Dol­lar stirs as yield gap yawns

Kuwait Times - - BUSINESS -

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.

Year-end cau­tion

“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.

Emerg­ing jit­ters

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.”

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