Markets

Dollar and stocks rebound as Korean tensions subside

Wednesday 21:15 BST

What you need to know

  • US dollar roars back after boost from GDP and jobs data
  • Brent crude falls more steeply than WTI amid tropical storm Harvey volatility
  • Stocks recover as haven assets lose appeal

Overview

The dollar bounced back from two-year lows to stage its strongest performance in nearly two months, as markets shook off North Korean missile jitters with stocks and Treasuries also recovering their poise.

Hot topic

The dollar index, a measure of the currency’s strength against peers, jumped 0.7 per cent after economic data showing that US GDP was revised upwards to 3 per cent in the second quarter — its fastest pace in two years.

“Global financial markets regained composure relatively quickly following yet another provocation from North Korea,” said Piotr Matys of Rabobank.

“It seems that a fairly measured response from US President Donald Trump, compared to his previous comments that North Korea will be met with ‘fire and fury’, eased market concerns that geopolitical tensions could escalate.”

Risk assets that had been hardest hit on Tuesday led the rebound, with European stocks winning back nearly all the previous day’s losses. The region-wide Euro Stoxx 600 climbed 0.7 per cent.

The recovery had begun late in the US trading session on Tuesday and Wall Street extended gains while haven assets were sold off with the yen falling 0.5 per cent to ¥110.32 against the dollar.

“There is no respite from hurricane Harvey for the people of Houston and the surrounding region but markets are demonstrating their resilience yet again,” said Kit Juckes of Société Générale. “Unless yields break below 2 per cent in the US, it’s hard to imagine sub-105 in $/¥ at this point.”

Charlie Diebel at Aviva Investors, highlighting the fleeting nature of Tuesday’s sell-off, said: “The safe haven flows prove ever more shortlived and are consistently used as a buying opportunity for risk. This highlights the degree of comfort markets have about [the] central bank policy remaining benign.”

Forex

The euro retreated from Tuesday’s two-and-a-half-year highs — and the $1.20 level against the dollar — after declining 0.7 per cent to $1.1889.

A rise in German inflation — and a stalling of the euro’s recent gains — provided some good news for the European Central Bank, which is set to hold its policy meeting next week amid concerns that a stronger euro could hamper its plans to taper off its bond purchases.

German inflation figures for August surpassed expectations, rising 1.8 per cent on a year-on-year basis. Preliminary Spanish inflation data also beat economists’ expectations with a rise of 2 per cent year-on-year in August.

“It is probably no surprise that Washington would like a weaker dollar now and the problem for the ECB will again be trying to slow a EUR/USD advance that is increasingly being driven by the dollar,” said Chris Turner of ING. “A EUR/USD break of $1.20 may cause a few headaches for the ECB but there’s little they can do about it.

“The ECB will take some solace from the fact that a stronger euro has not been accompanied by higher interest rates. This is why we expect the ECB to package any tapering plans in the most dovish way possible.”

Sterling managed to ride out yesterday’s bout of dollar strength, rising 0.1 per cent to $1.2929 as the pound enjoys a respite from the worst fears over Britain’s EU exit on growing political talk that a transitional deal could provide a smoother ride ahead for the UK economy.

Meanwhile, the Australian dollar retreated, giving up earlier gains against its US counterpart after building approvals fell less than expected for July. It traded at $0.7903, down 0.6 per cent, having earlier in the session hit its highest level in four weeks.

Equities

The FTSE All World index edged 0.1 per cent higher, boosted by the European stock market bounceback with Frankfurt’s Xetra Dax index gaining 0.5 per cent and London’s FTSE 100 rising 0.4 per cent.

All the Wall Street indices were in the black with the S&P 500 up 0.5 per cent at the closing bell and tech stocks on the Nasdaq Composite outperforming with a 1 per cent advance.

“‘Sell volatility, buy the dip’, has been the investor mindset for some time when it comes to the equity markets,” said Jameel Ahmad of FXTM.

In Asia, broad gains saw Tokyo’s Topix rise 0.6 per cent while Hong Kong’s Hang Seng index added 1.2 per cent.

Commodities

Gold gave up some of Tuesday’s haven gains, slipping 0.1 per cent to $1,308.50. Analysts at Action Economics said: “With the dollar on the mend following solid ADP jobs and growth data on Wednesday morning, profit-taking has been under way since then.”

Oil prices remained volatile, under pressure from tropocal storm-hit refinery demand in Texas as US benchmark WTI fell 1 per cent to $45.98 a barrel while Brent was 2.4 per cent lower at $50.73 a barrel.

Meanwhile, US gasoline prices set fresh two-year highs, climbing 6.8 per cent to $1.9040 a gallon.

Fixed income

The German 10-year Bund yield moved 2 basis points higher to 0.36 per cent while 10-year US Treasury yields were also up 2bp at 2.14 per cent, partially retracing the haven buying of the previous session.

Additional reporting by Thomas Hale in London and Alice Woodhouse in Hong Kong

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