Wednesday, 23 May 2018

Sterling tumbles after weak UK inflation

LONDON (Reuters) - Sterling slid on Wednesday to a new five-month low after weaker-than-expected UK inflation dented the prospect of the Bank of England (BoE) raising interest rates this year.

The pound had been one of the best-performing currencies in 2018 but it has given up all its gains for the year following a broad rally in the dollar and signs Britain’s economy is slowing.

Data on Wednesday showed annual consumer price inflation cooled to 2.4 percent, its weakest increase in over a year.

That sent sterling tumbling to $1.3305, its lowest since Dec. 15..

Investors priced in a one-in-three chance of the BoE raising borrowing costs in August — the next time it updates its economic forecasts — down from 50/50 earlier this week.

At 1500 GMT the pound was down 0.7 percent to $1.3341 and headed for its biggest daily loss in three weeks.

“All bets are off for an interest rate rise this year,” Fexco Corporate Payments head of dealing David Lamb said.

“If the UK economy continues to stagnate as it did in the first quarter of 2018, the window for raising rates will remain closed,” he said.

Risks around the sort of relationship Britain can agree with the EU for after their divorce have influenced the pound this week.

Britain’s foreign minister Boris Johnson on Tuesday said the country must ditch EU tariff rules as quickly as possible and run its own trade policy, Bloomberg reported.

But the biggest reason for sterling’s fall has been a drastic shift in market expectations for interest rate rises from the Bank of England because of economic weakness.

Consistently weak economic growth figures in early 2018, partly blamed on bad weather, have called into question whether the BoE will tighten monetary policy to curb inflation at all this year.

“It is starting to appear the weaker CPI is more structural and not just because of the bad weather,” Mizuho head of FX hedge fund sales Neil Jones said.

“Brexit uncertainty continues to weigh and may indeed put the BoE on hold throughout the summer and beyond,” he said.

UK gross domestic product figures due out on Friday will also be scoured for clues on monetary policy.

Reporting by Tom Finn

Asian shares pressured as Trump tempers Sino-U.S. trade optimism

TOKYO (Reuters) - Asian shares were mostly weaker on Wednesday with investors cautious after U.S. President Donald Trump tempered optimism over progress made in trade talks between the world's two largest economic powers.MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.3 percent, while Japan's Nikkei lost 1.2 percent to end at a 1-1/2-week low and the Shanghai Composite Index retreated 1.1 percent.

European stock futures suggest major European share indexes .FTSE .GDAXI .FCHI will open about 0.5 percent lower.

On Wall Street, the S&P 500  shed 0.31 percent overnight, losing steam after hitting a two-month high.

Trump said on Tuesday he was not pleased with recent trade talks between the United States and China, souring the improved market sentiment following weekend comments from U.S. Treasury Secretary Steven Mnuchin that the “trade war” is “on hold”.

His remarks followed Beijing’s announcement that it would cut import tariffs for automobiles and car parts.

Trump also floated a plan to fine ZTE Corp and shake up its management as his administration considered rolling back more severe penalties.

“The market probably became overly optimistic on Monday. The reality is the talks are still continuing as they haven’t made headway on various issues, including intellectual property,” said Norihiro Fujito, senior investment analyst at Mitsubishi UFJ Morgan Stanley Securities.

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

“There are many uncertainties in the air, we still don’t know whether U.S.-North Korea summit is possible and scandals continued to drag Prime Minister (Shinzo) Abe’s popularity,” said Yasuo Sakuma at Libra Investments.

Investors fret Abe’s long-running cronyism scandal could attract more attention as the Ministry of Finance is due to release related documents on Thursday.

“Many investors are sitting on the sidelines. Personally, I haven’t done much trading over the past week, after the earnings season. The current price levels are not really attractive. I’m waiting for a 5 percent correction.”

The cautious mood helped to underpin bonds. The 10-year U.S. Treasuries yield stood at 3.050 percent, off Monday’s near seven-year high of 3.128 percent.

As lower U.S. yields sap the appetite for the dollar, the euro traded at $1.1765 EUR=, hovering above Monday's five-month low of $1.1717.

Against the yen the dollar slipped 0.4 percent to 110.49 JPY= from Monday's four-month high of 111.395.

The biggest mover in the currency market was the Turkish lira, which fell more than two percent early on Wednesday to a record low of 4.8450 after rating agencies sounded the alarm on Tuesday over plans by President Tayyip Erdogan to tighten his grip on monetary policy.

The lira has fallen around 15 percent so far this month.

In commodities, oil prices held firm near 3-1/2-year highs on potential supply concerns surrounding Venezuela and Iran.

U.S. West Texas Intermediate crude futures traded little changed at $71.95 a barrel, a 0.4 percent loss. They touched $72.83 a barrel, the highest since November 2014, on Tuesday.

Wall Street slides on trade talk uncertainty
Brent futures were 0.6 percent lower at $79.11 a barrel. Last week, the global benchmark topped $80 for the first time since November 2014.

Bitcoin dropped below $8,000 to five-week lows, entering a downtrend channel on technical charts. The cryptocurrency last traded at $7,913, down 0.9 percent on the day.

Reporting by Hideyuki Sano and Tomo Uetake

Dollar edges up ahead of Fed minutes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Masayuki Kitano

Tuesday, 22 May 2018

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

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

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

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

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

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

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

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

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

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

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

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

“Without it, sterling remains unattractive.”

Reporting by Saikat Chatterjee

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Masayuki Kitano

Asian shares stumble as dollar strengthens, oil surges

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reference: Swati Pandey

Monday, 21 May 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Caroline Valetkevitch

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

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

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

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

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

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

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

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

Concerns over Brexit also continue to dog the pound.

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

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

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

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

Reporting by Tom Finn

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

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

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

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

Japan's Nikkei gained 0.4 percent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reporting by Hideyuki Sano

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

Global stocks sink as soft China data, trade fears weigh

LONDON (Reuters) - World stocks fell on Tuesday as investors digested soft Chinese economic data and a lack of progress in U.S.-China trade talks, while a rise in U.S. borrowing costs supported the dollar.

MSCI’s world equity index, which tracks shares in 47 countries, was down 0.3 percent.

Europe's benchmark Stoxx 600 was 0.1 percent lower while Germany's DAX  shed 0.2 percent as first-quarter economic growth in the country came in lower than expected.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.8 percent.

China reported weaker-than-expected investment and retail sales in April and a drop in home sales, clouding its economic outlook even as policymakers try to navigate debt risks and defuse a heated trade row with the United States.

Mixed messages in U.S.-China trade talks also weighed on sentiment.

The two countries are still “very far apart” on resolving trade frictions, U.S. ambassador to China Terry Branstad said on Tuesday as a second round of high-level talks was set to begin in Washington.

U.S. President Donald Trump drew ire from lawmakers after suggesting he would help Chinese firm ZTE Corp, that flouted U.S. sanctions on trade with Iran and North Korea, with intelligence officials also saying the decision threatens national security.

“Sino-US trade negotiations have provided mixed signals, the White House promising conciliation (over ZTE) then indicating that some form of punishment is still in the cards,” said Mike van Dulken, head of research at Accendo Markets.

In fixed income, the U.S. 10-year bond yield rose above the key level of 3 percent, sending borrowing costs higher in a number of other countries and supporting the dollar.

The 10-year yield was last trading at 3.0226 percent, just off levels not seen since January 2014.

In Europe, the benchmark German bond yield rose 14 basis points to 0.629 percent, with investors also taking note of hawkish commentary from Bank of France Governor Francois Villeroy de Galhau, who said the European Central Bank could soon give guidance on its first rate hike.

“We have this Galhau interview and he was very much pointing to rate hikes after the end of QE (quantitative easing),” said DZ Bank rates strategist Daniel Lenz, explaining the weakness in euro zone debt markets. “And we still have a high oil price and U.S. Treasury yields above 3 percent.”

Against a basket of six major currencies, the dollar index .DXY gained 0.18 percent.

Oil prices were stable on Tuesday as ongoing production cuts by OPEC and looming U.S. sanctions against Iran threatened to tighten the market amid signs of ongoing strong demand.

Brent crude futures, the international benchmark for oil prices, rose to as much as $78.62 per barrel, touching a 3-1/2-year high.

“The commitment of Saudi Arabia and the rest of OPEC to the production cuts is a major factor in supporting the price at the moment as well as the possibility of reduced exports from Iran due to sanctions,” said William O’Loughlin, investment analyst at Rivkin Securities.

Reporting by Alasdair Pal

Euro stuck near four-month low as U.S. bond yield rise supports dollar

LONDON (Reuters) - The euro remained stuck near 4-month lows on Tuesday after weaker-than-expected economic growth out of Germany and a rise in U.S. Treasury yields helped the dollar recover following a pause in its rally.

The dollar’s strength also helped it gain to within a whisker of hitting a 3-1/2 month high versus the yen while major currencies elsewhere traded within tight ranges ahead of a euro zone economic sentiment survey and U.S. retail sales.

The greenback’s rally, which has seen the dollar claw back most of its 2018 losses after a reassessment of the path of U.S. monetary policy versus other countries, came to a halt last week following disappointing U.S. inflation numbers.

Euro bulls were also given a boost on Monday after European Central Bank policymaker Francois Villeroy de Galhau said that the ECB could give fresh guidance on the timing of its first rate hike as the end of its exceptional bond purchases approaches.

“After the U.S. CPI (consumer price inflation) data the dollar’s momentum has fallen off,” said Alvin Tan, an FX strategist at Societe Generale. “For our view to be validated, that euro/dollar will move higher, we will need to see European data pick up again. Data is going to be important in the near term.”

German economic growth slowed slightly more than expected in the first quarter of the year due to weak trade but analysts called it a blip and predicted Europe’s biggest economy would shift into a higher gear again.

The euro edged up 0.1 percent to $1.1932, but remained below Monday’s high of $1.1996, which was the common currency’s highest level since May 3.

The dollar’s index rose about 0.1 percent to 92.646, pulling up from 92.243 on Monday, which was its lowest level since May 2.

The benchmark 10-year U.S. Treasury yield increased to about 3.02 percent, after rising 2 basis points on Monday, helping support the greenback.

The benchmark yield was supported by signs of an easing in trade tensions between the United States and China after U.S. President Donald Trump pledged to help Chinese telecoms firm ZTE Corp, which has been penalised for violating U.S. sanctions with Iran.

Some traders remain upbeat about the dollar’s near-term outlook.

Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore, said interest rate differentials were still likely to work in its favour.

Innes said he would probably remain dollar positive until there is a wave of decent economic data from countries, or until the ECB started to sound “overtly hawkish instead of just tentatively”.

The Norwegian crown rose 0.3 percent versus the euro to 9.56 crowns after strong quarterly economic data raised expectations of a rate rise later this year.

The ailing Turkish lira to a fresh record low of 4.3990 against the dollar, bringing its losses this year to more than 13 percent after President Tayyip Erdogan said he plans to take greater control of the economy after presidential elections next month.

Reference: Tommy Wilkes

Monday, 14 May 2018

Sterling rises as dollar hits soft patch; data eyed

LONDON (Reuters) - Sterling rose on Monday as the dollar weakened against its rivals and investors focused on economic data that could help the pound recover after the Bank of England last week held rates and cut its growth projections.

At GMT 1010 the pound was up 0.4 percent at $1.3589 and trading flat against the euro to 88.20 pence..

On Thursday the BoE held interest rates steady as expected but cut its growth and inflation projections for this year and next, sending sterling to a four-month low against the dollar.

The decision left traders sceptical about whether the central bank will hike rates at all this year.

Market expectations of a rate hike in August are currently below 50 percent compared to nearly 60 percent at the start of last week.

Analyst at ING, though, said that the chances of a summer interest rate hike were being underestimated and that strong unemployment data on Tuesday could send the pound on a trajectory toward $1.37-1.38 range.

“An overall solid UK jobs report would go a long way to rekindling some of the lost BoE policy tightening sentiment in recent weeks,” said ING FX strategist Viraj Patel, in a note to clients.

LONDON (Reuters) - The euro headed for a third successive day of gains on Monday as a weak dollar helped the single currency recoup losses, as investors kept a wary eye on political events in Italy.

Italy’s anti-establishment 5-Star Movement and the far-right League, both hostile to EU budget rules, spent the weekend in talks to forge a common policy programme. The parties were adversaries as recently as March but now look likely to form Italy’s next government.

The euro was 0.3 percent higher at $1.1972, having fallen last week to $1.1823, its weakest since Dec. 22.

“Italian politics aren’t a major moving factor in the euro zone yet. It’s not an existential threat and isn’t driving a lot of positioning or putting the euro’s bounce at risk,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

“I expect inflation will rebound in the euro zone and that will keep the European Central Bank’s stimulus unwinding on track.”

The dollar retreated further from a 2018 peak hit last week as traders booked gains on its recent run-up, spurred by the widening interest rate gaps in favour of the United States.

The dollar index against a basket of six major currencies was down 0.1 percent at 92.515.

Bank of America Merrill Lynch strategists said the main catalyst for the dollar’s surge was the lack of improvement in euro zone economic data, prompting investors to unwind record short-dollar bets, particularly against emerging market currencies.

A loss of economic momentum in Europe has made policymakers in Europe and Britain more cautious about ending financial crisis-era policies.

On Friday, ECB President Mario Draghi said the euro zone needed a new “fiscal instrument” to help weaker member nations if they were being overly penalized by investors during a debt crisis.

Traders pushed out expectations of a rate hike in Britain to end-2018, and the European Central Bank boosting interest rates to the second half of 2019.

Analysts at ACLS said they expected a reduction in trade tensions between the U.S. and China this week to fuel risk-on sentiment that would be positive for the Australian dollar and negative for the yen, considered a safe-haven currency.

The Australian dollar was 0.2 percent higher at $0.7558 after rallying back from an 11-month low of $0.7413 plumbed on Wednesday.

Investors this week are focussed on speeches by Fed and ECB officials, as well as German GDP data due out on Tuesday and expected to show some slowdown in growth.

Reporting by Tom Finn

Fed's Mester reiterates support for gradual U.S. rate increases

(Reuters) - The Federal Reserve should continue its gradual approach to raising interest rates given that inflation has not yet reached the U.S. central bank’s 2 percent goal in a sustained way, Cleveland Fed President Loretta Mester said on Monday.

“In my view, the medium-run outlook supports the continued gradual removal of policy accommodation; it seems the best strategy for balancing the risks to both of our policy goals and avoiding a build-up of financial stability risks,” Mester said in prepared remarks for a speech in Paris.

Mester said she does not expect inflation to pick up sharply, adding that while it is close to the Fed’s symmetric 2 percent target, it will only reach that level on a sustainable basis over the next one to two years.

“We want to give inflation time to move back to goal ... this argues against a steep path,” she said.

The Fed unanimously decided to raise borrowing costs at its policy meeting in March. It forecasts another two rate rises for this year, although an increasing number of policymakers see three as a possibility.

Policymakers raised rates three times last year. The Fed’s benchmark overnight lending rate now sits in a target range of 1.50 percent to 1.75 percent.

The Fed’s preferred measure of inflation increased to 1.9 percent in the 12 months through March, effectively bringing price gains to the central bank’s 2 percent target after undershooting that goal in recent years.

Mester, who has a vote on monetary policy this year under a rotation system, also said the central bank could raise rates more rapidly if the U.S. economy grew faster than expected, though she added it could go slower if inflation weakens again.

Her views are consistent with the Fed’s policy statement earlier this month. It emphasized that policymakers do not see their 2 percent inflation target as a ceiling, and will not be unduly concerned with price gains above it for a time.

Mester also used her speech to a central banking conference to once again reiterate her stance that the central bank should begin to analyze whether its inflation framework is fit for the future.

“Now is the time to assess whether changes to our current framework could make monetary policy more effective in achieving our goals,” she said.

Several others on the Fed’s rate-setting committee have also called for a review this year on whether to stick to the current inflation policy, but Fed Chairman Jerome Powell has yet to publicly show support for such a move.

Investors have fully priced in a rate rise at the Fed’s next policy meeting on June 12-13.

Reporting by Lindsay Dunsmuir

World stocks head higher on hopes of thawing trade tensions

LONDON (Reuters) - Prospects of a thaw in U.S.-China trade tensions supported global stocks on Monday, as U.S. President Donald Trump pledged to help ZTE Corp “get back into business, fast” after a U.S. ban crippled the Chinese technology company, while oil prices retreated from highs.

Trump’s comments on Sunday came ahead of a second round of trade talks between U.S. and Chinese officials this week to resolve an escalating trade dispute. China had said last week its stance in the negotiations would not change.

The MSCI world equity index, which tracks shares in 47 countries, was up 0.1 percent, holding at its highest level in seven weeks and in positive territory for the year. European stocks were broadly flat as energy stocks and financials weighed.

“There have been some very serious issues raised in terms of the trade relationship between the U.S. and China, and then they’ve had this quite sudden about-turn on this particular company, and it simply raises questions as to what the underlying policy is,” Alastair George, chief strategist at Edison Investment Research, said.

“This is perhaps a little reminder which is being relatively well-received by markets over the last 24 hours that (with) the U.S. administration there is a strong degree of unpredictability compared to prior regimes,” Edison’s George added.

The United States has said it will lift sanctions on Pyongyang if North Korea agrees to completely dismantle its nuclear weapons programme.

Stocks in Asia were also upbeat. MSCI's broadest index of Asia-Pacific shares outside Japan  rose 0.5 percent, while Japan's Nikkei also tacked on 0.5 percent.

Chinese shares came off the day’s highs but were still higher after Trump’s comments on ZTE Corp, which JPMorgan analysts said was “a significant positive.”

Shanghai's SSE Composite index  rose 0.3 percent while the blue-chip rallied 0.9 percent. Hong Kong's Hang Seng index .HSE climbed 1.4 percent.

Elsewhere in Asia, the Malaysian ringgit recovered losses after sliding 1 percent to a four-month trough against the dollar in the first onshore trade since a shock election upset last week. Malaysian stocks sank as much as 2.7 percent at one point but were last up 1.5 percent.

Veteran Mahathir Mohamad came out of political retirement to lead the opposition Pakatan Harapan (Alliance of Hope) to a stunning victory defeating prime minister Najib Razak, a former protege he had accused of corruption.

Some investors were concerned that populist promises such as repealing an unpopular goods and services tax and restoring a petrol subsidy could undermine the country’s finances.

But some analysts believe Mahathir’s proposals could be positive for the economy.

“The repeal of GST, while only marginally negative for the fiscal deficit, will be a boon for consumers, who have been upset that they bear the burden of poor fiscal management and came out to vote against the establishment,” said Trinh Nguyen, senior economist at Natixis.

While tensions in the Korean peninsula have eased, U.S. plans to reintroduce sanctions against Iran have stoked anxiety in the Middle East.

Iran pumps about 4 percent of the world’s oil, and the latest development has sent oil prices near multi-year highs.

Citi analyst Mark Schofield said rising oil prices risk causing ‘stagflation’, which could create a particularly “hostile environment” for risk assets.

On Monday, U.S. crude slipped to $70.33 a barrel and Brent was down at $76.70 as a relentless rise in U.S. drilling activity pointed to increased output.

The United States threatened on Sunday to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational.

In currencies, the dollar dipped 0.2 percent to 92.40 against a basket of major currencies and was set for its fourth straight day of losses.

Against the Japanese yen JPY=, it ticked down to 109.52 per dollar, remaining largely in a holding pattern since late last month.

The euro EUR= rose 0.3 percent to $1.1974 following two consecutive sessions of gains as Italy's anti-establishment parties looked likely to form the next government.

Last week, the Bank of England held rates steady and New Zealand’s central bank said the official cash rate will remain at historic lows of 1.75 percent for “some time.”

That leaves the Fed as the only major central bank in the world committed to rate increases although recent data showing moderate inflation reading has cast doubt over the pace of any hikes.

The U.S. 10-year Treasury yield was slightly higher at 2.9805 percent.

Spot gold XAU= was up 0.2 percent at $1,320.01 an ounce, after eking out a small weekly gain last week.

Reporting by Kit Rees

Sunday, 13 May 2018

Homebuilders poised for gains but face interest-rate fears

NEW YORK (Reuters) - Some investors are betting on shares of homebuilders to outperform U.S. stocks at large, but with interest rates expected to rise they may have to wait several months before those bets pay off.

The U.S. economy looks ideal for homebuilding stocks to benefit. The unemployment rate has fallen to its lowest level in more than 17 years and consumer confidence is near the highest levels in 17 years, according to the Conference Board.

And demand for housing in an already tight market is being supported by the many millennials seeking to purchase their first home, several investors said.

The U.S. Commerce Department’s data on April housing starts will be released on Wednesday, followed by data on new-home sales on May 23.

But other factors could raise costs for home buyers, potentially hampering home sales. A sharp rise this year in U.S. Treasury yields reflects increasing worries about inflation and fears that the Federal Reserve will raise interest rates more aggressively than has been expected.

The yield on the 10-year Treasury note is used as the benchmark for mortgage interest rates; higher rates increase mortgage costs for home buyers.

“The continued rally in yields is a potential red flag,” said Jared Woodard, an investment strategist at Bank of America Merrill Lynch in New York.

The 10-year Treasury yield  has briefly exceeded the 3 percent mark, the highest level since January 2014 and more than 50 basis points higher than where it started the year.

The S&P Composite 1500 Homebuilding index .SPCOMHOME has lagged the broader market, falling 16.9 percent from its Jan. 22 peak, which is more than three times the percentage decline of the S&P 500 from its high that month. In 2017, the homebuilding index soared 74.8 percent from the previous year.

Other factors also cast a cloud on the housing market. Last year’s federal tax overhaul put a cap on deductions for state and local and property taxes and lowered the amount of mortgage interest that is deductible, all of which results in higher costs for many homeowners.

Homebuilders have also pointed to rising costs for materials and labor in their earnings calls, though so far they have had little impact on their margins.

“The factors indicate that there may be some headwinds going forward,” said Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds in San Francisco, which owns shares of Lennar Corp, the largest U.S. homebuilder by market capitalization.

Shares of the five largest U.S. homebuilders by market capitalization jumped on April 4, when Lennar reported robust quarterly sales and raised its forecast for the year. Lennar’s shares climbed 10 percent that day, and PulteGroup Inc, D.R. Horton Inc, Toll Brothers Inc and NVR Inc rose between 4.1 percent and 6.4 percent.

The stocks have given up much of those gains since then, even though homebuilders have continued to deliver upbeat results. Lennar shares have tumbled 13.7 percent. D.R. Horton, NVR and Toll Brothers are down 3.9 percent, 3.3 percent and 3 percent, respectively. Only PulteGroup has added to its April 4 gains, rising 1.8 percent.

Homebuilders that sell units at multiple price points, from starter homes to luxury properties, and are active throughout the United States are best positioned to withstand investors’ skittishness over interest rates, Cuggino said.

Next up to report is Toll Brothers, which focuses on the luxury market and is scheduled to release its quarterly earnings on May 22.

Still, some investors say this year’s industry underperformance looks like a normal response to the 2017 run-up.

Though housing starts have risen, hitting 1.319 million units in March, demand among home buyers has outpaced the limited housing supply in part because of the many millennials are entering the market.

“This is just a pause,” said Brian Macauley, co-portfolio manager of the Hennessy Focus Fund in Arlington, Virginia, which owns shares of NVR. “As fundamentals come through, the stocks will behave better.”

Signs of worries about affordability among home buyers, such as a move toward smaller homes or an uptick in adjustable-rate mortgages, have not yet emerged, said Jack Micenko, an analyst at Susquehanna Financial Group in New York.

Low earnings multiples could also draw investors’ attention. The 12-month forward price-to-earnings ratio for the S&P 500 Homebuilding index .SPLRCHOME, which comprises just Lennar, PulteGroup and D.R. Horton, has fallen to 9.5 from 13.7 at the end of 2017. The price-to-earnings ratio for the S&P 500 is 16, down from 18.5 at the end of 2017.

“If (homebuilders) have solid orders and growth and hold their margins, they could work from here,” said Jonathan Woloshin, head of Americas equities and real estate at the chief investment office of UBS Global Wealth Management in New York. “There are some very attractive valuations out there.”

Reporting by April Joyner

Friday, 11 May 2018

Stocks set for best week since March

LONDON (Reuters) - World shares rose on Friday as investor appetite for risky assets got a boost from soft U.S. inflation numbers, helping soothe worries that the Federal Reserve might step up the pace of its rate hikes.

The MSCI All Country World Index, which tracks shares in 47 countries, was up 0.3 percent and was set for its best week since March 9. The dollar was flat against a basket of currencies.

Oil prices eased from multi-year highs hit this week on hopes that alternative supplies could replace a looming drop in Iranian exports due to sanctions that Washington plans to re-introduce after abandoning a global deal on limiting Iran’s nuclear ambitions.

Thursday’s soft U.S. inflation numbers followed employment data last week that pointed to sluggish wage growth.

While the rally in stocks seemed to point to investor relief, analysts were split over whether the slowdown in inflation could lower the chances of the Fed increasing the number of rate hikes it has suggested will take place this year. Federal Reserve Bank of St. Louis’ James Bullard will make a speech on Friday, as will European Central Bank President Mario Draghi.

Konstantinos Anthis, head of Research at ADS Securities, said the case for two or three further U.S. rate hikes could be decided after the summer. Fed funds futures show a 93 percent chance of one next month.

“The data from the U.S. for the past few months has been supportive so if this trend is to continue there’s plenty of time for the Fed to witness stronger performance again and grow more aggressive,” Anthis said.

Softer inflation numbers also flattened the U.S. Treasury yield curve further, with the gap between 5- and 30-year bonds at its narrowest since 2007. Investors also bought up southern European government bonds, taking advantage of a rise in yields on the back of Italian political concerns.

Italian, Spanish and Portuguese 10-year borrowing costs fell 2-3 basis points, outpacing better-rated peers at the end of a week in which the increasing likelihood of an anti-establishment coalition taking power in Italy had hurt the euro zone’s lower-rated debt.

Italian 10-year yields were set for their biggest weekly rise since February.

European stocks, meanwhile, were set to seal their longest winning streak in over three years as fresh deal-making stole the spotlight from the tail-end of a busy earnings season.

The pan-European STOXX 600 was flat, but set for its seventh straight week of gains - its longest winning streak since March 2015. Germany’s DAX was down 0.1 percent and Britain’s FTSE 100 was flat.

Asian markets were cheered by a further easing in tensions on the Korean Peninsula, after U.S. President Donald Trump said he would meet North Korean leader Kim Jong Un in Singapore on June 12 for talks on Pyongyang’s nuclear weapons program.

MSCI’s broadest index of Asia-Pacific shares outside Japan . rose 0.7 percent to near three-week highs with broad-based gains across all sectors. Japan’s Nikkei climbed 1.2 percent.

While North Korea has come off the boil for now, political concerns are focused elsewhere as the United States and China continue skirmishing over trade and tensions rise in the Middle East.

“Trump still needs President Xi (Jinping) and China’s support in dealing with North Korea and this will be his priority in the short term,” economists at JPMorgan wrote in a note to clients.

“Once the meeting is finished, trade may return to the fore.”

U.S. and Chinese officials will meet in Washington for a second round of trade talks next week, after apparently making little progress in discussions in Beijing earlier this month.

Oil stocks buoy European shares as US pulls out of Iran deal
In currency markets, the pound traded at $1.3528, inching above a four-month low of $1.3457 touched on Thursday after the Bank of England held interest rates.

In commodities markets, spot gold rose 0.1 percent to $1,322.61 an ounce.

U.S. crude futures were down 0.1 percent at $71.3 a barrel. Brent crude futures fell 0.3 percent to $77.26 a barrel.

Reporting by Ritvik Carvalho

Dollar hovers below 2018 peak after softer U.S. inflation

LONDON (Reuters) - The euro slipped on Friday as the dollar recovered following weaker than expected inflation data that appears to have stalled the greenback’s recent rally to 2018 highs.

The dollar is still headed for its fourth straight week of gains, although much more modestly this week. The U.S. currency’s recovery has been led by investors unwinding short positions in the belief that the U.S. economy looks relatively strong and that interest rates in the United States will rise while stagnating in other parts of the world.

U.S. consumer prices rose less than expected in April, which would support gradual, rather than more aggressive, rate increases by the Federal Reserve.

The dollar index is up 0.2 percent this week, less than the more than 1 percent gains it racked up in the previous two weeks.

“The dollar’s rally is likely to have ended for now. But of course U.S. dollar strength could hardly go on as quickly and smoothly as it had done for the past weeks,” said Commerzbank analysts, predicting that the inflation numbers would only cause a pause in the dollar’s recovery.

The dollar index against a basket of major currencies rose 0.1 percent to 92.744, down from Wednesday’s 4-1/2-month high of 93.42.

The euro fell 0.1 percent to $1.1905 EUR= but was off its 2018 lows of $1.1823 hit on Wednesday.

The single currency had started 2018 on a run as investors bet on a stronger euro zone economy and tighter monetary policy, but is now down year-to-date against the dollar.

The euro has so far weathered the impact from rises in Italian bond yields on signs the two anti-establishment parties could sweep into power as they made “significant steps” toward forming a government after weeks of political stalemate.

However, Italy’s next prime minister could be an independent figure who is not a member of either the anti-establishment 5-Star movement or the far-right League and a government could be sworn in next week if all goes well, a top 5-Star member said in a newspaper interview published on Friday.

Currency trading was generally quiet on Friday after a busy week, with most major pairs holding within small ranges.

“Given recent rises in oil prices, a weaker dollar earlier this year, and U.S. tax cuts, markets were clearly worried more about upside risks in (U.S.) inflation,” said Minori Uchida, chief currency strategist at MUFG Bank.

The dollar traded flat against the yen at 109.41 yen JPY=, off its three-month top of 110.05 yen touched on May 2.

The Australian dollar AUD=, which had been hit by the loss of its long-cherished status as the highest yielding currency in the developed world as U.S. rates have risen, bounced back to $0.7539 from Wednesday's 11-month low of $0.7413

The dollar’s retreat should also take the heat off emerging market currencies that have been battered by worries about rising dollar costs and about capital outflows to the U.S.

Political uncertainty in specific emerging markets has also hurt some emerging market currencies.

The Turkish lira, however, fell another half a percent to 4.26 to the dollar, although that was off its record low of 4.3780 hit on Wednesday.

Reporting by Hideyuki Sano and Tommy Wilkes