FT: Euro firmer after Trichet signals July rate hike
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Thursday 13.40 BST. Forex markets are signalling the tentative emergence of risk appetite, but traders remain cautious after nagging concerns about the US economy’s “soft patch” left major equity benchmarks near 3 month lows.
The FTSE All-World is down 0.1 per cent, commodities and core bonds are mixed. S&P 500 futures point to a 0.3 per cent gain for New York’s benchmark at the open, and this has helped Europe’s FTSE Eurofirst 300 gain 0.1 per cent.
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The conundrum for risk asset bulls is being highlighted by the performance of the euro. The single currency is firmer against the dollar and yen – up 0.3 and 0.4 per cent respectively – after European Central Bank president Jean-Claude Trichet signalled interest rates would rise in July.
This brings home to the market that even in the face of slowing growth, the longer-term trend is for the crutch of ultra-loose monetary policy to be removed.
Ben Bernanke, US Federal Reserve chairman, on Tuesday appeared to rule out any further quantitative easing to support assets, apparently dismaying some investors who had hoped the Fed’s largesse would extend beyond June, when its current $600bn bond-buying programme concludes.
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The New Zealand dollar has risen from $0.8151 to $0.8245 after the Reserve Bank of New Zealand hinted at rate rises before the end of this year. The ECB and Bank of England left rates unchanged at 1.25 per cent and 0.5 per cent on Thursday, respectively on Thursday.
Worries about more monetary tightening saw Shanghai drop 1.7 per cent, contributing to a 0.4 per cent decline for the FTSE Asia-Pacific index.
The effect of Beijing’s more restrictive policies could be seen in official car sales data, which showed a 0.1 per cent fall in May compared with a year earlier – the first month-on-month drop in more than two years.
Still, evidence that a major cause of the recent economic deceleration was the supply disruption caused by the March 11 Japanese earthquake will encourage those who contend that markets can now be weaned off the monetary sugar.
But with the S&P 500 down nearly 6 per cent from its March cyclical peak, it is clear that cold turkey can be a messy affair.
A complicating factor for investors is what impact the move higher in energy costs will have on consumers and corporate margins. The failure of Opec to deliver an agreed production increase pushed the price of Brent crude, the global benchmark, back above $118 a barrel – though it is currently up just 5 cents at $117.90.
Any further advance for oil is likely to revive inflation concerns. These are not to the fore at the moment as far as the core bond complex is concerned. US 10-year yields are near six-month lows at 2.95 per cent, little changed on the session.
Meanwhile, 10-year “break-evens”, which signal the market’s inflation expectations, are at 2.2 per cent, the lowest level since mid-December and more than 40 basis points below the recent high seen in April.
Low US Treasury yields are not helping the dollar, which is also likely to be suffering from a slight improvement in broader market sentiment. The dollar index, which tracks the buck against a basket of its peers, is down 0.1 per cent to 73.85.
Commodities would normally revel in a weaker dollar, but it seems residual worries about global demand are having a greater impact. Copper is leading the industrial metals slightly lower with a fall of 1.1 per cent to $4.06 a pound.
Precious metals are also shunning the greenback’s influence, with gold off 0.1 per cent to $1,535 an ounce and silver struggling to hold $37 an ounce.
