Emerg­ing mar­ket cur­ren­cies’ sell­off re­sumes

Kuwait Times - - BUSINESS -

LON­DON:

The dol­lar hit a four-month high against the yen and world’s top bonds and emerg­ing mar­ket cur­ren­cies were back un­der pres­sure yes­ter­day, on bets for higher in­ter­est rates in a small but grow­ing group of ma­jor economies. With the ex­pec­ta­tions fu­elled by in­creas­ingly ro­bust-look­ing global growth, MSCI’s 47-coun­try All World share in­dex was up for a third day run­ning, though it was forced to cling on as Europe’s main bourses fal­tered de­spite a fresh flurry of M&A ac­tiv­ity.

They were un­set­tled by some heavy falls among de­fen­sive con­sumer sta­ples and prop­erty stocks, a dip in the com­mod­ity sec­tor as oil stum­bled and as fu­tures mar­kets pointed to flat start to US trad­ing for Wall Street. Trea­suries and bench­mark Euro­pean bond yields re­sumed their march up­wards, hav­ing paused on Mon­day, as the fo­cus shifted back to the pace of mone­tary tight­en­ing in the world’s largest economies.

Fed­eral Re­serve chief Janet Yellen starts two days of tes­ti­mony to­day as it pre­pares to un­wind the mas­sive hoard of bonds it bought to ease the fi­nan­cial cri­sis, while top ECB and Bank of Eng­land pol­i­cy­mak­ers were due to speak in Europe yes­ter­day. Ger­many’s 10-year yield edged up 2 ba­sis points to 0.56 per­cent hav­ing more than dou­bled over the last few weeks. The South African rand, Turk­ish lira and Rus­sia rou­ble all dropped around 1 per­cent as some un­usu­ally con­cen­trated sell­ing re­sumed to emerg­ing mar­kets too.

Roger Webb, Head of Euro­pean Credit at Aberdeen As­set Management said slightly stronger-than-ex­pected global growth num­bers re­cently had boosted ex­pec­ta­tions of higher in­ter­est rates. “I think the in­creased hawk­ish­ness we have seen from the cen­tral banks has led to a fear that we could see a mini-ta­per tantrum,” he said. “I don’t think there is too much alarm. I think the move to slightly higher yields in Europe and the US, UK and else­where is prob­a­bly un­der­stand­able.”

The dol­lar ground higher against most ma­jor cur­ren­cies, in­clud­ing to a four­month high of 114.43 yen as traders played the past fort­night’s 25 ba­sis-point rise in US govern­ment bond yields against the Bank of Ja­pan’s vow to keep its stim­u­lus flow­ing. The New Zealand dol­lar fell to its low­est in over two weeks mean­while af­ter an 6.8 mag­ni­tude earth­quake hit the coun­try’s south is­land.

The Cana­dian dol­lar was down slightly too as in­vestors awaited a Bank of Canada in­ter­est rate de­ci­sion to­day which could be its first hike since the fi­nan­cial cri­sis. Fore­cast­ers are still di­vided on whether it will pull the trig­ger, but money mar­kets seem con­vinced it will and are also 80 per­cent priced for a fol­low-up rise by De­cem­ber.

Fine China vs toxic trio

In com­modi­ties, crude oil slipped back af­ter push­ing higher overnight in Asia. In­creased drilling ac­tiv­ity in the United States and un­cer­tainty over Libyan and Nige­rian pro­duc­tion cuts clouded the fu­ture sup­ply out­look, leav­ing US crude down a third of a dol­lar at $44.13 a bar­rel and Brent at $46.57. BNP Paribas slashed its fore­casts for Brent by $9 to $51 a bar­rel for 2017 and by $15 to $48 for 2018. Bar­clays also cut its 2017 and 2018 Brent fore­casts to $52 a bar­rel.

Gold edged lower to $1,212.13 an ounce as it headed back to­wards a four­month low and cop­per dipped too as the prospect of a strike at one of Chile’s big mines failed to off­set data show­ing a rapid build-up of in­ven­to­ries. Stain­less steel in­gre­di­ent nickel, how­ever, gained af­ter Chi­nese steel prices reached their high­est in 3-1/2 years.

That came as bluechip Chi­nese stocks also hit an 18-month high as in­vestors chased firms with stronger fun­da­men­tals and the cen­tral bank re­sumed liq­uid­ity in­jec­tions hav­ing kept the taps closed for last 12 ses­sions. Other emerg­ing mar­kets heavy­weights were on the ropes though. South Africa’s rand hit a twom­onth low while Turkey’s lira and Rus­sia’s rou­ble both lost al­most 1 per­cent to trade just off re­cent re­spec­tive 21/2 month and six-month lows.

They have be­come a new ‘toxic trio’ for traders hav­ing been ham­mered over the last few weeks de­spite other ma­jor EM cur­ren­cies, such the Mex­i­can peso, Brazil­ian real and Pol­ish zloty, all far­ing rel­a­tively well. “We have been em­pha­siz­ing the fun­da­men­tal weak­ness of the South African macro story for some time, and be­lieve that mar­ket pric­ing on ZAR (the rand) showed a de­gree of com­pla­cency that in part was ex­plained by low G3 bond yields,” an­a­lysts at Mor­gan Stan­ley wrote in a note. “It is thus not much of a sur­prise that it is the worst-per­form­ing EM cur­rency now that liq­uid­ity con­di­tions look less sup­port­ive.” —Reuters

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