FT: Wall St steady, Europe firm as bond yields dip
Thursday 14:30 BST. The Japanese yen earlier strengthened to less than ¥‎100 per dollar, hitting Tokyo stocks, as the US currency struggles for traction in the wake of Federal Reserve minutes that left traders betting on no imminent US interest rate rise.
Still, the prospect of borrowing costs staying at ultra-low levels for longer is pushing down government bond yields, boosting European equities and underpinning Wall Street.
“We are having another lively session in G10 FX as the US dollar continues to look soggy and market participants continue to focus on the price action in Japanese yen,” said Asia-based analysts at Citi.
The pan-European Stoxx 600 equity index is up 0.5 per cent, bolstered by mining and energy stocks as the soft greenback boosts dollar-denominated commodities. Base metal prices are gaining ground and West Texas Intermediate crude is climbing 1.4 per cent to $47.42 per barrel.
Sentiment in Europe is being lifted by the S&P 500 opening barely changed at 2,182, holding just below record levels after Wednesday’s late recovery from initial losses.
That rebound was cemented by the release of the transcript covering the Fed’s July monetary policy meeting, the contents of which have done little to convince the market that a tightening is close.
“I’m still sure that the [Fed] would like the market to price a bit more in, but only because when they finally act, they don’t want the dollar to go up too much (if at all) and risk sentiment to suffer too much (if at all).”
On Thursday, the probability of a 25 basis point rise at the Fed’s September meeting is 20 per cent, while the chance of a rate rise in December has dipped to 46.7 per cent from 51 per cent the day before, according to market pricing tracked by Bloomberg.
The nudging back of the timing for a Fed rate rise is weighing on bond yields and the US dollar.
The 10-year US Treasury yield, which moves inversely to the price, and which before release of the Fed minutes was trading around 1.59 per cent, is off 1 basis point on the day to 1.55 per cent. Equivalent maturity German Bunds and UK gilts are down 4bp to minus 0.08 per cent and a fraction of a basis point softer at 0.57 per cent, respectively.
The dollar index, which tracks the buck against a basket of its peers, is down 0.2 per cent to 94.49 as the euro strengthens by 0.2 per cent following ECB minutes, and sterling jumps 0.7 per cent after UK retail sales in July confounded Brexit doomongering.
But most focus is on the Japanese yen, which earlier touched a session trough of ÂĄ99.66 and is now just 0.1 per cent softer at ÂĄ100.37 per dollar.
The currency is moving back toward the roughly two-and-a-half-year high of ¥‎99.02 hit on June 24 in the wake of the UK’s vote to leave the EU. And its strength may be increasing pressure on the Bank of Japan to be more aggressive in easing monetary policy — especially after data showed Japanese trade took a knock in July, with imports and exports suffering their biggest monthly fall since 2009.
While a weak dollar is a key reason for the stronger yen, Julian Jessop at Capital Economics pointed out that the Japanese currency has appreciated by more than twice as much as any other major since late July.
“The main explanation for the continued appreciation of the yen is that, having disappointed the markets by leaving monetary policy on hold at its late July meeting, the Bank of Japan is now thought increasingly unlikely to ease any further. This might be because the onus has shifted towards fiscal stimulus, or simply because the BoJ has run out of options,” he said.
Japan’s exporting stocks were under pressure, pushing the Nikkei 225 stock average down 1.6 per cent. Hong Kong’s Hang Seng, which tends to take its cue more from Wall Street, rose 1 per cent, also helped by a strong gain in index heavyweight Tencent after the company delivered a record profit in the second quarter. On the Chinese mainland the Shanghai Composite eased 0.2 per cent.
Gold, which usually is sensitive to interest rate expectations and dollar moves, is adding $3 to $1,351 an ounce, eyeing a fourth day of gains.
Finally, in a reminder that not all countries are adopting easier monetary policy, Mongolia hiked interest rates by a chunky 4.5 percentage points to 15 per cent in order to protect its currency, the tugrik.
