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

Financial Times Middle East - - Markets & Investing - DAVE SHELLOCK

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.

Is­abel In­fantes/AFP/Getty

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

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