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

Thursday, 10 May 2018

Euro bounces as dollar's rally stalls

LONDON (Reuters) - The dollar’s rally paused on Thursday as Treasury yields dipped and traders looked to U.S. consumer price data later in the day that could show an acceleration in inflation.

Ten-year Treasury yields, which have been pushing the greenback higher, slid back below the psychologically important 3 percent level to stop the dollar in its tracks after a three-week long rally.

The dollar index fell 0.2 percent against a basket of six major currencies at 92.88 after hitting a 4-1/2-month high of 93.42 on Wednesday.

A weakened dollar helped lift the euro above a 4-1/2-month low of $1.1823 on Wednesday. The euro had fallen in six of the last seven sessions, and on Thursday was last trading 0.3 percent on the day at $1.1890.

There has been little respite for investors this week with tensions between Israel and Iran flaring after U.S. President Donald Trump exited from an international nuclear accord with the Islamic Republic.

A three-week-long rally for the U.S. currency, which on Monday rose to its highest levels this year, reversing several months of weakness, has caused the unwinding of popular long bets on emerging market and G10 currencies.

In the aftermath of Trump’s announcement on the Iran nuclear deal, oil continued to rally on Thursday although the gains being made were slowing.

“Markets are firmly focused on interest rates today,” said Ulrich Leuchtmann, head of FX strategy at Commerzbank.

“Despite the U.S. exit from the Iran nuclear deal we’re looking at a broadly risk-off environment...Interest rate differentials get to decide where the dollar goes next.”

U.S. consumer price data due at 1230 GMT are expected to show that annual core CPI inflation rose to 2.2 percent in April, which would be the highest in more than a year, from 2.1 percent in March.

Analysts are divided over whether the rally for the U.S. currency will continue.

“It is our view that the broad-based rebound in the USD has further to run,” said analysts at Rabobank.

But Societe Generale’s European economist, Klaus Baader, said that the U.S. interest rate yield curve, an important indicator of dollar strength, was falling and that would make the greenback’s bounce transient.

The British pound on Thursday fell after the Bank of England kept interest rates on hold and cut its forecasts for growth.

At 1150 GMT sterling traded flat at $1.3542, not far from $1.3485 touched on Tuesday, its lowest level in four months.

Markets were closed in countries including Switzerland, Sweden and Austria.

Discussions on forming a new government in Italy to end nine weeks of political stalemate are continuing and could remain a source of market volatility.

Italian government bond yields jumped to a seven-week high on an increased possibility that a government of anti-establishment parties comes into power in the euro zone’s third largest economy.

The New Zealand dollar shed as much as 1.1 percent to a five-month low of $0.6916 after the Reserve Bank of New Zealand held interest rates steady and said the next move in rates could just as easily be a cut as a hike.

Reference: Tom Finn

Sterling down, bonds rise as Bank of England cuts inflation, growth forecast

LONDON (Reuters) - Sterling reversed earlier gains and fell to the day’s lows on Thursday after the Bank of England kept interest rates on hold as widely expected, but cut inflation and growth projections for this year and the next.

Before the decision, sterling was up as much as 0.4 percent at $1.3618 but fell to trade 0.2 percent lower on the day at $1.3521, not far away from a four-month low of $1.3485 hit on Tuesday.

While expectations of a rate hike have fallen rapidly in recent days after a run of weak data and cautious comments from policymakers, the cut in inflation and growth forecasts weighed on currency markets.

The 2-year gilt yield fell around 2 basis points after the decision to 0.81 percent.

Short sterling interest rate futures rose 3 to 4 ticks across 2018 and 2019 contracts, indicating a shallower path for future BoE interest rate rises.

“I think the fact you have as expected downgrades to growth forecasts and more importantly perhaps, downgrades to the inflation story for 2019 and 2020 period, has probably been a influence on sterling,” said Sarah Hewin, chief economist for Europe at Standard Chartered in London.

Britain’s blue chip FTSE 100 index cut losses to trade flat in percentage terms after the BOE kept rates on hold.

In sharp contrast to overwhelming expectations a few weeks ago that they would raise rates, BoE policymakers voted 7-2 to keep them at 0.5 percent.

That was in line with forecasts from economists polled by Reuters in the past week.

Governor Mark Carney said the BoE - which cut its 2018 growth prediction and trimmed its inflation forecasts - expected growth would gain speed again. It was sticking to its message that rates would probably need to rise - for only the second time in over a decade - once that recovery was clear.

“What’s the sensible thing to do? Do you act now or do you wait to see evidence that momentum is re-asserting,” Carney told reporters.

Investors slightly pushed back their bets on when rates would rise, and sterling slid close to a four-month low against the dollar while the yield on two-year British government bonds edged down.

Rate futures showed less than a 50 percent chance of a hike in August, the next time the BoE updates its forecasts.

“It looks like the 2018 rate hike has been delayed not cancelled,” Fitch Ratings chief economist Brian Coulton said.

Britain’s economy grew more slowly than most of its peers last year after a Brexit-driven jump in inflation hit consumer spending power and some businesses delayed long-term investment.

Growth slowed even more sharply in early 2018 on a mix of unusually icy weather and headwinds from Britain’s impending European Union exit.

Recent data “had been consistent with a temporary soft patch...,” most of the BoE’s rate-setters said. “(But) there was value in seeing how the data unfolded over the coming months.”

Despite weak growth, the BoE sees the need for rate hikes because it thinks the economy could overheat due to long-term weak productivity and lower immigration driven by Brexit.

Carney said in February that rates might go up sooner than the BoE had previously suggested, and was asked by a reporter on Thursday about the description of him as an “unreliable boyfriend” - first used by a British lawmaker because of his previous signals about when rates might rise, which misfired.

“The only people who throw that term at me are in this room,” Carney told the news conference.

Policymakers Ian McCafferty and Michael Saunders, who again voted for a rate rise, agreed the weak growth so far this year reflected “temporary or erratic factors”, but said delaying a rate hike risked more abrupt tightening later on.

The BoE said the weakening of inflation was due to a faster fading of the impact of sterling’s plunge on import prices, and domestic inflation pressures continued to rise.

Inflation was seen dropping to 2.1 percent in a year’s time, and returning to target a year later but only if interest rates rose by 25 basis points about three times over three years, as markets expect.

The BoE said the economy would grow by 1.4 percent this year, down from the 1.8 percent it predicted in February, with slowing consumer lending and a sluggish housing market creating greater-than-usual uncertainty about consumer demand.

For 2019 and 2020, it predicted growth of 1.7 percent, down from 1.8 percent in its February forecasts.

Reporting by Tom Finn, David Milliken and William Schomberg

Wednesday, 9 May 2018

Sterling slides to new four-month low as dollar extends rally

LONDON (Reuters) - Sterling fell to a fresh four-month low on Tuesday as the dollar extended its rally and investors continued to trim their pound holdings before a Bank of England meeting on Thursday, when the central bank is expected to keep interest rates on hold.

Weaker-than-expected data on UK house price growth and resurfacing worries about divisions within the British government about what the relationship with the European Union should look like after Brexit also hit sterling.

The pound has fallen heavily in recent weeks on expectations the BoE would not, as earlier believed, tighten monetary policy because of a relatively weak economy and as investors piled into a rallying dollar.

The British currency on Tuesday dropped to $1.3485, its weakest since Jan. 11 and leaving what had been one of the best performing G10 currencies this year down for 2018.

Positioning data released late last week shows investors have cut their net long positions in the pound over the past fortnight by the biggest amount since March 2017, although net long positions remain near a four-year high.

David Madden, analyst at CMC Markets, said the collapse in expectations for a BoE hike when it meets on Thursday, from an 80 or 90 percent chance a month ago to around 10 percent today, was the primary reason for sterling’s weakness.

“It has all happened at a time when the dollar index is hitting multi-month highs,” he said. “Expectations were probably too high that the BoE was going to raise rates.”

Tensions within Britain’s governing Conservative Party over how to agree terms of exit from the European Union have also re-emerged as a key political risk for the pound.

Prime Minister Theresa May faces a tough battle as her party attempts to steer flagship legislation through Britain’s upper house of parliament.

Her foreign minister, Boris Johnson, has described as “crazy” a proposed customs partnership that is believed to be May’s preferred option for relations with the EU after Britain leaves the bloc, underlining deep divisions within her top team about future ties with the EU.

ING analysts said in a note that while the focus would be on the passage of Brexit legislation, sterling against the euro remained steady for now.

Against the euro sterling gained 0.2 percent to 87.810 pence on Tuesday as the stronger dollar pulled the single currency down across the board.

Reporting by Tommy Wilkes

Dollar firms vs yen as oil surges on Iran uncertainty, pushing up U.S. yields

TOKYO (Reuters) - The dollar rose to a six-day high against the yen on Wednesday as crude oil prices rallied and pushed Treasury yields higher after U.S. President Donald Trump pulled out from an international nuclear deal with Iran.

The greenback also gained on the euro as concerns about Italian political turmoil hurt the common currency.

The dollar was 0.3 percent higher at 109.480 yen after touching 109.640, its highest since May 3.

The dollar index against a basket of major currencies was marginally higher at 93.206.

The U.S. currency was lifted as long-term Treasury yields climbed to two-week peaks with crude oil prices surging more than 2 percent to their highest since November 2014.

“The dollar is firmer overall, particularly against the yen, stirred once again in the aftermath of President Trump’s decisions with U.S. yields rising and oil on the move,” said Bart Wakabayashi, Tokyo Branch Manager of State Street.

“Opinion seems divided among market players on how far higher U.S. yields can go, so the dollar could be in for turbulence going forward.”

The 10-year Treasury note yield was about 2 basis points higher at 2.989 percent. A rise above 3.035 percent scaled on April 25 would take it to its highest since early 2014.

Trump on Tuesday pulled the United States out of an international nuclear deal with Iran, raising the risk of conflict in the Middle East, upsetting European allies and casting uncertainty over global oil supplies.

The euro lost 0.05 percent to $1.1857 after sliding as low as $1.1838 overnight, its weakest since Dec. 22.

The common currency, already under pressure from weak economic indicators and widening U.S.-euro zone interest rate differentials, was also hit by political developments in Italy.

Italian President Sergio Mattarella’s call to bickering political parties to rally behind a “neutral government” was met with immediate opposition and raised the prospect of elections as early as July.

“The dollar is in a firm position to gain against its European peers as rhetoric from central banks such as the ECB and the Band of England is perceived to have turned dovish,” said Shin Kadota, senior strategist at Barclays in Tokyo.

The euro was 0.25 percent higher at 129.830 yen after plumbing a six-week low of 129.240 on Tuesday. It was on track to end a seven-day losing run.

Sterling traded at $1.3533 following a decline to a four-month low of $1.3485 overnight.

The pound has fallen heavily in recent weeks on expectations the BoE would not, as earlier believed, tighten monetary policy because of a relatively weak economy and as investors piled into a rallying dollar.

The Australian dollar extended its overnight slide to touch an 11-month low of $0.7424.

Pressured by the dollar’s broad strength, the Aussie has slid despite an upbeat budget from the country’s government.

The New Zealand dollar was little changed at $0.6968.

The Reserve Bank of New Zealand is widely expected to stand pat on monetary policy when it meets on Thursday but the event was still approached with anticipation as it will be the first under new Governor Adrian Orr.

Reporting by Shinichi Saoshiro

Tuesday, 8 May 2018

Dollar near four-month high, Trump's Iran decision in focus

TOKYO (Reuters) - The dollar hovered near a four-month high on Tuesday, continuing to draw support from higher Treasury yields and upbeat prospects for the U.S. economy, leaving its major rivals such as the euro struggling and others including the Argentine peso down sharply.

The market’s attention was on U.S. President Donald Trump’s decision about the future of an international nuclear agreement with Iran, which he has repeatedly threatened to withdraw from.

Trump is expected to make an announcement on the nuclear deal at 1800 GMT. A U.S. withdrawal from the deal, which eased economic sanctions in exchange for Tehran limiting its nuclear programme, would impact risk sentiment in the broader markets.

“The currency market sees the Iran announcement as a potential risk. That said, this is a theme that has been long in the works and reaction, if any, could be limited,” said Shusuke Yamada, chief Japan FX strategist at Bank of America Merrill Lynch.

Diminished market concerns over perceived risks from the U.S.-China trade spat and North Korea, have helped shift investor focus back on dollar-supportive fundamentals over the past month.

“While a U.S. withdrawal from the (Iran) deal may be a dollar-negative theme, but at least for the short term it is hard to ignore the dollar’s broad strength, particularly against emerging market currencies like the Argentine peso,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

The dollar dipped was flat at 109.090 yen after going as high as 109.400 overnight. The yen is often sought in times of political tensions and market turmoil.

The dollar index against basket of six major currencies was 0.1 percent higher at 92.864 after reaching 92.974 overnight, its highest since Dec. 28.

The greenback received its latest boost as the euro sank below $1.19 for the first time this year the previous day in the wake of weaker-than-forecast data on German industrial orders and euro zone investor sentiment.

The euro was effectively flat at $1.1920 after plumbing $1.1897 the previous day, its lowest in more than four months.

The soft economic indicators added to already shrinking expectations of the European Central Bank raising interest rates any time soon, which has been a major drag on the common currency.

Rising U.S. Treasury yields and solid economic data have bolstered the dollar in recent weeks. While Friday’s U.S. payrolls data came in mixed, underlying strength in the labour market backed expectations of steady rate increases by the Federal Reserve.

Indeed, monetary policy normalisation in the United States, which has moved significantly ahead of other countries, has been a major dollar-supportive factor.

And persistent concerns over rising U.S. interest rates kept up the relentless sell-off in Latin American currencies overnight, with the Mexican, Chilean and Argentine pesos all falling more than 1 percent, while the Brazilian real lost 0.84 percent.

The Argentine peso’s slide stood out in particular as the country’s central bank had just raised rates on Friday.

Emerging market currencies have taken a hit in recent weeks as investors have shed high-yielding assets on expectations that accelerating U.S. inflation and a widening fiscal deficit could force the Fed to tighten policy at a quicker pace.

Elsewhere, the Australian dollar was down 0.25 percent at $0.7498 following the release of soft domestic retail sales data for March.

Upbeat China trade figures for April helped limit losses for the Aussie, often used as a proxy for China-related trades.

The New Zealand dollar was little changed at $0.7017.

Reference: Shinichi Saoshiro

Buffett bashes bitcoin as thriving on mystique, favors stocks

NEW YORK (Reuters) - Billionaire investor Warren Buffett on Monday said buyers of bitcoin, which he has characterized as “rat poison squared,” thrive on the hope they’ll find other people who will pay more for it.

Likening bitcoin demand to the tulip bulb mania in 17th century Holland, Buffett, the chairman and chief executive of Berkshire Hathaway Inc, said the mystique behind the cryptocurrency has caused its price to surge.

“If you don’t understand it, you get much more excited,” Buffett said on CNBC television. “People like to speculate, they like to gamble.”

He said investors now are much better off owning U.S. stocks, whose prices are elevated but not in a “bubble,” and it would take a “nanosecond” for him to choose stocks over 10- or 30-year U.S. government bonds now yielding around 3 percent.

Charlie Munger, Buffett’s longtime business partner and a Berkshire vice chairman, is also no bitcoin fan, describing it as “worthless artificial gold.” He likened it to Oscar Wilde’s definition of fox hunting, calling it “the pursuit of the uneatable by the unspeakable.”

Buffett, 87, and Munger, 94, spoke two days after they presided at Berkshire’s annual shareholder meeting in Omaha, Nebraska, which was expected to have drawn more than 40,000 people.

It was the first meeting since Berkshire elevated longtime executives Greg Abel and Ajit Jain to vice chairmen, making them top contenders to replace Buffett as chief executive.

Buffett said their promotions have been “very, very good” for the company. Berkshire has said its board knows who would become chief executive if the need arose.

One of its members, Microsoft Corp co-founder Bill Gates, said on CNBC “it’s not a horse race” between Abel and Jain.

Buffett renewed his desire to spend some of Berkshire’s low-yielding cash on a major acquisition. He said he would be happier if Berkshire had $30 billion of cash and equivalents, not the $108.6 billion it reported holding at the end of March.

“If a $100 billion deal came along that Charlie and I really liked, we’d get it done,” he said.

Buffett revealed last week Berkshire had bought about 75 million additional Apple Inc shares in the first quarter, adding to the 165.3 million it already owns. It now has a 5 percent stake in the iPhone maker, trailing only Vanguard Group and BlackRock Inc.

Buffett said he would be happy to see the Apple share price fall if it would spur repurchases.

Munger, meanwhile, said Berkshire may have been “a little too restrained” in buying Apple, saying “it’s reasonably priced and strong.” He added: “I wished we owned more of it.”

Buffett also said the list of CEO candidates has been “narrowed down” for the healthcare venture between Berkshire, and JPMorgan Chase. He said choosing the CEO will be “by far the most difficult decision we will make.”

Reporting By Jennifer Ablan and Jonathan Stempel

Fed to communicate clearly to avoid market disruptions: Powell

ZURICH (Reuters) - The Federal Reserve’s interest rate hikes may not pose as big a risk for global financial markets and emerging market economies as many have thought, the U.S. central bank’s chairman said on Tuesday.

Still, Jerome Powell said global risk sentiment bears watching as the Fed carries out its well-telegraphed gradual policy-rate increases.

“I do not dismiss the prospective risks emanating from global policy normalization,” he said in remarks prepared for delivery to a policy conference sponsored by the International Monetary Fund and the Swiss National Bank.

Though Fed interest-rate decisions have had only limited impact on capital flows into and out of emerging markets in recent years, he said, there may be some investors and institutions that are unprepared for the policy tightening to come.

To foster global financial stability and growth as the Fed raises rates, he said, the Fed will continue to help build resilience in the financial system and “will communicate our policy strategy as clearly and transparently as possible to help align expectations and avoid market disruptions.”

Powell did not mention the 2013 taper tantrum, when then Fed Chair Ben Bernanke suggested the central bank would soon slow its bond-buying program, taking investors by surprise and triggering a global financial market swoon.

Reporting by Ann Saphir

Monday, 7 May 2018

Dollar surge bringing emerging market rate cut cycle to a halt

LONDON (Reuters) - A resurgent dollar and higher borrowing costs are smashing through Argentina and Turkey’s currencies like a wrecking ball and raising the likelihood more broadly that emerging markets’ three-year long interest rate cutting cycle is at an end.

Emerging markets came into the year flying, riding on the back of a healthy global economy and rising commodity prices alongside tame inflation and a weak dollar. It looked more than likely that a wave of rate cuts would keep rolling, allowing a bond rally to continue.

From Brazil and Russia to Armenia and Zambia, developing countries, big and small, have been on a rate cutting spree. With hundreds of rate cuts since Jan. 2015, the average emerging market borrowing cost fell under 6 percent earlier this year from over 7 percent at the time.

Fund managers’ profits too have soared in this time, with emerging local currency debt among the best performing asset classes, with dollar-based returns of 14 percent last year. Even in the first quarter of 2018, returns were a buoyant 4.3 percent

Now though, almost exactly five years since the so-called taper tantrum shook an emerging market rally, these gains appear to be on the cusp of reversal.

Argentina has jacked up its interest rates to 40 percent in response to a rout in its peso currency, while Turkey was also forced into a rate rise as its lira hit record lows against the dollar. Indonesia, after heavy interventions to stem rupiah bleeding, has also said it could resort to policy tightening.

As emerging currencies slide almost everywhere, yields on bonds denominated in emerging market currencies are back up near 6.2 percent and returns are now negative for 2018.

“The rate cut trade has unwound,” Naveen Kunam, a portfolio manager at Allianz Global Investors said, citing the increased uncertainty on monetary policy.

For decades, a rising dollar has spelt bad news for emerging markets and despite all the progress in the developing world in recent years, latest price moves show not that much has changed.

With the dollar on the rise, emerging currencies have weakened some 3 percent in the past two weeks, as measured by a JPMorgan index.

Figures from the Institute of International Finance this week showed that the result has been a faster exodus from EM debt than at a similar stage of the 2013 taper tantrum. At $5.5 billion in two weeks the IIF described it as the “ghost of tantrums past”.

It has looked as though emerging economies had the upper hand over their old enemy — inflation. Inflation has fallen below target to record lows in Russia, slipped to five-month lows in India and is projected at a below-target 3.8 percent in Brazil this year.

Indonesian inflation in April was a 100 bps off year ago levels, data last week showed.

But the shifts of recent weeks have prompted some analysts to reassess whether interest rate cuts can continue. In Russia for instance, analysts have reduced their bets on rate cuts after the central bank held rates in late April and now predict only one or two moves this year versus earlier calls for deeper cuts.

Sberbank CIB analysts said they did not now expect a Russian rate cut to come before September.

India, like all energy-importing emerging economies, is being hit also by the oil price rise — each $10 rise in oil prices adds 0.8 percent to inflation there, analysts at TS Lombard calculate.

In the past week, expectations for an interest rate hike in India over the coming 12 months have jumped — markets now price more than two rate hikes compared to just over one, a week ago. Last year it was cutting rates.

The question emerging market policymakers may ask themselves has changed, said Sebastien Barbe, global head of EM research and strategy at Credit Agricole.

“Now the question for many central banks is: should they increase (rates) more quickly?” he said.

It is not only those that are normally vulnerable either. Even in the relatively calm backwaters of eastern Europe, the Czech central bank has warned it may have to raise rates again following a sudden slump in the crown.

All that is a huge blow to fund managers who have piled into the EM asset class in anticipation the returns would continue. It may be especially painful for newcomers — a raft of new funds have launched this year, including one from Franklin Templeton’s high-profile portfolio manager Michael Hasenstab.

Countries such as Indonesia where foreigners own a large share of their local bond markets have consequently been among the worst hit as investors jostle to sell.

“If there are worries, this money will get out,” Credit Agricole’s Barbe said.

Reference: Marc Jones, Karin Strohecker