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Tuesday 14:00 GMT. A burst of risk aversion before the Wall Street open has pushed gold and the Swiss franc higher and forced stocks on to the back foot.
The FTSE Eurofirst 300 is down 0.7 per cent and US index futures have turned a suggested 4 point gain for the S&P 500 into a putative 5 point loss.
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The dollar index is down 0.2 per cent as the ‘haven’ Swiss franc rises 0.3 per cent to Sfr0.8878, a two-year high. Gold has broken back above resistance at $1,250 an ounce, up $20 to $1,261 after the market sensed positioning may have become overly bearish.
Industrial commodities have pared gains, with Brent crude, which had earlier flirted with $110 a barrel, now adding just 15 cents to $109.54 and copper up fractionally to $3.21 a pound.
There is little in the way of data catalysts to explain the moves, but the deterioration in mood coincided with a rally by the yen after the Japanese unit had earlier fallen to fresh multi-year lows versus a number of peers.
The yen is considered by some a sentiment proxy for the wider market because it is the funding currency for bullish carry trade strategies.
But after the euro/yen cross traded above Y142 for the first time since October 2008, on expectations the BoJ will increase further its stimulus in 2014, the yen began to strengthen and is now up 0.4 per cent to 141.40 per euro. Similarly, the dollar has lost ground, falling 0.4 per cent to Y102.83.
But perspective is required for Tuesday’s risk asset pullback. In particular, the mild dip for the S&P 500 is from a record close which was reached after the index gained 27 per cent this year.
Stocks have trundled higher of late as investors appeared to come to terms with the prospect of less Fed largesse, provided short-term borrowing costs remain grounded – the two-year yield is holding near historic lows of 30 basis points – and economic conditions improve.
A poll by Reuters this week found that a small majority of economists think the Fed will start to reduce its $85bn-a-month bond-buying stimulus programme in March. However, following better than expected US jobs data on Friday, the proportion of analysts who think the central bank could “taper” in January, or even after this month’s meeting, has risen notably.
Yet, 10-year Treasury yields are down 4 basis points on the day to 2.82 per cent, 11 basis points below the three-month high hit last week, helped lower by benign inflation levels.
This is putting pressure on the dollar and nudging the euro up 25 pips to $1.3762, less than a cent shy of the highest level since October 2011, as investors also reduce expectations that the European Central Bank will instigate further stimulus measures.
The single currency has been getting support from the bloc’s current account surplus and as the region’s steadier banking system helps reduce the ECB’s balance sheet.
Earlier in Asia, when the yen was weaker, it touched a five-year trough versus the South Korean won.
But what may be good news for Japanese exporters is not so great for their Korean counterparts, and Seoul’s Kospi index fell 0.4 per cent.
Tokyo’s stock market did not benefit from the initially softer yen either, with the Nikkei 225 slipping 0.3 per cent.
One reason sentiment turned in Japan was a Kyodo poll showing support for Shinzo Abe’s administration dropped more than 10 points to 47.6 per cent, its lowest level yet.
Barclays analysts noted that a decline in support for Mr Abe raised concerns about the direction of his ambitious growth programme, dubbed “Abenomics”.
“If sustained, Mr Abe could struggle to approve the second consumption tax increase in mid-2014 and to advance his growth strategy, strengthening the incentive to support the economy through fiscal expenditure,” they told clients.
Asian emerging markets were more chipper as worries about Fed tapering faded. Indonesia’s bourse added 1.5 per cent while Malaysia held a record high.
The renminbi rose to a record high versus the dollar for the second day in a row – hitting $6.0703 – as China’s central bank allowed the unit to appreciate. That may be a bullish sign because it suggests Beijing feels the improving economy can cope with a more competitive exchange rate.
