Wednesday 16.45 BST. A turn in US economic data has reversed the decline of the dollar and given a lift to risky assets that had earlier tumbled amid uncertainty about a global recovery that is increasingly reliant on consumers.
The risk appetite picture is mixed. The FTSE All-World stock index is down 0.3 per cent. European and Asian shares are lower, but Wall Street is trading higher. US Treasury yields are now rising following stronger than expected US employment figures.
Earlier, a run in the yen brought the Japanese currency nearer to its 15-year high below Y85 to the dollar. Uncertainty about the US economy has driven investors seeking havens from risk away from the dollar – normally in demand in such markets – and into the arms of the yen. The yield on Japanese 10-year bonds dropped to a fresh post-crisis low, at just 1 per cent.
But a silver lining in the US labour market has eased risk revulsion, and lessened expectations of the Federal Reserve taking emergency steps to loosen access to money. Ahead of the official non-farm payroll report on Friday, ADP reported 42,000 jobs created in the private sector in July, above expectations of 40,000. Also in July, US non-manufacturing services activity grew slightly, contrary to expectations of a decline.
“Markets are extremely responsive to economic data right now,” said Stephen Wood, chief market strategist at Russell Investments. “And the employment situation is becoming a dominant data point, because it also has an impact on Federal Reserve policy. They’re keeping one if not two eyes on the jobs market.”
Meanwhile, the corporate picture continued to be bright. Toyota, Japan’s biggest company, added its name to the list of carmakers that have topped forecasts and raised their projections for second-half profits. And a series of European banks, led by Lloyds Banking Group, also lowered their provisions for losses on bad loans.
Yet sentiment is likely to remain restrained. European equity markets did not respond to the US economic surprise, and the euro and the pound dropped back after reaching multi-month highs on Tuesday.
The chief global worry is about the consumer, and whether there will be enough demand to support a global recovery once industries’ inventory restocking subsides. Reports showed that eurozone and UK services activity were surprisingly slow, and eurozone retail sales in July also behind forecasts.
Asia is showing a mixed bag, and its stock markets reflected that. Emerging markets in the region are doing well, while larger economies are struggling to keep pace. China said its inventory restocking cycle was easing, putting the onus on consumers to pick up as business demand slackens. Australia’s service sector activity was reported to have also dipped in July.
☼ Factors to watch. The US’s own services index, the ISM non-manufacturing index, is due later in the day. But the big report is still the non-farm payroll. Reuters today polled a group of the most accurate forecasters. They expected the headline figure, which includes government jobs to be below expectations, at a loss of 70,000 jobs, versus 65,000 in the broader forecast.
The Bank of England’s monetary policy committee announces its decision on interest rates on Thursday. Few bank-watchers actually expect a rate rise – though you wouldn’t know that from the way the pound has been surging of late, nearing $1.60. ☼
• Europe. Banks are down across Europe, in spite of strong earnings reports. Another clutch of European lenders reported earnings that topped estimates, including Lloyds Banking Group, Société Générale and Standard Chartered. Profitability was driven by lower provisions for bad loans, as it was for HSBC and BNP Paribas earlier in the week.
Without their support, the FTSE Eurofirst 300 is down 0.1 per cent. The leading decliners are retail shares, thanks to weakening measures of consumer demand. The UK’s FTSE 100 index closed down 0.2 per cent after the UK’s services PMI missed expectations. Germany’s Dax index is up 0.4 per cent, as the country’s own service sector was found to be expanding at its fastest rate in three years.
• Asia. The Nikkei led decliners in the region, down 2.1 per cent. The yen’s push brought further fears for Japanese companies, whose exports would become more expensive if the yen were to remain at such elevated levels. Australia’s S&P/ASX 200 was down 0.7 per cent.
After Indonesia’s central bank declined to raise rates, Jakarta’s IDX composite index was up 0.3 per cent, as were other Asian emerging markets. Hong Kong’s Hang Seng was up 0.7 per cent, though Shanghai was up barely 0.1 per cent. China said growth would slow in the current quarter, which would also moderate inflation pressures – a top worry for Asian property and manufacturing sectors.
Mumbai’s Sensex was up 0.6 per cent, as the government looks more likely to tackle inflation. Street protests at high prices have put pressure on the finance ministry to reverse course and support rate increases planned by the central bank.
• Currencies. Investors were easing their flight from risk in the afternoon.
The yen is now down 0.4 per cent against the US dollar at Y86.21. Earlier it had inched closer to Y85, its lowest level in nearly 15 years. Gains peaked in the Asian session after Japan’s finance minister said he was “watching closely”, sparking fears that Japan could intervene to counterbalance the yen’s rise. It switched to a loss after the ISM and ADP figures in the US. The yen is also now down 0.5 per cent against the New Zealand dollar.
The US dollar is also showing strength elsewhere. The euro and the pound are weaker versus the dollar after hitting fresh multi-month highs during Tuesday’s session. The euro is down 0.5 per cent at $1.3160, and the pound is 0.5 per cent lower at $1.5882.
• Bonds. “Haven” debt was seeing strength earlier, but has eased. Japanese 10-year yields fell to their lowest since 2002, dropping 4 basis points to 1.00 per cent. On Monday, US 2-year bond yields had reached all-time lows.
But US Treasury benchmark 10-year bonds are up 3 basis points to 2.96 per cent. German Bund yields are up 1 bp at 2.61 per cent. The US said it will auction off $74bn of 3, 10 and 30-year bonds, raising supply concerns that put downward pressure on bond demand.
US corporate bonds are at record levels of demand. Jim Reid, strategist at Deutsche Bank, said in a report that of the 10 lowest-coupon US-dollar corporate bonds ever issued, all have occurred in the past 14 months, as investors make a striking shift from equities into fixed income.
• Commodities. Gold is higher after risk aversion grew during Asian and European trading, up 1.2 per cent to $1,199 an ounce. Earlier it regained the $1,200 level for the first time in two weeks, rallying after falling to three-month lows in July.
US WTI crude oil is up by 22 cents at $82.75 a barrel. It rallied sharply when risk assets were accumulated at the beginning of March, reaching three-month highs, also supported by storm warnings for the Gulf of Mexico.
