European shares hit one-month high; dollar up on Yellen’s hint

London, New York markets closed for public holiday

LONDON, May 30, (Agencies): European shares hit one-month highs on Monday, while the dollar index rose to a two-month peak after Federal Reserve Chair Janet Yellen suggested that an interest rate hike in the United States may be around the corner.

The Fed should raise rates “in the coming months” if growth picks up and the labour market continues to improve, Yellen said on Friday. St Louis Fed President James Bullard chimed in, saying on Monday, global markets appear to be “well-prepared” for a summer rate hike, although he did not specify a date for the policy move.

The probability of a rate increase at the Federal Open Market Committee’s June 14-15 meeting rose to around 34 percent from 26 percent on Thursday, according to CME’s Fedwatch programme. Bets on an increase at the July 26-27 policy meeting edged up to 60 percent, more than double the level of a month ago.

Against a basket of currencies, the dollar was up 0.4 percent at 95.879, while the euro struggled near 2-1/2 month lows of $1.1097 hit in the Asian session.

The euro zone’s blue-chip Euro STOXX 50 index was 0.1 percent higher, while Germany’s DAX was up 0.3 percent, hitting a one-month high. Trading volumes are expected to be thin as the London and New York markets are closed for a public holiday.

While higher US interest rates would sap global liquidity, Wall Street and European investors took Yellen’s comments in their stride, as they suggested the world’s largest economy was strong enough to weather another rate hike, following from the December hike.

“The return to US rate hike expectations have reopened the possibility of short-term outperformance for European stocks,” said Didier Duret, global chief investment officer at ABN-AMRO Private Banking, adding investors were keeping an eye on the dollar for it to break recent ranges.

The rise in European markets came after Japan’s Nikkei stock index ended up 1.4 percent, as the yen weakened to a one-month low and expectations rose that the government would delay a sales tax hike scheduled for April next year.

Japanese Prime Minister Shinzo Abe said he would delay the increase by 2-1/2 years, Masahiko Komura, vice president of the ruling Liberal Democratic Party, told reporters on Monday, echoing what a government source told Reuters on Sunday.

One uncertainty, however, is how markets would react if a postponement of Japan’s sales tax hike were to lead to a downgrade of the country’s sovereign rating.

“What would be scary is if there were to be a downgrade. I think equities would fall if that happens. That remains a risk,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

This week investors will keep an eye on the all-important US non-farm payrolls and the Institute for Supply Management surveys. The May jobs report is due on Friday and a solid reading could heighten expectations for a June move.

Economists expect US employers to have added 170,000 jobs this month, slightly more than they did in April. Hourly wages are expected to show a 0.2 percent increase from the previous month.

Crude oil futures remained shy of the $50 per barrel level after marking weekly gains, feeling some pressure from the stronger US dollar that made it more expensive for holders of other currencies.

Brent crude slipped to $49.10 a barrel, after gaining 1 percent last week. US crude was down 0.3 percent at $49.18 after rising about 3 percent for the week.

The dollar’s strength took a toll on spot gold, which dropped 0.9 percent to $1,201 an ounce. It plumbed a low of $1,199.60 earlier in the day, its lowest since late February.

Europe

Equities markets across the world firmed Monday as investors lost their fear of higher US interest rates, focusing instead on signs of economic recovery.

Trading volumes were, however, sharply curtailed by London and Wall Street closures due to bank holidays.

But those European dealers present found reason to cheer data showing that German inflation was back in the black, a sign that economic recovery in Europe’s powerhouse economy is finally translating into higher prices.

An upward revision in French growth also lifted spirits.

“While not exactly splendid, the outlook for the eurozone economy is quite satisfactory,” said Holger Schmieding, an economist with Berenberg bank.

This will comfort the European Central Bank in its unprecedented stimulus efforts, and allow the ECB to sit back at this week’s monetary policy council meeting without doing more for now, analysts predicted.

Across the Atlantic, a speech by US Fed chief Janet Yellen Friday boosted expectations of higher US interest rates in June or July.

While rate hikes are usually seen as bad for stock markets, increasing corporate borrowing costs and sapping consumer spending, equity markets are this time focusing instead on the economic rebound behind the projected rate rise.

“Janet Yellen’s remarks on Friday confirm that at least one increase in the Fed rate is likely this year,” Ric Spooner, chief market analyst at CMC Markets, wrote.

The Frankfurt main stock index rose 0.5 percent after data showed that German inflation returned to positive territory in May on the back of rising prices for rents and services.

France also had good news to report. An upward revision of the first quarter growth rate by 0.1 points to 0.6 percent and an increase of 1.5 percentage points in the French reading on the EU’s Economic Sentiment Indicator both lifted the mood, with the Paris CAC index ending 0.3 percent higher on the day.

■ Key figures around 1540 GMT Frankfurt — DAX 30: UP 0.5 percent at 10,333.23 (close)

Paris — CAC 40: UP 0.3 percent at 4,529.40 (close)

EURO STOXX 50: UP 0.4 percent at 3,089.97

Asia

Tokyo stocks led Asia higher Monday, boosted by hopes the government will delay a sales tax hike and by a weaker yen after Federal Reserve boss Janet Yellen hinted that a US interest rate increase was looming.

Yellen said Friday she believed growth and the strengthening of the labour market would continue, and in that case, “probably in the coming months such a move would be appropriate”.

That timeframe, which other Fed policymakers have also referred to in recent weeks, would put the Fed’s action at its June 14-15 or July 26-27 meeting.

The US central bank has repeatedly stated its intention to continue raising rates this year after December’s first hike in nine years.

“Janet Yellen’s remarks on Friday confirm that at least one increase in the Fed rate is likely this year,” Ric Spooner, chief market analyst at CMC Markets, said in an email commentary.

Tokyo led the charge in Asia, ending up 1.4 percent and above 17,000 points for the first time in a month as the dollar surged against the yen. Hopes the government would delay a consumption tax hike also powered shares higher.

The dollar rose to 111.15 yen in Asian trading from 110.37 yen Friday in New York — the yen’s weakest level in about a month. A weaker currency is good for exporters as it inflates the value of their overseas profits.

Media reports over the weekend said Prime Minister Shinzo Abe had told his close aides that he intends to push back a sales tax increase to October 2019 on fears it could damage the already fragile economy.

Hong Kong rose 0.3 percent, while Shanghai and Sydney were flat. Seoul shed 0.1 percent, but Jakarta and Taipei gained 0.5 and 0.9 percent respectively.

Meanwhile, China’s central bank on Monday set the value of the yuan currency at a more than five-year low of 6.5784 to the US dollar, according to the national foreign exchange market, in a pattern of weakness in anticipation of higher US interest rates.

An increase of 1.5 percentage points in the French reading on the EU’s Economic Sentiment Indicator, also failed to budge the CAC.

With US exchanges also closed for Memorial Day, analysts at brokerage Aurel BGC said that “the week will really get underway on Wednesday with Chinese PMI and the US manufacturing ISM”, two key surveys of companies used as gauges of economic activity.

A stronger greenback makes dollarpriced oil more expensive, denting demand and hurting prices.

■ Key figures around 1000 GMT Tokyo: Nikkei 225: Up 1.4 percent at 17,068.02 (close)

Shanghai — Composite: UP 0.04 percent at 2,822.151 (close)

Hong Kong — Hang Seng: UP 0.3 percent at 20,629.39 (close)

Oil

Oil prices edged lower towards $49 a barrel on Monday as Iraq raised its crude exports target ahead of an OPEC meeting while Canadian production was set to restart after huge wildfires.

Attention turned to a meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna on Thursday, though most analysts did not expect any changes in the group’s production.

While OPEC has been unable to agree on an output freeze in an effort to support prices, Iraq was the latest Middle East producer to raise its export quota ahead of the meeting, supplying 5 million barrels of extra crude to its partners in June.

“We do not expect any (OPEC) agreement on a specific production target to be achieved,” Commerzbank analysts said in a note.

Brent crude futures were at $49.27 a barrel at 1222 GMT, down 5 cents, while US West Texas Intermediate (WTI) crude futures was down 6 cents at $49.27.

Strengthening of the dollar on higher expectations for a near-term US interest rate rise also weighed on commodities priced in the currency.

Trade was subdued because of public holidays in Britain and the United States, where Monday’s Memorial Day is seen as the traditional start of US summer driving season.

Vienna-based consultancy JBC Energy said that global oil demand between January and April rose by 1.5 million barrels per day from a year earlier. That was stronger than many forecasts and was driven by strong consumption in the United States, China and India.

US crude output also dropped to its lowest since September 2014 after oil drillers cut rigs for a ninth week in 10 despite the recent rally in oil prices.

Gold

Gold fell below $1,200 for the first time since mid-February on Monday, as comments from Federal Reserve chief Janet Yellen on the likelihood of higher US interest rates sent the dollar to twomonth highs.

The Fed should increase interest rates “in the coming months” if the economy picks up, Yellen said on Friday, bolstering the case for a rate hike in June or July. St. Louis Fed President James Bullard said on Monday global markets appeared to be “well-prepared” for a summer rate hike.

An increase in US rates would raise the opportunity cost of holding gold, which does not earn interest. It would also bolster the dollar, making gold more expensive for other currency holders.