Posts Tagged ‘currencies’

Investors Flee Turkey and Argentina

May 29, 2018

Investors, chasing better returns in US dollars, have forced the two countries’ currencies into free fall. The big question is whether the rout can threaten financial markets and the global economy medium-term.

   

The words “taper tantrum” are etched into the memory of most financial market analysts. The phrase describes the bout of panic selling in the spring of 2013 after former US Federal Reserve Chairman Ben Bernanke announced that the central bank would begin to reduce its billion-dollar bond purchases.

In the days that followed, bond prices collapsed and yields skyrocketed. The effects were felt most strongly in emerging markets, where domestic currencies were forced into free fall by the outflows of capital.

A similar pattern has emerged in recent weeks, where the Turkish lira, Argentine peso and South African rand have lost a great deal of their value. The US — with its move towards higher interest rates — is once again contributing to the problem, forcing capital to chase a subsequent rally in the dollar.

“At the moment, it is the strong dollar that is putting pressure on these currencies. All currencies are being affected, but this weakness is particularly pronounced in emerging markets,” says Antje Präfke, a currency expert at Commerzbank.

Read more: Eurozone central bank inches toward stimulus exit

Long-term US bonds rise

Today’s situation is quite different from the rout in 2013; after all, the markets have had years to adjust to the Fed’s unwinding of its bond purchase program introduced to support the US economy in the wake of the financial crisis. As well as reducing the size of its balance sheet, the Fed has raised key US interest rates in several steps.

The US central bank — perhaps having learnt from the fallout of the so-called taper tantrum — has taken its time in raising rates, and has repeatedly, and gently, prepared the markets for the return to normal interest levels.

But still, yields on US government bonds have also begun rising. Interest rates on 10-year US bonds currently hover around the 3 percent mark. Suddenly, these securities are more attractive for investors, who have been quitting emerging markets for better opportunities elsewhere.

The risks for those countries that have seen large outflows are not equal though. “We now have a fundamentally more solid environment for emerging markets. Only certain countries are struggling with major problems,” says Mauricio Vargas, economist at Union Investment.

Read more: Turkey’s low-interest time bomb

Image may contain: 1 person, closeup

Turkey’s homemade problems

One example is Turkey, which critics say is fast becoming an authoritarian presidential state under Recep Tayyip Erdogan.

Inflation in Turkey is climbing at around 10 percent, which led the central bank on May 23 to raise interest rates to 16.5 percent from 13.5 percent. That’s despite Erdogan’s threat to increase his influence on the central bank to prevent rate hikes.

The Turkish lira has been falling for months — and its tailspin has been exacerbated by the president’s remarks.

Most observers believe Turkey’s economic and currency issues are mostly homemade, even if Erdogan won’t admit it. His lack of economic insight could serve to worsen the problem, they say.

A weak currency means imports to Turkey, including fuel, will become more expensive. Ordinary Turks can only watch as the purchasing power of the lira goes down the drain due to inflation.

Read more: Argentina hikes interest rate to 40 percent to avoid new meltdown

Turkish currency exchange (picture-alliance/dpa/S. Suna)

Argentina and the IMF

Argentina also finds itself in the throes of another financial crisis, forced to beg the International Monetary Fund (IMF) for financial aid. The nation experienced an economic depression at the turn of the century, which saw the government default on its debt.

In the past two weeks alone, the Argentine peso has plummeted by more than 10 percent against the world’s leading currency, the dollar.

Like Turkey, Argentina has a large trade deficit, public debts are rising, and prices are skyrocketing — the IMF is expecting inflation of 23 percent this year.

To prevent further capital outflows, earlier this month the Argentine central bank raised the key interest rate from 27.5 to 40 percent.

Fortunately the investor shakeouts appear confined to a handful of countries. Other emerging markets may well adapt to rising US interest rates without creating major upheavals.

But some pressure will likely persist as US interest rates continue to rise — making dollar investments more attractive, while other currencies and regions become more and more unappealing.

http://www.dw.com/en/investor-shakeout-in-turkey-and-argentina-why-its-happening/a-43931348

Advertisements

Haven currencies buoyant as geopolitical concerns weigh

May 23, 2018

The Japanese yen and the Swiss franc moved higher on Wednesday amid a ratcheting up in tensions between Donald Trump and China over trade and North Korea.

Image may contain: 1 person

The currencies, which are traditionally financial havens at times of geopolitical uncertainty, firmed after the US president appeared to blame China for the possible delay or cancellation of a planned June summit with North Korea’s Kim Jong Un.

The yen was 0.6 per cent higher against the dollar at ¥110.30, its highest since May 17. The Swiss franc was 0.2 per cent stronger at SFr0.9905 against the dollar, near its best in May, and it has jumped against the euro, which has fallen 0.6 per cent on Wednesday to SFr1.1614.

The dollar index, measuring the greenback against a basket of peers was also 0.2 per cent stronger, implying that the yen and franc advances were not correlated with a dollar move.

Earlier, Asia-Pacific stocks retreated after Mr Trump tempered expectations for a resolution of trade issues with Beijing on Tuesday, saying the US was still discussing “various deals”.

The Hang Seng index in Hong Kong and the CSI 300 of large-cap Shanghai and Shenzhen stocks were both off 1.3 per cent.

https://www.ft.com/content/6afc35c6-5e59-11e8-9334-2218e7146b04

Hong Kong’s dollar weakens to three-decade low, testing city’s resolve to defend currency peg to US dollar

March 5, 2018

The widest gap between local borrowing cost and US interest rate is drawing traders into the carry trade, where they sell Hong Kong dollars for the greenback, putting more pressure on the exchange rate

By Karen Yeung
South China Moring Post

PUBLISHED : Monday, 05 March, 2018, 2:29pm
UPDATED : Monday, 05 March, 2018, 4:00pm

Hong Kong’s dollar weakened to its lowest level in more than three decades, as the gap between the city’s borrowing cost and US interest rates widened ahead of the US Federal Reserve’s March 21 meeting, drawing more dealers into the carry trade to sell the local currency for the greenback.

The Hong Kong dollar weakened for the third day on Monday, slipping to 7.8317 per US dollar, approaching the lower end of a 2005 trading band that could compel the Hong Kong Monetary Authority to support the currency.

“People are selling Hong Kong dollars to position for an interest rate increase by the US Federal Reserve in March,” said Jasper Lo Cho-yan, senior vice-president at iBest Finance in Hong Kong.

The premium of the US interbank rate, known as the Libor, over Hong Kong’s equivalent – known as the Hibor – is at the widest since 2008.

That’s attracted more dealers into the carry trade, encouraging them to use the low Hibor to borrow and sell Hong Kong dollars to buy US dollars, which in turn pushes local currency’s value lower.

The local currency hadn’t traded at such levels since its peg to the US dollar 35 years ago, transacting at 8.7 per dollar on September 26, 1983 just before the currency board system kicked in to peg the local currency at 7.8 per US dollar.

The local currency is “heading to the uncharted territory and the market development in the near term will probably test the function” of the peg, Mizuho Bank’s senior Asian foreign exchange specialist Ken Cheung Kin Tai wrote in a note today. “We expect market participants to push USD/HKD spot higher to test the policy responses” by the monetary authority, he wrote.

Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA) is obliged to prevent the currency from breaching either side of a trading band between 7.75 and 7.85 per US dollar. In the current situation, it would sell US dollars and buy Hong Kong dollars to reduce interbank liquidity and raise Hong Kong dollar rates in order to curb depreciation pressure.

Local media reported that Hong Kong’s Financial Secretary Paul Chan Mo-po said he expected some funds would flow out of Hong Kong, causing weakness in the currency. However he said that capital outflows was good for the city which should normalise Hong Kong’s market rates at a more ideal pace.

Pressure had been building on the Hong Kong dollar – the world’s 13th most-transacted currency – as worries over tightening Chinese regulation turned off the spigot of southbound capital flowing into the city’s real estate, stock market and assets recently. Mainland investors sold a net 350 million yuan (US$55 million) of Hong Kong shares via the Shanghai- and Shenzhen-Hong Kong stock connects, the first net outflows since December 2016, according to Bloomberg calculations.

The Hong Kong dollar had been able to find support at around its 10-year low of around 7.825 amid strong inflows globally into the city’s property and stock markets.

China must strengthen regulatory oversight and control the overall amount of money supply to guard against mounting financial risks in the economy, the Securities Times newspaper reported on Sunday, citing Yang Weimin, the deputy director of the Office of the Central Leading Group on Financial and Economic Affairs.

“The extremely arduous task was necessary to head off the financial risks in the Chinese economy that were becoming“progressively visible”, Yang said.

http://www.scmp.com/business/money/money-news/article/2135737/hong-kongs-dollar-weakens-three-decade-low-testing-citys

Stocks Fall With Bonds; Dollar Steady Before Powell: Market Wrap

February 27, 2018

Bloomberg

By Eddie Van Der Walt

 Updated on 
  • Bunds fall as Treasuries steady; S&P 500 futures decline
  • Fed Chair Jerome Powell is due to speak on Tuesday, Thursday
Dalio Says Central Banks May Face Challenges in ‘Year or Two’
 Image result for Ray Dalio, bloomberg, photos
Central banks may face challenges in a “year or two,” Ray Dalio tells Bloomberg.

European stocks and bonds slipped as investors await the first public comments from Federal Reserve Chairman Jerome Powell on Tuesday. Treasuries steadied and the dollar was little changed.

 Image result for Jerome Powell, photos
 Federal Reserve Chairman Jerome Powell

Most industry groups in the Euro Stoxx 600 Index declined, led by real estate and telecoms companies. S&P 500 Index futures signalled the first down day in four for the underlying gauge. Asian equities earlier edged higher, with Japanese stocks climbing to the highest in more than three weeks. The 10-year Treasury yield edged higher after falling to a two-week low, while German bunds and U.K. gilts led a retreat in European bonds.

The pace of U.S. monetary policy tightening remains a hot debate on Wall Street and traders are betting that Powell won’t seek to shock financial markets with overly hawkish comments this week. Federal Reserve Governor Randal Quarles made clear on Monday he thought a sustained period of higher growth might require higher interest rates.

Elsewhere, the won rose for a third day as the Bank of Korea left its benchmark interest rate unchanged. Oil slipped following a three-day rally as investors awaited U.S. inventory data. South Africa’s rand handed back recent gains amid a cabinet reshuffle.

Terminal users can read more in our markets blog.

Here are some key events scheduled for this week:

  • Powell testifies before a House panel on Tuesday. He’ll discuss the Fed’s Semi-Annual Monetary Policy Report and the state of the economy. Powell returns on March 1 before a Senate committee.
  • Companies announcing earnings this week include: Vale, Bayer and Lowe’s.
  • The European Union will publish a draft Brexit treaty on Wednesday and U.K. Prime Minister Theresa May delivers a speech Friday on Britain’s relationship with the European Union.
  • A barrage of data is expected out of Japan including retail sales and industrial production Wednesday, and capital spending Thursday.
  • In China, the official and Caixin purchasing managers’ indexes on Wednesday and Thursday respectively may show growth momentum slowed slightly in February, though the signal may be clouded by the holidays.

These are the main moves in markets:

Stocks

  • The Stoxx Europe 600 Index advanced 0.1 percent as of 6:23 a.m. New York time, the highest in more than three weeks.
  • The MSCI All-Country World Index gained less than 0.05 percent to the highest in more than three weeks.
  • Futures on the  S&P 500 Index decreased 0.3 percent.
  • The U.K.’s FTSE 100 Index increased 0.4 percent to the highest in more than three weeks.

Currencies

  • The Bloomberg Dollar Spot Index declined less than 0.05 percent.
  • The euro increased 0.1 percent to $1.2324.
  • The Japanese yen fell less than 0.05 percent to 106.95 per dollar.
  • South Africa’s rand dipped 0.7 percent to 11.6321 per dollar, the biggest decrease in almost three weeks.
  • The British pound decreased less than 0.05 percent to $1.3965.

Bonds

  • The yield on 10-year Treasuries gained one basis point to 2.87 percent.
  • Germany’s 10-year yield gained two basis points to 0.68 percent, the first advance in a week and the biggest gain in more than a week.
  • Britain’s 10-year yield fell one basis point to 1.509 percent, reaching the lowest in four weeks on its sixth straight decline.

Commodities

  • West Texas Intermediate crude declined 0.4 percent to $63.63 a barrel, the largest drop in more than two weeks.
  • Gold declined 0.1 percent to $1,332.58 an ounce.
  • LME copper decreased 0.6 percent to $7,070.00 per metric ton, the lowest in two weeks.

— With assistance by Richard Richtmyer, and Adam Haigh

https://www.bloomberg.com/news/articles/2018-02-26/asia-stocks-to-rise-as-u-s-gains-before-powell-markets-wrap

Investors Get a Reprieve From Recent Turmoil

February 12, 2018

Stocks Bounce Back With S&P Futures; Dollar Falls: Markets Wrap

 Updated on 
  • Won jumps as Kim Jong Un invites South Korea’s Moon for talks
  • Investor focus turns to U.S. CPI, as volatility index eases
Kleinwort Hambros’ CIO Says Opportunities Will Arise From This Market
Kleinwort Hambros’ CIO says opportunities will arise from this market.

Investors got a reprieve from the rout in stocks and the worst volatility spike since 2015, with equities rising in Europe and Asia. S&P 500 futures rose, while the dollar and Treasuries fell amid concern President Donald Trump’s budget proposal will drop his party’s goal to balance the budget in 10 years.

The Stocks Europe 600 index climbed, led by miners and chemical makers. South Korean equities rose after President Moon Jae-in was invited by North Korean leader Kim Jong Un to meet. The dollar’s decline supported commodities, with metals higher and crude oil halting a six-day selloff. Japan’s markets are closed for a holiday.

Traders however remained on edge following tumultuous moves in equities last week, which saw the S&P 500 post its worst week in two years with a 5.2 percent decline on fears over interest rate hikes. The Cboe Volatility Index dropped on Monday after an almost three-fold jump since late January week when the turbulence erupted.

Investors are awaiting U.S. consumer-price data on Wednesday with some trepidation. Pressure on equities has been emanating from the Treasury market and in the outlook for inflation. Ten-year Treasury yields climbed on Monday, touching a fresh four-year high amid concern the Federal Reserve may accelerate its rate-hike schedule.

Asian stocks were buoyed by the attempts to thaw the tensions on the Korean Peninsula. Vice President Mike Pence told the Washington Post the U.S. is ready to engage in talks about North Korea’s nuclear program, signaling a shift in policy. The won outperformed major currencies.

Terminal users can read more in our markets blog.

Here are some important things to watch out for this week:

  • Trump will deliver his 2019 budget blueprint on Monday.
  • Chinese New Year celebrations for the Year of the Dog begin in China and follow across much of Asia, including Hong Kong, Taiwan, Singapore, Malaysia and Indonesia. Chinese mainland markets are closed Feb. 15-21.
  • South African President Jacob Zuma’s fate is set to be sealed on Monday when the top leadership of the ruling African National Congress meets to conclude the transition to a new administration.
  • The U.S. consumer-price index, due Wednesday, probably increased at a moderate pace in January, economists project. Retail sales in the U.S., also out Wednesday, probably increased for a fifth straight month.
  • Japan is expected to extend the longest stretch of economic growth since the mid-1990s when it reports fourth-quarter gross domestic product on Wednesday.
  • Earnings season continues in full swing with reports from Bunge, TripAdvisor, SunPower, Con Edison, Bombardier, Heineken, Loews, Michelin, PepsiCo, MetLife,Cisco, Japan Post Bank, Credit Suisse, Nestle, Airbus, Allianz, Telstra, Coca-Cola, Deere, Eni, Credit Agricole and Campbell Soup.

These are the main moves in markets:

Stocks

  • The Stoxx Europe 600 Index climbed 1.3 percent as of 9:15 a.m. London time.
  • The MSCI All-Country World Index jumped 0.5 percent, the largest increase in more than two weeks.
  • Futures on the S&P 500 Index rose 1.2 percent.
  • The U.K.’s FTSE 100 Index gained 1.2 percent.

Currencies

  • The Bloomberg Dollar Spot Index dipped 0.2 percent, the largest decrease in more than a week.
  • The euro gained 0.2 percent to $1.2274, the biggest climb in more than a week.
  • The British pound increased 0.3 percent to $1.3862, the largest climb in more than a week.
  • South Africa’s rand increased 0.1 percent to 11.9764 per dollar.

Bonds

  • The yield on 10-year Treasuries rose four basis points to 2.89 percent, the highest in more than four years.
  • Germany’s 10-year yield increased three basis points to 0.78 percent, the highest in more than two years.
  • Britain’s 10-year yield gained four basis points to 1.605 percent.

Commodities

  • West Texas Intermediate crude surged 2.4 percent to $60.65 a barrel, the first advance in more than a week and the biggest jump in almost seven weeks.
  • Gold rose 0.3 percent to $1,321.23 an ounce, the largest advance in a week.
  • LME copper gained 1.4 percent to $6,850.00 per metric ton, the first advance in a week.

https://www.bloomberg.com/news/articles/2018-02-11/traders-brace-for-more-turmoil-after-recent-rout-markets-wrap

— With assistance by Elena Popina, Ruth Carson, and Andreea Papuc

Europe Stocks Gain as U.S. Futures Drop; Oil Rises: Markets Wrap

February 7, 2018

Bloomberg

By Adam Haigh and Samuel Potter

 — Updated on 
  • Treasury yields decline after spike on Tuesday; dollar steady
  • Gold rises after slide yesterday; EM shares flat after rout
 “People are looking at this as partially a buying opportunity,” says Goldman Sachs Co-President Harvey Schwartz.
.
Video:
Goldman Sachs’ Schwartz Says Volatility May Be Catalyst for M&A
 Image result for Goldman Sachs Co-President Harvey Schwartz, photos

The rebound in stock prices spread to Europe, but markets remained on edge as Asian equities pared their advance while U.S. futures retreated. Treasuries rebounded after Tuesday’s slump, gold climbed and crude advanced.

The Stoxx Europe 600 Index headed for the first increase in eight days as most sectors on the gauge rose. Earlier in Asia, Japan’s benchmarks eked out slim gains at the close after retreating from the session’s highs, while Chinese shares dropped. The dollar was flat as most commodities rallied.

Markets from Europe to Japan tumbled into oversold territory after the rout of the past week, which was triggered by rising bond yields and the prospects for a return of inflation and subsequent tighter monetary policy. Amid a slew of calls to “buy the dip,” investors will be watching Wednesday’s auction of 10-year Treasuries for clues on where markets go from here.

Elsewhere, oil rose after three days of declines as an industry report showed an unexpected decline in U.S. crude stockpiles. And Bitcoin traded little changed at around $7,700.

Here are some key events scheduled for this week:

  • Monetary policy decisions are due this week in Russia, Brazil, Poland, Romania, the U.K., New Zealand, Serbia, Peru and the Philippines.
  • Earnings season continues with reports from Philip Morris, Tesla, Rio Tinto, L’Oreal Rio Tinto and Twitter.
  • New York Fed President William Dudley and Dallas Fed President Robert Kaplan are among policy officials due to speak.

Terminal users can read more in our markets blog.

These are the main moves in markets:

Stocks

  • The Stoxx Europe 600 Index increased 0.4 percent as of 8:23 a.m. London time, the first advance in more than a week.
  • Futures on the S&P 500 Index sank 1.1 percent.
  • The MSCI Asia Pacific Index increased 0.2 percent, the largest climb in more than a week.
  • The U.K.’s FTSE 100 Index gained 0.6 percent, the first advance in more than a week.
  • The MSCI Emerging Market Index advanced less than 0.05 percent, the first advance in a week.

Currencies

  • The Bloomberg Dollar Spot Index decreased less than 0.05 percent.
  • The euro fell less than 0.05 percent to $1.2372.
  • The British pound dipped 0.1 percent to $1.3931, the weakest in almost three weeks.
  • The Japanese yen gained 0.6 percent to 108.96 per dollar, the strongest in more than a week.
  • South Africa’s rand declined 0.2 percent to 11.9431 per dollar.
  • The MSCI Emerging Markets Currency Index rose 0.4 percent.

Bonds

  • The yield on 10-year Treasuries dipped four basis points to 2.76 percent.
  • Germany’s 10-year yield climbed one basis point to 0.70 percent.
  • Britain’s 10-year yield advanced less than one basis point to 1.523 percent.

Commodities

  • West Texas Intermediate crude climbed 0.4 percent to $63.65 a barrel.
  • Gold climbed 0.5 percent to $1,330.74 an ounce.

https://www.bloomberg.com/news/articles/2018-02-06/stocks-in-asia-face-rally-as-u-s-equities-recover-markets-wrap

Making the Dollar Weak Again — The one-two punch of protectionism and devaluation

January 25, 2018

Mnuchin and Trump want to reduce U.S. purchasing power.

Steven Mnuchin, U.S. Treasury secretary, speaks during an Economic Club of Washington conversation in Washington, Jan. 12.
Steven Mnuchin, U.S. Treasury secretary, speaks during an Economic Club of Washington conversation in Washington, Jan. 12. PHOTO:ANDREW HARRER/BLOOMBERG NEWS

The Trump Administration contains dueling economic impulses good and bad, and this week we’ve seen the bad. First President Trump imposes tariffs on solar cells and washing machines, and a day later Treasury Secretary Steven Mnuchin decides to talk down the dollar.

“A weaker dollar is good for trade,” Mr. Mnuchin said from Davos, Switzerland on Wednesday, and the greenback promptly tumbled to a three-year low against a basket of other currencies. The one-two punch of protectionism and devaluation also sparked a rally in gold to its highest level since August 2016.

What a spectacle: The man whose signature is on the greenback tells the world he wants its value to be lower so the U.S. can beggar its neighbors on trade. Mr. Trump has also said he favors a weak currency, and the buck has fallen some 8% in his first year.

The Sinking DollarDollar vs. the Euro, Nov. 1, 2017-Jan. 24, 2018Source: WSJ Market Data Group
Nov. ’17Dec.Jan. ’180.800.810.820.830.840.850.860.87

Someone ought to tell these fellows the history of strong- and weak-dollar presidencies. The weak include Jimmy Carter, Richard Nixon and George W. Bush. The strong include Ronald Reagan and Bill Clinton. Perhaps Mr. Mnuchin aims to follow Michael Blumenthal, who held the Treasury job in the Carter Administration. His weak-dollar lobbying, along with an easy money policy at the Federal Reserve, led to a collapse of the dollar of more than 20% between January 1977 and October 1978 that fed higher inflation and elected Reagan.

Britain has repeated the experiment since it voted to exit the European Union in June 2016 and the central bank responded to economic weakness by cutting interest rates and more quantitative easing. By October the pound had reached a 31-year low. Inflation rose and wages stagnated, contributing to the Tory election embarrassment last year.

A weak dollar makes the U.S. worse off because Americans don’t live in an economic bubble. They buy from abroad because other countries make things Americans want or need. U.S. manufacturers import components to produce value-added goods like machinery and aircraft that are exported. Dollar devaluation makes those imports more expensive, which undermines competitiveness vis-a-vis foreign rivals. Commodities like oil and copper are traded in dollars so a weak dollar requires more of them. This is good for dictators in places like Venezuela. For Americans, not so much.

Devaluation can make the trade deficit look better for a time and there is often a short-term gain for corporate income statements. But it’s ultimately a fool’s game because the underlying terms of trade don’t change. Companies and prices adjust and, in David Ricardo’s classic formulation, one bottle of wine still equals 10 loaves of bread.

Mr. Mnuchin’s comments are all the more baffling because he and the Administration should be riding high. The U.S. is growing faster than it has in 12 years as deregulation and tax reform boost business and consumer confidence. Capital that was sidelined during the Obama years is being put to work. Unemployment is at historic lows. Why mess it up by imitating the economic policy of Argentina?

Appeared in the January 25, 2018, print edition.

Related:

Dollar Gets the Cold Shoulder in Global Economic Boom

January 14, 2018

Investors are flocking to the yen, euro and other currencies amid promise of quickening growth overseas

The dollar decline is the latest reversal for many investors who expected the currency to rise as the Federal Reserve continues on a yearslong path of gradual interest-rate increases.

The promise of accelerating economic growth overseas is propelling investor funds into the yen, euro and many emerging-market currencies, intensifying a yearlong siege on the U.S. dollar.

The ICE Dollar Index hit its lowest level in more than three years on Friday, extending a nearly 10% decline last year that marked the dollar’s steepest annual fall since 2003. The index tracks the value of the currency vs. a basket of U.S. trading partners.

Investors point to the global economic upswing of recent months and the tentative, accompanying steps by central bankers in Europe and Japan to normalize monetary policy after years of expansive support. While the European Central Bank and the Bank of Japan continue to supply generous support to markets, expectations are building that the world’s biggest economies will soon unwind nearly a decade of postcrisis stimulus measures and eventually join the Federal Reserve in raising interest rates.

That potentially makes the dollar less appealing to investors, who for years piled into U.S. assets anticipating steady growth and accepting low yet still above-market yields. While the Dow industrials have surged to records alongside many global stock markets, major U.S. indexes have lagged behind foreign counterparts in recent months, a sign that markets here have become something of an afterthought following large gains earlier in the decade.

“The dollar narrative is one of a global regime shift,” said Mark McCormick,  North American head of FX strategy at TD Securities. Economies like Europe and Japan “are actually starting to look like places where you would want to invest.”

The dollar decline is the latest reversal for many investors who expected the currency to rise as the Fed continues on a yearslong path of gradual interest-rate increases. Recently, the dollar’s decline has been slow and steady, but the currency’s failure to tick up when news might seem to point toward a faster pace of Fed rate increases or an uptick in inflation has impressed itself upon some investors.

Two recent examples stand out. Robust U.S. consumer-price data on Friday didn’t spur a dollar rally, and rising Treasury yields in recent weeks have had no appreciable effect on the currency, even as they have reignited a longstanding market debate about whether interest rates will eventually return to precrisis levels.

“You are seeing all these positives that should be causing the dollar to strengthen having virtually no effect,” said Said Haidar, head of Haidar Capital Management, which oversees $388 million.

Mr. Haidar is betting that the dollar will decline against the currencies of commodity-producing emerging markets such as Malaysia, Chile and Colombia.

Many analysts believe the dollar’s decline in 2018 is likely to be accelerated by the passage of the U.S. tax bill, which is widely expected to expand the U.S. fiscal deficit. The dollar tends to fall when the deficit expands, reflecting in part the rising need for the nation to sell bonds to close its funding gap.

Goldman Sachs and J.P. Morgan expect U.S. fiscal deficits to rise to $1 trillion, or 5% of GDP, in 2019 from $664 billion in the 2017 fiscal year ended September, or around 3.4% of GDP.

In part, the recent dollar weakness merely reflects the normal wax and wane of market forces.The dollar has rallied nearly 25% against its peers from its lows of 2011, a gain that in the eyes of many analysts has made the U.S. currency more expensive than its underlying fundamentals would dictate.

A modest further decline in the dollar would be welcomed by many large U.S. companies that report substantial earnings overseas. A falling dollar tends to boost exports by making U.S. goods more competitive abroad, a key policy objective of President Donald Trump, and a weaker currency potentially also gives the Federal Reserve more room to raise interest rates.

But some investors worry that an extended drop in the dollar could shake faith in the U.S. economy, elevating concerns about the lofty stock-market valuations and complicating the Fed’s efforts to raise rates. A rapid drop could also spur fears that inflation will rise beyond the moderate pace hoped for by policy makers and investors.

Net bets against the dollar in futures markets shrank to their lowest level in more than a month in December, due in part to expectations that companies will take advantage of a one-time cut for repatriation of earnings and cash held overseas, which was written into the GOP tax overhaul. However, bearish bets on the dollar grew again in recent weeks, as wagers on the euro shot higher.

For investors seeking yield, “there is the most upside in countries like Europe and Japan, where monetary policy is the furthest away from normal,” said Kit Juckes, a strategist at Société Générale. “You don’t want to buy into stories that have largely played themselves out.”

Write to Ira Iosebashvili at ira.iosebashvili@wsj.com

European Shares Creep Lower Ahead of Central Bank Speeches

November 13, 2017

The British pound slipped on a potential leadership challenge in Parliament

 Image may contain: skyscraper, sky and outdoor

European stocks started the week mostly down after closing in the red Friday as investors appeared increasingly concerned over the U.S. tax-overhaul plan.

The Stoxx Europe 600 was 0.3% lower, led by losses in banking and financial services.

Futures pointed to a small opening loss for the S&P 500 and the Dow Jones Industrial Average, after both indexes posted drops last week. In Asia, markets were broadly down.

In currencies, the British pound dropped 0.9% Monday on weekend news that as many as 40 Conservative members of Parliament had agreed to sign a letter of no confidence in Prime Minister Theresa May, eight short of the number needed to trigger a leadership challenge.

Sterling could face further pressure this week, with several Bank of England members set to speak and data on U.K. inflation and retail sales due.

Some investors warned that the disunity within the ruling Conservative party could weigh on Brexit talks and diminish the probability of an extended transitional arrangement.

“I think the vulnerability in terms of the government and the lack of unity within the Conservative party means that the political backdrop for smooth Brexit negotiations has probably decreased slightly,” said Mark Richards, multi-asset Strategist at J.P. Morgan Asset Management.

The Amsterdam Stock Exchange in the Netherlands. European markets opened lower, led by losses in banking and financial services.
The Amsterdam Stock Exchange in the Netherlands. European markets opened lower, led by losses in banking and financial services.PHOTO: JASPER JUINEN/BLOOMBERG NEWS

Meanwhile, talks on the U.S. Republican tax proposals will continue to be in focus after concerns over their prospects for passage interrupted remarkable stock gains last week and “triggered some profit-taking activities,” said Margaret Yang at CMC Markets.

Among this week’s highlights will be speeches by central bank leaders, with European Central Bank President Mario Draghi and Federal Reserve Chairwoman Janet Yellen both set to speak Tuesday.

In the U.S., investors will keep a close eye on the October Consumer Price Index, due Wednesday, as a proxy for inflation. While the Federal Reserve is widely expected to increase rates in December, a soft inflation reading could fuel the debate around the flattening of the U.S. yield curve.

In the bond market, prices climbed, pushing down yields. The 10-year Treasury yield moved slightly lower Monday to trade at 2.373% according to Tradeweb, compared with Friday’s close of 2.397%. The 10-year German government bond yield was also off at 0.386%, from 0.407%.

Earlier in Asia, most major stock indexes logged declines, with Japanese stocks again underperforming after their gains of the past two months.

After logging its biggest drop percentage-wise in two months Friday, the Nikkei Stock Average fell a further 1.3%. Monday’s decline in Japan came despite a pullback in the yen.

Earnings, which had been supporting the market, also clouded sentiment, with real-estate developer Mitsui Fudosan and fiber maker Toray both off about 4%.

In South Korea, the Kospi index closed down 0.5%, while Hong Kong’s benchmark index got a boost from technology stocks. The Hang Seng Index was up 0.2%.

E-gaming services provider Razer surged as much as 41% in its market debut Monday; it was recently up 18%.

In the commodities market, Brent crude was down 0.3% at $63.33.

Write to Ese Erheriene at ese.erheriene@wsj.com

https://www.wsj.com/articles/global-markets-japan-leads-losses-early-1510537341

Wall Street Banks Warn Winter Is Coming as Business Cycle Peaks

August 23, 2017

Bloomberg

By Sid Verma and  Cecile Gutscher

August 22, 2017, 12:47 PM EDT August 23, 2017, 4:48 AM EDT
  • HSBC, Citigroup, Morgan Stanley say end of market boom is nigh
  • Breakdown in trading patterns is signal to get out soon
 Image result for Morgan Stanley, signage, photos

Gallo Says Investors Are Looking for Next Piece of Sugar

HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.

Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published Tuesday.

His bank’s model shows assets across the world are the least correlated in almost a decade, even after U.S. stocks joined high-yield credit in a selloff triggered this month by President Donald Trump’s political standoff with North Korea and racial violence in Virginia.

Morgan Stanley

Just like they did in the run-up to the 2007 crisis, investors are pricing assets based on the risks specific to an individual security and industry, and shrugging off broader drivers, such as the latest release of manufacturing data, the model shows. As traders look for excuses to stay bullish, traditional relationships within and between asset classes tend to break down.

“These low macro and micro correlations confirm the idea that we’re in a late-cycle environment, and it’s no accident that the last time we saw readings this low was 2005-07,” Sheets wrote. He recommends boosting allocations to U.S. stocks while reducing holdings of corporate debt, where consumer consumption and energy is more heavily represented.

That dynamic is also helping to keep volatility in stocks, bonds and currencies at bay, feeding risk appetite globally, according to Morgan Stanley. Despite the turbulent past two weeks, the CBOE Volatility Index remains on track to post a third year of declines.

Morgan Stanley

For Savita Subramanian, Bank of America Merrill Lynch’s head of U.S. equity and quantitative strategy, signals that investors aren’t paying much attention to earnings is another sign that the global rally may soon run out of steam. For the first time since the mid-2000s, companies that outperformed analysts’ profit and sales estimates across 11 sectors saw no reward from investors, according to her research.

“This lack of a reaction could be another late-cycle signal, suggesting expectations and positioning already more than reflect good results/guidance,” Subramanian wrote in a note earlier this month.

Zero Alpha Beats – Bank of America Corp

Oxford Economics Ltd. macro strategist Gaurav Saroliya points to another red flag for U.S. equity bulls. The gross value-added of non-financial companies after inflation — a measure of the value of goods after adjusting for the costs of production — is now negative on a year-on-year basis.

“The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters,” he said in an interview. “That, along with the most expensive equity valuations among major markets, should worry investors in U.S. stocks.”

The thinking goes that a classic late-cycle expansion — an economy with full employment and slowing momentum — tends to see a decline in corporate profit margins. The U.S. is in the mature stage of the cycle — 80 percent of completion since the last trough — based on margin patterns going back to the 1950s, according to Societe Generale SA.

Societe Generale SA

After concluding credit markets are overheated, HSBC’s global head of fixed-income research, Steven Major, told clients to cut holdings of European corporate bonds earlier this month. Premiums fail to compensate investors for the prospect of capital losses, liquidity risks and an increase in volatility, according to Major.

HSBC Holdings Plc

Citigroup analysts also say markets are on the cusp of entering a late-cycle peak before a recession that pushes stocks and bonds into a bear market.

Spreads may widen in the coming months thanks to declining central-bank stimulus and as investors fret over elevated corporate leverage, they write. But, equities are likely to rally further partly due to buybacks, the strategists conclude.

“Bubbles are common in these aging equity bull markets,” Citigroup analysts led by Robert Buckland said in a note Friday.

— With assistance by Cecile Vannucci

https://www.bloomberg.com/news/articles/2017-08-22/wall-street-banks-warn-winter-is-coming-as-business-cycle-peaks