Markets jittery; dollar hits six-week high
london — World stock markets entered March on shaky ground on Thursday, falling for the third straight day before the second leg of Federal Reserve chief Jerome Powell’s testimony to lawmakers.
The testimony, due at 1500 GMT, will come two days after his hawkish comments ignited fears the Fed could deliver four US rate rises this year instead of the three already priced in, triggering an equity selloff and pushing up bond yields.
The US dollar rose to six-week highs against a basket of currencies while the gap between short-dated US and German bond yields was at its widest since 1997.
MSCI’s all-country equity benchmark fell 0.4 per cent after snapping a record 15-month long winning streak in February, while European stocks lost almost 1 per cent. Emerging Asian and Japanese shares also fell earlier, with the latter down 1.6 per cent.
Wall Street looked set for another weak open, futures signalled, after it ended February with its worst monthly performance in two years. Chinese shares bucked the trend, however, edging up after a private survey showed manufacturing sector growth picking up to a six-month high. Shanghai shares closed 0.4 per cent higher.
Fed chief Powell will deliver the second leg of his semi-annual testimony on Thursday, an opportunity to clarify comments made on Tuesday that rekindled speculation over US monetary tightening this year happening faster than expected. Powell on Tuesday vowed to prevent the economy from overheating while sticking with a plan to gradually raise interest rates.
For equity markets, the fear is that a pick-up in the pace of rate rises could crimp corporate activity and cool economic growth.
Philip Shaw, chief economist at Investec in London said Powell’s testimony was unlikely to change from the one he delivered on Tuesday, putting the focus on the question and answer session. “He (Powell) appears to have got an easy ride from lawmakers in the sense that the technical questioning on Tuesday wasn’t too heavy,” Shaw said. “He may not have such an easy time today with the Senate Banking Committee.”
The dollar meanwhile has taken heart from the Fed chair’s comments. The dollar index rose to 90.776, a six-week high.
It has clawed back from the threeyear trough of 88.253 set in midFebruary, as fears of a ballooning US budget deficit and worries of a possible weak-dollar policy from Washington took a toll. The gap between short-dated borrowing costs in the United States and Germany was at its widest in over 20 years as the monetary policy outlooks for the two regions diverge.
The US/Germany two-year bond yield spread widened to 281 basis points. In contrast to rising ratehike speculation in the United States, data on Wednesday showing euro zone inflation slowed to a 14-month low in February highlighted that a rate rise from the European Central Bank remains some way off. —