian markets had been jolted on Wednesday by a draft coalition document showing plans to ask the European Central Bank to forgive 250 billion euros in debt, and create procedures to allow countries to exit the euro.

But broader Italian markets held up better on Thursday as investors played down the broader impact on euro zone political stability and questioned whether the Italian parties would really follow through on such plans.

On Thursday, the far-right League and 5-Star Movement agreed the basis for a governing accord that would slash taxes and ramp up welfare spending.

A 5-Star source said the programme contained no reference to a possible exit from the euro.

The euro has slumped six cents from more than $1.24 in about a month, after a huge dollar rally. Investors are betting U.S. interest rates will need to rise further, while other central banks are postponing monetary tightening.

That has forced investors who took big positions against the dollar anticipating a fall in 2018 to unwind and cover their positions, pushing the greenback even higher.

The dollar will probably stay on solid footing against the yen and the euro in the near term, with U.S. economic data looking more upbeat compared to the recent indicators out of the euro zone and Japan, said Tan Teck Leng, forex analyst for UBS Wealth Management in Singapore.

In order for the dollar’s rally to lose momentum and start reversing, there needs to be an improvement in euro zone and Japanese economic data, Tan said.

“We need the data in Europe, in Japan to recover, because in the year to date, data disappointment was happening in Europe and Japan but in the U.S. it was a different picture so there was the divergence,” Tan said.

Most emerging market currencies continued to wilt against the surging dollar.

The Indonesian rupiah weakened half a percent to 14,115, its lowest in more than 2-1/2 years and shrugging off a rate rise by the central bank late on Thursday.

Reporting by Masayuki Kitano

Thursday, 17 May 2018

Sterling rallies on EU customs union report

LONDON (Reuters) - Sterling briefly rallied more than half a percent versus the dollar on Thursday after a media report that Britain would tell Brussels it was prepared to stay in the European Union’s customs union beyond a transitional arrangement.

British cabinet ministers are deadlocked over a future deal with the block and the Telegraph newspaper said Britain would tell Brussels it was prepared to stay in the customs union beyond 2021, sending the pound to a two-day high.

Sterling later relinquished most of its gains however. Prime Minister Theresa May denied she was “climbing down” from her position and said Britain would be leaving the EU customs union as she has previously outlined.

At GMT 0820 sterling was up 0.2 percent at $1.3525 and traded up 0.1 percent versus the euro at 87.37 pence, close to a three-week high of 87.15 hit earlier in the session.

The pound’s jump suggests the currency remains vulnerable to Brexit negotiations that have dominated British politics since a 2016 referendum, even as Britain’s economy has shown signs of strengthening.

“[This] again proves that sterling benefits the closer the Brexit scenario under discussion resembles the status quo,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

Riechelt said that the risk of a hard brexit remained, though, and that the pound could face downward pressure because the EU would likely meet the proposal with scepticism.

Britain is due to leave the EU in March next year although it has secured a transitional arrangement to keep its trade ties with the bloc unchanged until the end of 2020, as long as a permanent deal can also be reached in the coming months.

Cabinet ministers have discussed keeping the UK tied to EU customs rules for longer as a way of avoiding a hard Irish border.

Other analysts downplayed the importance of the customs union discussions for the pound.

“I wasn’t particularly excited about the news since most investors have been expecting a customs union change for a while,” said Jordan Rochester, FX strategist at Nomura.

He said that data on the UK economy and the Bank of England’s path for monetary tightening would dictate the fortunes of the currency.

Reference: Reuters

Asian shares inch higher; euro tries to shake off Italian political risk

SINGAPORE (Reuters) - Asian shares edged higher on Thursday while the euro gained some respite after hitting five-month lows a day earlier.

The common currency slumped on Wednesday following a report that Italian populist parties trying to form a coalition government could ask the European Central Bank to forgive 250 billion euros of Italian debt.

In equity markets, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1 percent, while Japan’s Nikkei gained 0.7 percent.

The gains in Asian shares came after U.S. equities advanced on Wednesday, led by retail and technology shares, even as a rise in U.S. 10-year Treasury yields to an almost seven-year high suggested more competition for equities.

“In general, Asian equities are buffered from rising U.S. yields by the constructive tone of the U.S.-China trade talks as well as strong earnings numbers,” said Heng Koon How, head of markets strategy for UOB in Singapore.

The United States and China start trade talks on Thursday intended to avert a damaging tariff war, with the White House’s harshest China critic relegated to a supporting role, senior Trump administration officials said on Wednesday.

Shares of Chinese tech giant Tencent Holdings Ltd rose 5.2 percent in Hong Kong, having opened the day up 7 percent after it reported first-quarter results on Wednesday that were better than expected.

In currency markets, the euro rose 0.2 percent to $1.1825, regaining some composure after having set a five-month low of $1.1763 on Wednesday.

Worries about political risks jolted Italian markets and pressured the euro following reports that Italy’s anti-establishment 5-Star Movement and anti-immigrant League may ask the European Central Bank to forgive 250 billion euros of debt as the parties worked to draft a coalition program.

That was enough to spook Italian markets, even though the League’s economic spokesman told Reuters that debt cancellation was never in an official draft of a government program..

The two populist parties have been holding talks aimed at forming a coalition government and ending 10 weeks of stalemate following an inconclusive election on March 4.

On Wednesday, Italian stocks tumbled 2.3 percent while Italy’s 10-year bond yield jumped nearly 19 basis points to 2.13 percent.

Although Italian bond yields jumped on Wednesday, the move wasn’t out of line with the recent rises in long-term bond yields seen globally, said UOB’s Heng.

Yields on 10-year U.S. Treasuries hit 3.10 percent on Wednesday for the first time since July 2011, continuing to weigh on stocks as investors considered whether U.S. government bonds might be more attractive than riskier equities.

The U.S. 10-year Treasury yield set a fresh seven-year high of 3.108 percent in Asian trade on Thursday. It last stood near 3.104 percent.

The rises in U.S. bond yields have helped buoy the dollar, which has gained 1.5 percent against a basket of six major currencies so far in May.

“If the market continues to trade off U.S. yields and diverging economic data between the U.S. and EU, it’s hard to argue against the current direction in yields or the dollar,” Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said in a note.

“On the U.S. economic data front, the consumer remains the economy’s backbone, and if this robust trend in the retail space continues to build, factor in a bit of wage growth pressure and the U.S. dollar will continue to move higher on the back of higher yields,” Innes added.

U.S. bond yields have risen after data this week showed a solid rise in U.S. retail sales, suggesting the U.S. economy is on a stronger footing in the second quarter.

The dollar index eased 0.2 percent to 93.187. On Wednesday it touched a five-month high of 93.632.

Oil prices firmed on Thursday, with Brent crude creeping ever closer to $80 per barrel, a level not seen since November 2014, as supplies tighten while demand remains strong.

Brent crude futures gained 0.2 percent to $79.40 a barrel.

Reporting by Masayuki Kitano

Wednesday, 16 May 2018

Asian shares edge down as U.S. yields climb.

SHANGHAI/TOKYO (Reuters) - Asian stock markets dipped on Wednesday after Pyongyang abruptly called off talks with Seoul, throwing a U.S.-North Korean summit into doubt, while surging bond yields revived worries about faster U.S. interest rate hikes that could curb global demand.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.1 percent as Pyongyang’s move appeared to mark a break in months of warming ties between North and South Korea and with Washington.

European shares looked set to open flat to marginally higher on Wednesday and U.S. S&P futures ESc1 were little changed.

Financial spread-betters expect London's FTSE to open 3 points higher at 7,725, Frankfurt's DAX to open 19 points higher at 12,989 and Paris' CAC to open unchanged at 5,533.

A cancellation of the June 12 summit in Singapore could see tensions on the Korean peninsula flare again as investors worry about China-U.S. trade tensions and the sustainability of global economic growth.

“This will weigh on the Korean reconstruction beneficiaries that have had a strong run on peace and even reunification hopes recently,” JPMorgan analysts wrote in a note.

“The broader risk for the region if talks do break down is that Trump no longer feels the need to keep China on side and could escalate trade tensions again.”

Strong U.S. retail sales and factory data on Tuesday pushed the U.S. 10-year yield through a key level to hit 3.095 percent, its highest since July 2011, raising worries about higher borrowing costs for companies worldwide.

The 10-year yield was last at 3.071 percent.

The rise in yields hurt U.S. share markets on concerns it would undercut stock valuations.

The Dow Jones Industrial Average fell 193.00 points, or 0.78 percent, to 24,706.41, the S&P 500 lost 18.68 points, or 0.68 percent, to 2,711.45 and the Nasdaq Composite dropped 59.69 points, or 0.81 percent, to 7,351.63.

Elsewhere in Asia, Japan's Nikkei slid 0.4 percent, while South Korea's KOSPI struggled for traction.

Stocks in China dipped 0.3 percent as traders awaited news from a second round of Sino-U.S. trade talks in Washington this week, with both sides believed to be still far apart. But Australian stocks bucked the trend and advanced 0.2 percent.

The strong U.S. data underpinned the dollar in currency markets.

The U.S. dollar index, which tracks the greenback against a basket of six major rivals, hit a 2018 high of 93.46 on Tuesday and last stood at 93.22.

The euro fell to as low as $1.1814 EUR=, its lowest level in five months.

The dollar held firm at 110.24 yen having hit a near four-month high of 110.45 yen JPY= on Tuesday.

The yen largely shrugged off data that showed Japan’s economy shrank more than expected in the January-March quarter.

“U.S. retail data assured that the world is still in a synchronized global growth. If U.S. retail had been a disappointment, the market would have taken Japan’s GDP more negatively,” said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.

High-yielding Asian currencies were particularly vulnerable to higher U.S. yields, which could prompt investors to shift funds out of emerging markets.

The Indian rupee unexpectedly gained 0.5 percent on suspected currency market intervention by the central bank after hitting a 16-month closing low of 68.15 per dollar on Tuesday.

The South Korean won was steadier but the country's bond yields rose to the highest level since late 2014.

Some market participants think emerging market assets would be better placed than they were in the past, when hints the U.S. Fed would taper its quantitative easing knocked their prices.

“What we see today is a reallocation to the U.S. because of a strong U.S. economy. I don’t expect panic selling in emerging markets for now,” said Daiwa’s Yamamoto.

He also said he does not see the U.S. 10-year yield rising further towards 3.5 percent given the Fed’s estimate of neutral U.S. interest rates is much lower.

San Francisco Federal Reserve President John Williams, who is about to assume a vice chairmanship as head of the New York Fed, said on Tuesday that the neutral rate remained around 2.5 percent.

In commodities markets, gold slightly rebounded after hitting a 4 1/2-month low the previous day on a strong dollar.

It stood at $1,294 per ounce XAU=, off Tuesday’s low of $1,289.30.

Crude oil prices remained near recent highs amid concerns U.S. sanctions on Iran may restrict crude exports from a major producer.

U.S. light crude was 0.4 percent lower at $71.06 after reaching $71.92 on Tuesday, its highest level since November 2014.

Brent crude oil traded at $78.21 a barrel, down 0.3 percent. On Tuesday, it reached an intraday peak of $79.47 a barrel, its highest since November 2014.

Reporting by Andrew Galbraith and Tomo Uetake

Dollar near 5-month peak after benchmark Treasury yield vaults above 3 percent

TOKYO (Reuters) - The dollar hovered near a five-month high against a group of major currencies on Wednesday, as a surge in the benchmark 10-year Treasury yield above 3 percent reignited a rally that had lost steam last week.

The dollar index versus a basket of six major peers stood at 93.270 after rallying to 93.457 overnight, its highest since Dec. 22. It was still 0.05 percent higher than Tuesday.

The dollar has gained since mid-April as easing tensions in the Korean Peninsula and moves by China and the United States to avoid a full-blown trade war allowed investors to focus on the yield advantage the United States enjoys over other countries.

The advance stalled last week after weaker-than-expected April U.S. inflation data, but regained traction overnight as strong U.S. consumer spending numbers sent long-term Treasury yields surging to a seven-year peak of 3.095 percent.

The 10-year Treasury yield had hovered around 3 percent since late last month on concerns about rising inflation and a ballooning federal budget gap. But until Tuesday, it was unable to convincingly break above 3 percent.

“The dollar stands to benefit, particularly against the euro, on higher Treasury yields. But against the yen, its advance could stall if the negative impact of higher yields on equities is prolonged,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

The uptick in U.S. yields which unnerved equity markets and sent Wall Street shares significantly lower on Tuesday. The yen’s tends to draw demand in times of market turmoil and investor risk aversion.

“The next focal point is trying to figure out the yield levels which are bearable for equities,” Ishikawa said.

Broader risk sentiment was also dented after North Korea on Wednesday opted to suspend high-level talks with South Korea and said it may reconsider holding a summit with the United States if Washington continues to unilaterally insist on Pyongyang giving up its nuclear program.

“North Korea hardening its stance again at an earlier than expected juncture is a risk that bears watching,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

The euro was 0.05 percent lower at $1.1833 EUR= after brushing $1.1815, its weakest since late December.

The dollar edged down 0.05 percent to 110.285 yen JPY=, having risen to 110.450 overnight, its strongest since Feb. 5.

The yen barely budged after data showed Japan’s economy contracted for the first time in nine quarters during January-March.

The Australian dollar was largely flat at $0.7475 AUD=D4 after sliding 0.7 percent overnight. The New Zealand dollar last traded at $0.6874 after plumbing a five-month trough of $0.6851 NZD=D4.

The pound was a shade weaker at $1.3501 GBP=D3 after slipping to $1.3452 on Tuesday, its lowest since Dec. 29.

Reporting by Shinichi Saoshiro

Tuesday, 15 May 2018

BOJ's Kuroda shifts into lower gear on stimulus policy

TOKYO (Reuters) - As Haruhiko Kuroda walks away from his “shock and awe” stimulus in favour of incremental policy shifts, he is edging ever closer to the approach of his predecessor at the Bank of Japan, a man he once derided for being too cautious.

An actual exit from stimulus does not appear imminent. But central bank policymakers have begun brainstorming ways to raise bond yields from near-zero levels as a first step toward ending crisis-mode policy, sources familiar with the BOJ’s thinking say.

Last month’s decision to drop a deadline for hitting its inflation target was the latest sign the central bank was scaling back Kuroda’s radical monetary experiment.

The move is partially an acknowledgement of the pain prolonged easing is inflicting on banks’ profits. It also gives the Bank of Japan more flexibility on monetary policy, the sources say, which could prove useful if it wants to raise its yield target before inflation reaches its goal of 2 percent.

“It’s back to the old days, when monetary policy was guided by carefully weighing the pros and cons of each step,” one of the sources said, a view echoed by another source.

Policy normalisation will be gradual, with plenty of advance signals to avoid disrupting markets - unlike the “bazooka” stimulus Kuroda deployed five years ago, the sources say.

Reading those signals might not be easy, however, as the central bank will likely keep its signals nuanced, partly to ensure it can back off if markets overreact.

Sources say the signs could be as subtle as a modest upgrade in the bank’s assessment of inflation expectations or stronger warnings on the risks of prolonged easing.

“The trigger for action has become ambiguous as the BOJ puts more weight on factors besides inflation, such as the impact of its policy on the banking system,” a third source said.

Kuroda, under orders from premier Shinzo Abe to lift Japan out of decades of deflation, deployed a huge stimulus programme in 2013, pledging to achieve his 2 percent inflation target in two years.

The idea was a sharp contrast to the approach of his predecessor Masaaki Shirakawa, who was criticised for a drip-feed approach of increasing stimulus incrementally.

But years of money printing have failed to lift inflation, and the days of bold, sweeping policy moves might be over.

“There’s a chance inflation expectations may not heighten smoothly,” Kuroda said last week, a sea change from his comments five years ago that bold action could invigorate price growth.

Kuroda says he still aims to achieve 2 percent inflation as soon as possible. But he has become more open to debating an end to stimulus, saying the central bank would discuss conditions to do so if the inflation target seems achievable.

Some central bankers have warned that the cost of easing was rising and the returns diminishing, a summary of debate at the April rate review showed. The discussion was a sign the bank was preparing markets for a future withdrawal of stimulus.

“Many people in the BOJ have their eyes set on an eventual policy normalisation,” said former board member Takahide Kiuchi, who retains deep insight into the workings of the bank’s policy. “From now on, the BOJ will put more attention to how its policy is affecting the banking system.”

Behind the change is a growing view among politicians and policymakers that staying the course could do more harm than good.

“We shouldn’t continue with unprecedented monetary easing for too long,” said Seiko Noda, a cabinet minister considered one of the contenders to be the next premier, adding that it was clear the central bank’s policy was hurting regional banks.

Mindful of such concerns, the Bank of Japan is brainstorming ways to justify a modest increase in its yield target, so long-term rates could rise and give banks room to profit.

In March, it released an academic paper showing how damage to Japan’s banking system could undercut the effects of stimulus. A month later, the central bank warned of a rise in bank loans to low-profit businesses.

“There may be a point where monetary easing could work to hamper achievement of the price target,” a fourth source said. “Identifying such risks would be key to future BOJ policy.”

That is no easy task, especially for a central bank fixated for so long on an elusive inflation target, analysts say.

“The BOJ wants as much free-hand on future policy as possible, as it’s probably not convinced the cost of maintaining stimulus for years would be manageable,” said Kazuo Momma, a former central bank executive who oversaw monetary policy during his stint there.

“You can’t predict risks,” he added. “But what’s clear is that the longer the BOJ continues its current policy, the bigger the risks become.”

Reporting by Leika Kihara