Dol­lar soars as US yields spike; shares di­vided

Kuwait Times - - BUSINESS -

The US dol­lar hit an 11-month peak yes­ter­day as the risk of faster in­fla­tion and wider bud­get deficits, if pres­i­dent-elect Don­ald Trump should go on a US spend­ing spree, sent Trea­sury and other bench­mark global bond yields shoot­ing higher.

Cur­ren­cies in many emerg­ing mar­kets - from the Mex­i­can peso to the Malaysian ring­git - fell to new lows and for share mar­kets it made for a mixed start to the week. The pan-Euro­pean STOXX 600 in­dex had lost much of its early buoy­ancy by the time US trad­ing neared but was still up 0.2 per­cent as banks eyed a boost from higher in­ter­est rates and min­ing com­pany shares rose on the back of Trump’s prom­ises of ma­jor in­fra­struc­ture spend­ing. The re­fla­tion trade also saw fu­tures for the S&P 500 and Dow Jones in­dus­trial add an­other 0.2 per­cent to 0.5 per­cent af­ter the Dow chalked up its best week for five years last week.

The dol­lar mean­while bounded towards 108 yen, hav­ing hit and then dropped back from the eye-catch­ing 100 thresh­old on the in­dex that mea­sures it against the world’s other ma­jor cur­ren­cies. Trade was brisk with the green­back’s rally tak­ing the pace off a resur­gent ster­ling and see­ing the euro slide to its low­est since the start of the year at about $1.0745.

“Clearly the mar­ket has set­tled on a ‘buy dol­lar’ theme on the ba­sis there will be a debt­fu­elled US fis­cal binge that will push up in­fla­tion,” TD Se­cu­ri­ties Euro­pean Head of Cur­rency Strat­egy Ned Rumpeltin said. “Peo­ple are repric­ing the Fed on the ba­sis of that so it all seems to be a rel­a­tively straight­for­ward.” The dol­lar has been romp­ing ahead since Trump won the US pres­i­den­tial elec­tion on Nov 8, trig­ger­ing a mas­sive sell-off in Trea­suries.

Yields on the US 10-year Trea­sury notes climbed to their high­est since Jan­uary on Mon­day at 2.28 per­cent, while 30-year pa­per reached 3 per­cent. Ger­man 30-year yields topped 1 per­cent for the first time in more than six months. Just two days of sell­ing last week wiped out more than $1 tril­lion across global bond mar­kets, the worst rout in nearly a year and a half, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch. The jump in yields on safe-haven US debt threat­ened to suck funds out of emerg­ing mar­kets, while the risk of a trade war be­tween the United States and China is also caus­ing jit­ters.

“There are signs that higher bond yields and the knock of a stronger US dol­lar are hav­ing a domino im­pact, tak­ing down the weak­est risky as­sets first, be­fore mov­ing on to the next,” Deutsche’s global co-head of forex, Alan Ruskin, said.

“There is only so much fi­nan­cial con­di­tions tight­en­ing that risky as­sets can take when fis­cal stim­u­lus is still a prom­ise that lies some way in the fu­ture.” The stam­pede from bonds has seen 30-year yields post their big­gest weekly in­crease since Jan­uary 2009 and the 50-ba­sis-point move in 10year bonds is the equiv­a­lent of two stan­dard in­ter­est rate hikes. Three Fed­eral Re­serve of­fi­cials are due to speak later.

Africa’s rand were all at the cen­tre of the sell-off. Emerg­ing mar­ket stocks also ex­tended their post-US elec­tion slump to more than 7 per­cent. MSCI’s broad­est in­dex of Asia-Pa­cific shares out­side Ja­pan ended at its low­est since mid-July as Hong Kong and In­done­sia led the re­gion’s losses with drops of 2.7 and 2.2 per­cent. By con­trast, Ja­pan’s Nikkei jumped 1.7 per­cent on the weak­en­ing yen to hit its high­est in nine months.

It got an added fil­lip from data show­ing Ja­pan’s econ­omy grew at an an­nu­al­ized rate of 2.2 per­cent in the third quar­ter, hand­ily beat­ing fore­casts. Else­where, the New Zealand dol­lar eased af­ter an earth­quake on Mon­day that killed at least two peo­ple and prompted a tsunami warn­ing that sent thou­sands flee­ing to higher ground. The cur­rency dipped to $0.7092, with losses lim­ited by talk that re­build­ing work would sup­port an al­ready strong econ­omy and lessen the need for fur­ther in­ter­est rate cuts.

Egypt’s pound strength­ened, mean­while, af­ter the In­ter­na­tional Mon­e­tary Fund ap­proved a $12 bil­lion, three-year loan pro­gram the gov­ern­ment hopes will help re­store in­vestor con­fi­dence and sta­bi­lize the cur­rency and econ­omy. In com­modi­ties, the ram­pant US dol­lar put pres­sure on gold, which lost 0.8 per­cent to $1,215 an ounce. It has lost 7 per­cent over the last week. Yet, in­dus­trial met­als ex­tended their bull run, with cop­per adding 1.2 per­cent.

In the oil mar­ket, Brent crude be­gan back­slid­ing, dip­ping 70 cents to $44.17 a bar­rel, while U.S. crude eased 60 cents to $42.75. One mar­ket rate, mea­sur­ing ex­pected US in­fla­tion over the five-year pe­riod that be­gins five years from today, shot up 30 ba­sis points to 2.46 per­cent last week, the high­est since late 2014. It had been as low as 1.84 per­cent in June.

Speak­ing in Frank­furt, Euro­pean Cen­tral Bank Vice Pres­i­dent Vi­tor Con­stan­cio warned about the uncer­tainty be­ing caused by the sud­den swing in mar­kets. “We should be cau­tious in draw­ing hasty, pos­i­tive con­clu­sions from those mar­ket de­vel­op­ments be­cause they may not nec­es­sar­ily in­di­cate that the world econ­omy will have an ac­cel­er­at­ing re­cov­ery with higher growth,” he said.

Asian mar­kets hit

Ja­panese stocks soared yes­ter­day as the dol­lar reached a four-month high against the yen, but most other Asian mar­kets were hit by wor­ries about the im­pact of Don­ald Trump’s pres­i­dency on global trade. Eq­ui­ties around the world have seen volatile trad­ing since the ty­coon’s shock elec­tion win, with his pledge of big-spend­ing mea­sures and tax cuts lead­ing to pre­dic­tions of a surge in in­fla­tion and higher bor­row­ing costs. The prospect of bet­ter and safer re­turns in the US has also led to an ex­o­dus from emerg­ing mar­kets and cur­ren­cies, while the Mex­i­can peso is also strug­gling ow­ing to con­cerns about Trump’s warn­ing he will tear up a key trade deal. Tokyo’s Nikkei ended up 1.7 per­cent, with ex­porters ral­ly­ing on the back of the weak­ened yen. The dol­lar was at 107.61 yen, its high­est mark since July.”The Fed­eral Re­serve now face the co­nun­drum of ris­ing in­fla­tion ex­pec­ta­tions,” Chris We­ston, chief mar­ket strate­gist in Mel­bourne at IG Ltd, said, ac­cord­ing to Bloomberg News.

“What we saw last week was a gen­uine change in the thought process of many money man­agers, with some feel­ing we need to be pre­pared for in­fla­tion, while many oth­ers have been truly skep­ti­cal of the moves and note that while mar­kets are firmly in the ‘hope’ phase there are great ex­e­cu­tion risks.”

Ja­panese in­vestors were also lifted by news the econ­omy grew more than ex­pected in the third quar­ter as ex­ports off­set slack con­sumer spend­ing.

Dol­lar surges

Welling­ton gained 0.5 per­cent as a deadly earth­quake in New Zealand’s south is­land boosted con­struc­tion firms on ex­pec­ta­tions of a re­build­ing pro­gram. Shanghai put on 0.5 per­cent de­spite data show­ing be­low-fore­cast re­tail sales and in­dus­trial out­put for Oc­to­ber. How­ever, Hong Kong sank 1.4 per­cent, ex­tend­ing a heavy loss on Fri­day, while Seoul and Syd­ney each shed 0.5 per­cent and Sin­ga­pore fell 0.9 per­cent. Manila dived 1.5 per­cent and Jakarta was 1.8 per­cent lower, with deal­ers con­cerned Trump’s pro­tec­tion­ist rhetoric could see him throw­ing up tar­iffs. The prospect of higher US in­ter­est rates bat­tered higher-yield­ing cur­ren­cies last week and on Mon­day South Korea’s won was down 0.6 per­cent, the Philip­pine peso fell 0.5 per­cent and the Thai baht lost 0.1 per­cent. “Asian cur­ren­cies con­tinue (to come) un­der al­most uni­ver­sal pres­sure in the af­ter­math of Don­ald Trump’s vic­tory in the US pres­i­den­tial elec­tions as traders bet that an iso­la­tion­ist and pro­tec­tion­ist pres­i­dency could harm the re­gion,” Greg McKenna, chief mar­ket strate­gist at CFD and FX provider Ax­iTrader, said. The dol­lar was also at record highs against the Mex­i­can peso. The peso and Mex­ico’s stock mar­ket have been hurt by fears Trump will fol­low through on cam­paign pledges to rene­go­ti­ate the North Amer­i­can Free Trade Agree­ment, as well as pres­sure the coun­try to pay bil­lions of dol­lars for a gi­ant bor­der wall. — Reuters

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