Markets

Dollar holds month-high as Fed eyes 2017 rate rise

Thursday 07.30 BST

What you need to know

  • European stocks set to rise and Asian markets diverge after the Fed
  • Dollar stays around highest level of the month
  • Gold’s drop overnight punishes miners
  • Sovereign bonds broadly lower

Leading quote

“We suspect the Fed will be confident enough to hike rates again in December,” says James Smith, an economist at ING.

“The Fed’s economic assessment remains fairly upbeat with the latest 2017 growth forecast revised up to 2.4 per cent. We’re expecting growth in the 2.5-3 per cent region again in the third quarter.”

Hot topic

The dollar is holding around its highest level of the month as markets absorb the Federal Reserve’s decision to leave the door open for another rate rise in 2017 and begin paring down its multi-trillion dollar balance sheet in October.

The dollar index is steady flat at 92.517, keeping the 0.8 per cent gain it made in immediate reaction to the Fed’s statement.

The yield on 10-year Treasuries also held its ground at 2.26 per cent, having risen 3 basis points to a month-high when the Fed also confirmed expectations it would reduce the size of its balance sheet, swelled by crisis-era bond buying.

The prospect of less re-investment from the US central bank of the proceeds from the maturing debt it owns was being felt in wider capital markets, with the yield on 10-year German Bunds up 2 basis points at 0.46 per cent.

US stocks appeared largely to take the prospect of a further rate rise this year in their stride, with the S&P 500 index rising 0.1 per cent to close at another record high, although the Nasdaq Composite finished 0.1 per cent lower because of a fall in Apple shares.

Equities

European stocks are expected to make gains, with opening calls from CMC Markets pointing to a 61-point rise for Frankfurt’s Xetra Dax and a 3-point gain for London’s FTSE 100.

A weaker yen helped spur the Topix index to a 0.4 per cent rise as the financials segment gained 1.1 per cent. Shares in Toshiba dipped as much as 5.4 per cent after Western Digital announced its subsidiaries were launching arbitration proceedings against the company following a decision to sell its chip unit to a consortium led by Bain Capital.

Sydney’s S&P/ASX 200 index was down 1 per cent, with materials stocks dropping 1.3 per cent and financials off 0.7 per cent. Gold miner Syrah Resources was down 5.9 per cent after an overnight sell-off for the precious metal.

The Hang Seng was up 0.1 per cent in Hong Kong, as financials gained 0.4 per cent and consumer discretionary stocks climbed 1.5 per cent.

Forex and fixed income

Asia-Pacific stock markets diverged in Thursday trading after the Fed on Wednesday announced that it would begin paring back its balance sheet in October and left the door open for another rise in short-term borrowing costs in 2017.

Japan’s yen was 0.2 per cent weaker at ¥112.45 per dollar, following on from a dip of 0.6 per cent overnight. The Australian dollar was down 0.4 per cent against its American counterpart at $0.7999.

While Asia-Pacific stock markets moved in different directions, sovereign bonds in the region were broadly lower, pushing up yields. The yield on the 10-year US Treasury was up 2.3 basis points in Asia trading at 2.268 per cent after rising 2 basis points during Wednesday’s session.

Worst off in the region was the Australian 10-year government bond, which saw yields up 2.8bp at 2.853 per cent. Yields on the equivalent Japanese government note were up 1.1bp at 0.023 per cent.

Commodities

Gold edged down 0.2 per cent at $1,298.44 in Asia, falling through the $1,300 an ounce level after a drop of 0.8 per cent in the previous session.

Oil prices were mixed as Brent crude, the global benchmark, shed 0.2 per cent to $56.20 a barrel while West Texas Intermediate, the US marker, was steady at $50.69 a barrel.

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