London — Financial markets showed the diverging
path of US and eurozone monetary policy on Wednesday. Wall Street broke
new ground and the dollar perched near a 14-year high while German bond
yields plumbed new record lows.
World stocks edged up and the Dow closed above 19,000 for
the first time with investors expecting a growth boost under the
presidency of Donald Trump and an imminent rate hike from the Federal
Reserve that should be reinforced by minutes issued later in the day.
With European rate setters leaning the other way,
reaffirming their commitment to easy policy, the euro has been pushed
near one-year lows. The split has been most stark in bond markets with
yields on two-year German paper hitting record lows, stretching the gap
to US equivalents to an 11-year wide.
In Britain, sterling was a tad weaker at $1.2408 before a
budget update where hopes for fiscal stimulus have been lowered as the
government has stressed its limited borrowing room.
"We do like policy divergence trades," said Rabobank
strategist Lyn Graham-Taylor. "I think markets had been a bit euphoric
in the wake of Trump, and now they are coming around to the
understanding that there is not going to be fiscal stimulus that is
going to be good for everyone."
European stocks were flat, struggling to match the
exuberance in Asia, where stocks gained 0.7% to strike a one-week high,
or the US, where the Dow hit a record high up 0.35%, the S&P 500
gained 0.22% and the Nasdaq 0.33%. With Japan on holiday, Australia’s
main index led the action in Asia with a rise of 1.35% to a one-month
top helped by strength in bulk commodity prices.
China’s blue-chip CSI300 index advanced 0.5 percent to a near 11-month peak as the yuan touched its lowest in six years.
Yield gap undermines euro
With equities in demand, US bonds were getting the cold
shoulder. Two-year note yields rose as far as 1.107 percent on Tuesday,
the highest since April 2010.
Eurozone yields were heading in the opposite direction and
some solid growth data could not shake expectations for more monetary
easing from the European Central Bank next month.
That saw yields on German two-year paper dive to record lows
of minus 0.74%, which in turn expanded the yield premium offered by
treasuries to an 11-year peak.
The widening spread kept the euro pinned at $1.0611, not far
from last week’s one-year trough at $1.0569. Against a basket of
currencies, the dollar was up slightly at 101.12, very close to a
14-year peak.
The dollar also kept most of its recent hefty gains on the
yen at 111.05, though it has met resistance around 111.35 in the last
couple of sessions.
Emerging markets have struggled in recent days as surging US bond yields sucked much-needed capital out of Asia.
Trump’s past talk of trade tariffs has also weighed on
sentiment in the export-intensive region. Analysts at JPMorgan said his
pledge to dump the Trans-Pacific Partnership was already priced into
markets.
"What may not be factored in is the possibility of
follow-through on other, more protectionist campaign proposals," they
wrote in a note to clients.
"We remain concerned about this as a source of downside
risk, delivering a negative surprise to markets which so far appear to
be enamoured of his emphasis on fiscal stimulus and deregulation since
the election." Elsewhere, oil prices declined as doubts re-emerged over
whether Opec would agree to a crude oil production cut at a ministerial
meeting next week.
Brent crude eased 10c to $49.03 a barrel, while US crude lost 5c to $48.00.
Industrial metals advanced on talk of demand from China and
the whole global reflation trade. Copper was near a 16-month high, while
iron ore futures surged 8% on higher steel prices.
Reuters /
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