In a mostly quiet Wednesday session, Asian stocks rose overnight along with European bourses, which were led higher by miners after Rio Tinto (RIO) posted higher profits for the first time in three years and a bigger-than-expected dividend, while India’s Sensex extended declines after the central bank unexpectedly left rates unchanged. US futures were little changed as oil continued to fall after API reported a huge inventory build in the last week.
Trading around the globe continues to be directionless, with moves in financial markets punctuated by midday reversals, underscoring a lack of conviction as investors continue to look for more details from the Trump administration on promised spending increases and tax cuts at the same time that data continue to paint a mixed picture on the pace of inflation in developed markets. Corporate earnings have provided some relief for investors, with companies including Tata Steel Ltd. and Rio Tinto showing strong results.
Continued political uncertainty ahead of European elections prompted investors to sell the euro and kept lower-rated euro zone debt under pressure on Wednesday while the price of safe-haven gold hit three-month highs. Three months before the final round of France’s presidential election, investors are concerned about the strong showing of far-right candidate Marine Le Pen, who has promised to take France out of the euro zone and to hold a referendum on European Union membership. Several other front runners are in disarray.
“The French political noise has brought the euro down and that has given the dollar a reprieve,” said Gavin Friend, a strategist with National Australia Bank in London.
French 10-year government bond yields dipped 1bp to 1.1% but held close to 17-month highs touched on Monday. Low-risk German equivalents fell 2.3 bps to 0.34 percent. This pushed the gap between the two yields to more than 78 bps, its widest since November 2012.
“With 2 1/2 months to go until the first round of voting, which means there is plenty of time for things to change, it is hard to see spread volatility subsiding for the time being,†UniCredit fixed income analysts wrote in a note. The same dynamic was relevant in Italian bonds where the premium investors demand to hold low-rated Italian 10-year bonds rather than German Bunds hit its highest since 2014.
To hedge political risk, investors also bought gold: the yellow metal hit a three-month high of $1,237.90 an ounce.The euro currency weakened a further 0.2 percent to $1.0653 after a sharp fall on Tuesday. According to Reuters, options markets show the biggest bias for euro weakness against the dollar since late June. As Bloomberg adds, implied volatility on the euro climbed on Wednesday amid growing political worries about the continent.
As noted above, the dollar, whose predicted path higher has been interrupted lately by uncertainty over U.S. President Donald Trump’s economic policies, rose 0.2 percent against a basket of other major currencies. Investors are still waiting to see whether Trump makes good on his campaign pledges to cut taxes and boost spending. “Markets know that if Trump was to come out and start talking about tax reform and infrastructure spending, the dollar would go up. The dollar rose a long way at the end of last year, it has come back, now we are sitting around waiting for the next steer.”
In stock markets, the European STOXX 600 index rose 0.6% while Britain’s FTSE 100 fell 0.2%. The STOXX basic resources sector rose nearly 2% driven byRio Tinto which gained 2.1% after it announced it will pay a much higher dividend than expected and buy back $500 million of shares after higher iron ore prices boosted profits, while fellow miner Anglo American added 2.3% . MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.2% in late trade, after spending most of the session in negative territory. Japan’s Nikkei rose 0.5 percent. U.S. stock futures were up less than 0.1%, pointing to a flat start on Wall Street.
Oil prices fell after American Petroleum Institute data on Tuesday showed a larger-than-expected rise in U.S. crude inventories and after signs of slowing demand growth in China. “The API delivered a Goliath crude inventory number … The second highest on record. The reaction was predictable as the herd, already nervous from the previous day’s price action, turned en masse and ran off the cliff,” said Jeffrey Halley of futures brokerage OANDA in Singapore. Copper prices rose 1.7 percent to just shy of $5,900 a tonne after the world’s biggest mines said they planned to cut output due to strikes and other issues. BHP Billiton (BHP) said it would halt output at Chile’s Escondida mines, the world’s biggest, and Freeport-McMoRan warned it would scale back activities at its Indonesian mine.
In major rates markets, yields on 10Y TSYs held below 2.40 percent, after crossing that threshold for the first time in two weeks on Tuesday. Portugal’s 10-year debt yield fell 12 basis points while French benchmark yields dropped three basis points and Italy’s fell six basis points. Indian bonds tumbled after the central bank unexpectedly left rates unchanged, defying market expectations for a cut to counter slowing inflation. Yields on Greece’s two-year notes advanced for a fourth day, climbing eight basis points to 9.80 percent.
