Dollar stirs as yield gap yawns
The dollar, oil and world stocks all rose yesterday following upbeat US data that saw the gap between Treasuries and other benchmark global government bonds hit new highs. Europe’s main stock market, London’s FTSE, reopened with a gain of 0.25 percent as it played catch-up after similar run-ups in Germany and France the previous day and by Wall Street and Asia overnight.
The dollar also edged higher after US consumer confidence shot to its highest in more than 15 years in December on hopes that President-elect Donald Trump will nurture further improvements in the world’s biggest economy. Having already jumped 16 percent against the Japanese currency since the US election, the greenback gained a further 0.15 percent to 117.61 yen. It was up a similar amount against the euro and sterling too at $1.04 per euro and at $1.2235 to the pound.
“Everything is broadly dollar supportive,” said Societe Generale’s head of currency strategy Kit Juckes.” “We have come back from Christmas with some good US data, (US) bond yields are at the top end of their recent range, oil is edging higher and the Dow is flirting with 20,000 points.” Euro zone bond yields fell across the board as concerns about the strength of a rescue plan for Italian banks and normal year-end caution pushed investors to the safety of government debt.
Germany’s 10-year yields hit their lowest in seven weeks at 0.18 percent. That in turn widened the yield gap to US Treasuries, which act as the world’s benchmark borrowing rate, to a record high of 237 basis points. Oil prices - the other major market driver in recent weeks - climbed back towards a 1-1/2 year high as promised output cuts loomed.
It has surged over 50 percent this year despite plunging to a 12-year low in January. Brent was at $56.50 a barrel and US crude at $54.25 after an overnight surge of 1.7 percent. In a sign that the world’s oil major producers may abide by their output agreement, OPEC member Venezuela said it will cut 95,000 bpd of oil production in the New Year. Gazprom Neft said it planned to boost oil output by less than it had intended before Russia, one of the non-OPEC member countries, joined the deal to cut supply.
Helped by the broadly robust tone to stock and commodity markets. the Australian and New Zealand dollars both firmed. Australian stocks rode the rise to gain 1 percent. Indonesian shares added 1.9 percent, while Japan’s Nikkei rose 0.1 percent. Shanghai dipped 0.3 percent to continue a dire 2016. It has slumped the best part of 18 percent this year having been a star performer in 2015, dampening an otherwise strong rebound in emerging markets after three years of straight losses.
With the dollar and bond yields on the rise again and China’s yuan on the slide, investors though are wondering whether the rally could falter. Data from Morgan Stanley showed EM equity funds suffered weekly outflows of $3.35 billion, the second largest of the year, while EM bond funds saw outflows of $800 million which made it seven straight weeks of outflows running.
It said the cumulative drop over the last eight weeks totaled $11.1 billion. Firmer oil prices and the upbeat US data continued to support the wider commodity market. Copper on the London Metal Exchange was up 1 percent at $5,513 per ton as trading resumed after the Christmas holidays.
Iron ore on the Dalian Commodity Exchange extended gains after breaking a nine-day slump the previous day. It was up 3.5 percent at 569.0 yuan ($81.82) per ton and has now risen about 170 percent this year, boosted by expectations of Chinese stimulus and hopes that the incoming Trump Administration will increase US infrastructure spending. “There is strong positive sentiment on the outlook for these industrial metals going into 2017,” said a Perth-based commodities trader. “Let’s see if this carries in to the main LME session later on.”