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Dollar declines on Fed outlook as S&P 500 futures, Facebook gain

Jul 28 2016 13:46
Emma O'Brien and Stephen Kirkland

London - European and Asian currency markets reacted to signals from the Federal Reserve that it will maintain a gradual approach to raising interest rates.

The dollar extended losses, weakening against all but three of its 16 major peers, as bets on a rate increase in 2016 remained below 50%. Facebook Inc. climbed after reporting a 59% jump in sales.

Banks led declines in the Stoxx Europe 600 Index after Lloyds Banking Group Plc said it planned to cut 3 000 more jobs and warned Britain’s vote to leave the European Union may hurt earnings and dividends.

Industrial metals advanced, while oil traded below $42 a barrel in New York.

Positive corporate earnings and signs central banks will step in to support economic growth have helped lift global equities to their biggest monthly gain since March. While admitting risks to the US economy had subsided, the Fed left interest rates unchanged on Wednesday as policy makers assessed the fallout from Brexit. Ford Motor Company, MasterCard and Alphabet are among companies scheduled to report results on Thursday.

"The Fed comments were less hawkish than expected," said  Benno Galliker, a trader at Swiss Luzerner Kantonalbank. "There will be a hike this year, but later than in September. The stock market still has some room to go for the next few weeks."

Chair Janet Yellen has repeatedly stated that the Fed is likely to raise borrowing costs gradually, though market volatility and an unexpected dip in job gains have delayed such plans.

In Japan, traders are looking ahead to Friday’s monetary policy review, after Prime Minister Shinzo Abe announced a fiscal-stimulus package exceeding ¥28trn ($267bn) on Wednesday in a bid to jump-start the economy.

Currencies

The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, lost 0.3% as of 6:28 a.m. in New York, having reached the lowest since July 18.

Against the euro, the US currency was headed for its biggest two-day slide since June 23, the day of the UK referendum on its membership of the European Union.

South Korea’s won rose to a nine-month high, leading the charge along with Malaysia’s ringgit and the Australian dollar.

"We’re seeing broad dollar weakness," said Yuji Kameoka, the chief foreign exchange strategist at Daiwa Securities in Tokyo.

"Even though the Fed did note some improvements in the economy, a rate hike in September still isn’t certain."

The yen climbed 0.6% to 104.73 per dollar after dropping 0.7% on Wednesday. A majority of economists polled by Bloomberg predict Bank of Japan Governor Haruhiko Kuroda will boost asset purchases on Friday and lower the already negative key rate.

The pound slipped against all of its 16 major counterparts with swaps trading indicating that the Bank of England is certain to cut its key interest rate next week.

Stocks

Futures on the S&P 500 Index - which closed down 0.1% on Wednesday - added 0.2%, while those on the Nasdaq 100 Index climbed 0.1%.

Facebook jumped 4.8% in early New York trading. The social-network provider reported second-quarter revenue and user growth that exceeded analysts’ estimates after markets in the US closed.

The Stoxx Europe 600 slipped 0.3%. The gauge is less than 2% away from its June 23 level, the day of the UK’s EU referendum, while US and Asian shares have already recovered from their losses, with the S&P 500 trading near a record.

Banks fell the most among Stoxx 600 industry groups. Lloyds lost 4.1% after saying Brexit would reduce the amount of capital it will generate this year by 40 basis points. Banca Popolare di Milano Scarl, Deutsche Bank and Banco Popular Espanol declined more than 3.2%, with the latest stress-test results to be released on Friday.

Royal Dutch Shell Plc lost 3.6% and Spain’s Telefonica slid 3.2% after they posted profit drops. SABMiller retreated 1.5% and Anheuser-Busch InBev dropped 2.7% after the UK brewer suspended work on integrating its operations with that of its Belgian suitor.

Anglo American rallied 6.3%, sending mining shares to the biggest advance among industry groups, after posting sales and profit that topped projections. Adidas gained 4.6% after raising its full-year forecasts for sales and profit.

Commodities

Oil traded near the lowest close in more than three months after government data showed US crude stockpiles unexpectedly rose, adding to a glut of supplies that are at the highest seasonal level in at least two decades.
 
West Texas Intermediate crude decreased 0.4% to $41.74 a barrel and Brent slid 1.1% to $42.98.

"There is still a surplus and the oil price is going to have difficulty sustaining any rally because of that,” David Lennox, an analyst at Fat Prophets in Sydney, said by phone.

"We’re now heading toward the end of the drive season and the market is probably going to weaken further. The $40 a barrel level looks like the base at the moment."

Industrial metals advanced. Nickel added 1.7% while copper rose 0.8%. Iron ore made a comeback as Chinese steel mills increased production. Futures on the Dalian Commodity Exchange closed 1.4% higher at 472.5 yuan ($70.9) a metric ton, the highest since the peaks reached during the speculative frenzy in April.

Bonds

Treasuries declined for the first time in three days, pushing the 10-year yield up by two basis points, or 0.02 percentage point, to 1.52%. The yield had slid on Wednesday by the most since July 5 after the Fed’s rate decision.

European sovereign bonds were largely little changed as a report showed German unemployment extended its decline in July. The yield on benchmark German 10-year bonds was at minus 0.075%, after sliding five basis points on Wednesday. Spain’s 10-year bond yield increased one basis point to 1.11%.

Australian bonds led a rebound in government debt, with yields on notes due in a decade declining for the first time this week, down nine basis points, or 0.09 percentage point, to 1.87%. In New Zealand, similar maturity bond yields slipped four basis points to 2.22%.

Rates on Japanese notes climbed by two basis points to minus 0.275%.

dollar  |  markets  |  currencies
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