Dollar on the rise as bonds lick wounds

EMERGING MARKETS BATTERED BY A PUMPED-UP GREENBACK

World markets began to strain yesterday after a rollercoaster week that has seen oil break $80 (Dh293) a barrel, Italian politics rattle the Eurozone again and emerging markets battered by a pumped-up dollar and rising borrowing costs.

Traders hit Italian bonds, stocks and the euro as a pledge to ramp up spending from a coalition government taking shape in Rome caused fresh unease, while Wall Street was waiting to see the outcome of US and China trade talks.

Italy’s strife sent long-term borrowing to more than sevenmonth highs, stocks in Milan fell one per cent taking European stocks down with them, while the euro dropped back towards this week’s 5-month low.

Rome’s bonds saw their biggest sell-off in over a year last week. Italy accounts for around 15 per cent of Eurozone GDP and a quarter of the bloc’s public debt. For comparison, crisis poster child Greece contributed just 1.8 per cent to Eurozone GDP and 3.3 per cent to its pile of public debt.

“We have read the [Five StarLeague government] contract and the big question mark is where are they going to get the money,” Angelo Media, head of equities at Banor SIM said.

One policy includes issuing more short-term debt to pay companies owed money by the state, the economics chief of the one of the coalition parties, the far-right League, said yesterday.

With the dollar’s surge back on though, and oil shares gleeful about its rapid rise, European shares were heading for an eighth straight week of gains despite the Italian turbulence.

Japan target

Slowing Japanese core consumer price growth that kept the Bank of Japan’s elusive 2 per cent target well out of reach also kept the yen on the slide. It hit a fourmonth low of 111 per dollar.

It helped the six-currency dollar index rise to a new fivemonth high of 93.63.

The index gained about 1 per cent last week, buoyed by the surge in US Treasury yields, with the 10-year US Treasury note yield scoring a seven-year peak of 3.128 per cent. Euro traders meanwhile have nudged the shared currency back below $1.18. It fell nearly 1.2 per cent last week, largely pressured by the Italian uncertainty.

It was also heading for its fifth successive weekly drop versus the dollar, which would be a first for the shared currency since 2015.

“We don’t have an agreement on a [Italian] government at this point, but the market remains worried,” Societe Generale strategist Alvin Tan said, also pointing to last week’s fall in the euro against the traditionally-safe Swiss franc.

Elsewhere the two other macro spotlights were the hot oil markets after Brent crude broke up through $80 a barrel on Thursday, and the strain on emerging economy currencies.

The Turkish lira was wobbling again having fallen to a record low last week, the Brazilian real plumbed a two-year low, while Mexico’s peso has shed more than 5 per cent this month.

That latter continues to be hit by negotiations to rework the North American Free Trade Agreement (Nafta), which governs Mexico’s trade with the United States.

“The Nafta countries are nowhere near close to a deal,” US Trade Representative Robert Lighthizer said in a statement, pointing to “gaping differences” on a host of issues, including intellectual property, agricultural access, labour and energy.