Gloom descends on Europe as G20 ministers ponder US tariff threat
Dollar has choppy session ahead of Fed officials’ speeches, while sterling slips as UK prepares to trigger Brexit process
Wall Street struggled for direction and the dollar spent most of the day with a weaker bias as participants adopted a cautious stance following the weekend G20 meeting and awaited a heavy schedule of “Fedspeak” in coming days.
The hesitant tone displayed by US equities helped encourage a firmer showing for Treasury bonds while oil prices remained under pressure but gold hit a two-week high.
In early afternoon trade in New York, the S&P 500 equity index was down 0.1 per cent to 2,375, although Apple’s 1.1 per cent rise to a record high helped drive the technology-heavy Nasdaq Composite to anall-time intra day peak.
The mood in Europe was downbeat, with the pan-regional Stoxx 600 index falling 0.2 per cent from Friday’s 15month closing high.
The Xetra Dax in Frankfurt shed 0.4 per cent as Deutsche Bank tumbled 3.7 percent ahead of an €8bn cash call.
Energy stocks fell on both sides of the Atlantic as concerns about US crude inventories continued to weigh on oil prices. Brent was down 0.1 per cent at $51.73 a barrel but off a three-month intra day low of $50.25 struck last week.
Meanwhile, the dollar had a choppy session, with the dollar index — a measure of the currency against a basket of peers — touching 100.02, the lowest for nearly six weeks, before rallying to 100.34, slightly higher on the day.
The euro was up marginally at $1.0739 while the US unit was down 0.1 per cent versus the yen at ¥112.64.
The meeting of G20 finance ministers in Germany concluded with a communiqué that was notable in that the commitment to eschew trade protectionism had been dropped — a clear reflection of the Trump administration’ s stance.
“From an FX perspective, at the margin it may strengthen the expectations that the US will move toward a ‘border adjustment tax’ that would certainly have a positive impact on the dollar,” said Derek Halpenny, currency analyst at MUFG.
“However, it may also merely mean the US will implement specific tariffs on a very small number of countries that are deemed to be breaking trade rules. Or finally it might mean that the US continues to use the threat of tariffs to strengthen its negotiation power ahead of bilateral trade negotiations the US intends to conduct with countries like Mexico, Canada and China.”
Jim Reid, macro strategist at Deutsche Bank, highlighted that it was still early days for the Trump administration.
“So for now, it seems that markets will wait and see before becoming too scared by the implications,” he said.
“Indeed the more significant meeting may be the G20 meeting in Hamburg in July, by which time some of that uncertainty around the new US administrationmay have started to clear up .”
The dollar has been under pressure for the past few days after the Federal Reserve raised interest rates, as expected, but stuck to its forecasts regarding the pace of future tightening.
A number of Fed policymakers are due to speak this week — including Janet Y ellen, chair of the US central bank.
“While it would be natural to assume that Ms Yellen’s appearance should be the one carrying the most weight, we are very doubtful that her remarks will be useful to markets,” said Anthony Karydakis, chief economic strategist at Miller Tabak.
“She already had ample time just a few days ago to explain her thoughts on the economic landscape at considerable length and share with markets her — and the Federal Open Market Committee’s — way of approaching monetary policy ahead.
“It would be safe to assume that she has nothing new to add just a week later in the context of a generic keynote address at a Fed-sponsored conference on Community Development research .”
Meanwhile, sterling slipped 0.4 per cent against the dollar to $1.2342 — and 0.4 percent versus the euro to €1.1495— after news that Theresa May, UK prime minister, would trigger the two-year Article 50 EU exit process next week.
“Until now, we can regard the UK economy and politics as having enjoyed a honeymoon period following the June referendum on EU membership last year ,” said Divyang Shah, global strategist at I FR Markets.
“Once Article 50 is triggered, the hard task begins as the EU and UK gather around the negotiating table and divorce proceedings begin.”
The yield on the 10-year UK government bond — which moves inversely to its price — fell 2bp to 1.23 per cent while that on the equivalent-duration US Treasury was down 2 basis points at 2.48 per cent. The two-year US yield was also 2 bp lower at 1.30 percent.
Gold extended its run of gains to a fourth day as the metal rose $5 to a two week high of 1,233 an ounce.
Three big Brexit unknowns: FT.com/video The FT’s Gideon Rachman looks at a trio of post-EU riddles: negotiation challenges, world events and trade deals