BLBG: Dollar Falls as Hunt for High Yields Spurs Emerging-Market Gains
Global market risk index falls to lowest since start of year
U.S. stocks edge higher amid merger activity; oil slumps
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The dollar weakened against high-yielding currencies, while stocks rose, on confidence central banks around the world will go out of their way to avoid jolting financial markets. Oil slumped.
The MSCI Emerging Markets Currency Index extended a three-day advance as prospects for a U.S. interest-rate hike this month remained subdued, while global central banks keep monetary policies supportive of risk assets. Australia’s dollar climbed after the nation’s policy makers kept borrowing costs steady and gave no indication that cuts would become necessary. Stocks in developing nations rose toward a 13-month high, while the S&P 500 Index traded near a record. Oil dropped.
In a world where an increasing number of government bonds yield less than zero, high-yielding currencies have become particularly sought after. They’re also being spurred by waning bets on an imminent, dollar-boosting hike of Federal Reserve rates, after last week’s below-forecast payrolls data and a surprise slowdown in manufacturing. That leaves the door open to currency gains elsewhere as central banks in Europe and Japan keep the doors open to economic stimulus measures.
“We are not expecting the Fed to raise rates this month and at best we have one hike in December, so without the prospect of a near-term rate hike the volatility in the market has been suppressed,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London. “That generally favors the higher-yielding currencies.”
Traders are pricing in a 34 percent chance the central bank will raise borrowing costs at its September meeting, according to fed funds data compiled by Bloomberg. The first month with better-than-even odds of a hike is December.
The Bank of America Merrill Lynch GFSI Market Risk Index, a measure of future price swings implied by options trading on global equities, interest rates, currencies and commodities, fell to minus 0.38 on Monday. That’s the lowest level since Jan. 1 before concern over China’s slowing economy and tumbling oil prices rocked financial markets, sending the gauge to 0.48 in February, the highest since December 2011.
Currencies
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, retreated 0.2 percent at 9:51 a.m. in New York. The dollar also declined versus all of the Group-of-10 currencies before a report today that’s forecast to show growth in services slowed last month, supporting the case for Fed officials to stay cautious on interest rates.
Australia’s dollar rose for a fifth day in the longest winning streak since March. South Africa’s rand led gains among the world’s major currencies after data showed the nation avoided a second recession in seven years as mining and factory output rebounded. India’s rupee climbed to a four-month high, trading for the first time since Urjit Patel took over as governor of the central bank.
The yen weakened against the dollar but pared losses after Koichi Hamada, an economic adviser to Prime Minister Shinzo Abe, said the Bank of Japan should wait until after the Federal Reserve decides on interest rates to act.
Stocks
The MSCI Emerging Markets Index rose 1.2 percent, extending this year’s gain to 16 percent. That compares with a 4.6 percent year-to-date advance for the MSCI World Index of developed countries.
“Monetary policy is going to remain easy around the world and that will continue to be supportive of risk assets,” said James Woods, a strategist at Rivkin Securities in Sydney. "The non-farm payrolls last week indicate there’s no rush for the Fed to raise rates.”
U.S. stocks edged higher as markets reopened after the Labor Day holiday, amid deal activity and speculation the Fed will hold off raising interest rates this month. The S&P 500 gained 0.1 percent.
Spectra Energy Corp. rallied 9 percent after agreeing to a $28 billion stock-for-stock transaction with Enbridge Inc. Cepheid jumped 52 percent after Danaher Corp. agreed to buy the molecular diagnostics company in a deal valued at about $4 billion, including debt. Navistar International Corp. surged 50 percent after saying Volkswagen AG will take a 16.6 percent stake in the truckmaker.
“As long as you’ve got that combination of steady improvement in the labor market but not enough to really risk the Fed hiking rates, that’s the happy balance the market loves,” said Jasper Lawler, a market analyst at CMC Markets in London. “The question is whether the slightly weaker nonfarm payroll report will change the hawkishness of Fed officials. I would imagine they would taper back -- they will be a bit more mild.”
The Stoxx Europe 600 Index gained 0.2 percent near this year’s high, with trading volumes 32 percent less than the 30-day average. Germany’s benchmark DAX Index is close to erasing its annual decline. Most economists predict President Mario Draghi will lengthen quantitative easing for a second time, with euro-area inflation stuck near zero for almost two years and Britain’s secession vote threatening to undercut the region’s recovery.
Commodities
Oil fell after a cooperation agreement signed on Monday by Russia and Saudi Arabia didn’t yield specific measures to reduce a global oversupply.
An earlier freeze proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. Iran will support any move to stabilize markets, the nation’s Oil Minister Bijan Namdar Zanganeh said in Tehran on Tuesday after a meeting with OPEC Secretary General Mohammed Barkindo, according to the ministry’s Shana news service. He didn’t say whether Iran was ready to accept any limits on its own production.
Gold held a three-day advance as prospects for a U.S. interest-rate increase this month receded.
Bonds
U.S. Treasuries due in a decade were little changed from Friday, with the yield at 1.60 percent. The rate on the two-year notes, which tend to be more sensitive to the monetary policy outlook, increased by one basis point to 0.80 percent.
The extra yield investors demand to hold emerging market debt over Treasuries narrowed one basis point to 335, according to JPMorgan Chase & Co. indexes. The spread has shrunk by 172 basis points from this year’s peak in February as investors faced with near-zero rates in the developed world hunt for higher-yielding assets.
The BlackRock Inc. money manager who recommended in July joining a “great migration” into emerging-market debt is now advising investors to be selective. The time of “indiscriminate buying” is coming to an end and investors need to exercise caution or face being caught in a selloff if sentiment changes, Sergio Trigo Paz, head of emerging-market debt at BlackRock said in a Bloomberg TV interview on Monday.
Spanish bonds climbed for a third day, pushing the nation’s 10-year yield down five basis points to 0.96 percent. The yield on similar-maturity Italian bonds slide four basis points to 1.12 percent, while that on German bunds slipped three basis points to minus 0.08 percent.
Japan’s 30-year bonds rose for the first time in two weeks, pushing their yield down by 2 1/2 basis points to 0.50 percent. An auction of the tenor achieved a higher-than-estimated price on Tuesday and the bid-to-cover ratio rose from the previous sale.
The yield on 30-year gilts dropped five basis points to 1.27 percent. The Bank of England is scheduled to buy longer-dated debt in its expanded quantitative-easing program, aimed at supporting containing the fallout from the U.K.’s vote to leave the European Union in June.
