12/09/2014
Friday 21:30 BST. Stock benchmarks fell, the dollar held near multi-month
highs and bond yields nudged up as investors expressed caution over US monetary
policy and continued tension between Russia and the west over Ukraine.
Wariness over prospects for China’s economy and fresh sanctions
from Washington against Russia’s financial services and energy sectors also
contributed to the sour tone.
·
The US equity market dipped after a
mixed retail sales report, and with the Federal Reserve policy meeting looming
next week. Wall Street’s S&P 500 fell 12 points to close at 1,985.56 in New
York. Energy stocks were the biggest laggards, suffering from further declines
in oil prices and anxiety over sanctions on Russian energy companies.
The FTSE Eurofirst 300 fell 0.1 per cent after its Asia-Pacific
peer lost 0.2 per cent.
The rouble dipped as much as 0.9 per cent to a new record low of
Rbs37.88 per dollar but the Micex equity index rose 1.1 per cent after the EU
confirmed another round of sanctions on Moscow.
Much market focus of late has targeted the US dollar, whose recent
strength points to expectations that the Federal Reserve may use its upcoming
policy debate, the FOMC meeting concluding on Wednesday, to set the groundwork
for an interest rate rise next year.
Dropping “considerable time” from its policy statement “would be a
major hawkish step [by the Fed], even if replaced by a ‘data dependent’ pace of
rate hikes and a FOMC view that considerable slack remains in place,” said
Steven Englander, analyst at Citi.
“It would be seen as opening up room for hiking before mid-2015
and as opening risk of a faster move of policy rates to their equilibrium.”
The dollar index, which measures the buck on a trade-weighted
basis, was little changed at 84.25, but flirting with 14-month highs as
currency markets anticipate a more hawkish tone from the Federal Reserve.
Analysts at Morgan Stanley Research said: “We see potential for US
dollar strength to broaden out, particularly if the Fed surprises markets with
less dovish forward guidance next week.”
Meanwhile US bonds fell for the seventh straight day, the longest
losing streak in more than a year. Policy-sensitive 2-year Treasury yields
added 1 basis point to 0.56 per cent, only 3bp shy of their highest level since
May 2011. Ten-year Treasury yields gained 6bp to a six-week high of 2.61 per
cent, supported by data showing a 0.6 per cent rise in US retail sales in
August.
The stronger dollar has weighed on commodity prices. Gold fell 1
per cent to $1,228 an ounce, its cheapest in eight months, while emerging
market equities, which are regarded as benefiting from looser US monetary
policy, had their worst week in 10 months.
Oil prices also dropped. Brent crude lost 1.2 per cent to trade at
$96.95 a barrel, pulling the S&P 500 energy sector index down 1.5 per cent,
underperforming the broader benchmark.
In contrast to the Fed, the central banks of Japan and the
eurozone are seen on a more dovish trajectory as they strive to tackle
deflationary pressures. Two-year Japanese and German bonds yielded 0.08 per
cent and minus 0.06 per cent, respectively.
The euro was little changed at $1.2955, only 90 pips or so above a
14-month intraday low touched at the start of the week. Sterling gained 4 pips
to $1.6253 after the latest opinion poll on Scottish
independence showed 51 per cent saying no and 49 per cent yes.
The yen weakened 0.3 per cent at Y107.35, its cheapest relative to
the greenback in six years. A softer yen tends to lift the exporter-sensitive
Tokyo stock market and the Nikkei 225 added 0.3 per cent on Friday to finish at
its best level since January.
And there were signs dealers were unwinding carry trades, where a
low yielding currency is used to fund the purchase of a higher yielding one.
The Australian dollar, seen as a victim of the exit from carry
trades, slid as much as 0.8 per cent on Friday to a six-month trough of
US$0.9039.
The Aussie has also been hurt by falling commodity prices.
Concern over slowing Chinese demand may have been salved somewhat by data
showing credit grew in August.
Aggregate financing – a measure of credit in China that includes bank loans
and lightly regulated trust products funded by retail investors
– was Rmb957.4bn ($156bn) in August. That was up from Rmb273bn in July,
suggesting that Beijing is allowing banks to lend more freely amid a property market downturn.
The Shanghai Composite advanced 0.9 per cent, to its best close
since March 2013, but Hong Kong’s Hang Seng eased 0.3 per cent.
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