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Markets hesitant as hectic week gets under way

Monday 19:15 GMT

Overview

Global markets adopted a cautious stance ahead of number of important policy and political “risk events” this week — most notably a meeting of the Federal Reserve’s Open Market Committee and the Dutch general election.

Policy decisions will also be announced by the Bank of England and Bank of Japan, while participants kept a wary eye on developments in the oil markets following last week’s steep price declines.

UK politics was in the spotlight after Nicola Sturgeon, Scotland’s first minster, called for a second independence referendum — just as Westminster begins the process of leaving the EU. A meeting of G20 finance ministers in Germany this week should also attract plenty of attention.

Hot topic (1)

It was the looming Fed meeting that dominated the markets’ agenda. Last Friday’s US employment report appeared to give a green light to the central bank to raise short-term interest rates and the main focus for the markets will be whether the Fed’s “dot plot” of rate projections offer fresh clues about the future policy path.

“While a FOMC rate hike looks a formality, we think the bar is pretty high for policymakers to deliver a hawkish surprise — or at least one that could spur further dollar gains,” said Viraj Patel, FX strategist at ING.

“There is a fairly low chance that the median 2017 dot will be nudged higher and with markets already close to pricing in three Fed rate hikes for this year, potential upside at the front-end of the US rate curve looks limited.”

Indeed, the dollar index — a measure of the currency against a weighted basket of peers — was up less than 0.1 per cent at 101.33.

Hot topic (2)

The euro was down 0.1 per cent at $1.0657 as the markets awaited the outcome of the Dutch vote — which analysts said was unlikely to be a market-moving event in itself, but was important because of what it could herald about other forthcoming European elections.

The yield on the Dutch 10-year government bond, which moves inversely to its price, slipped 1bp to 0.57 per cent.

“If [far-right candidate Geert] Wilders does not do as well as expected on Wednesday, then we could see the markets start to reduce expectations of a victory for the French National Front leader Marine Le Pen in France’s presidential elections in May,” said Kathleen Brooks, research director at City Index.

Commodities

Oil prices stabilised on Monday, with Brent — which fell more than 8 per cent last week to its lowest level since December amid concerns about record levels of US crude inventories — barely changed at $51.36 a barrel.

US West Texas Intermediate was down 0.1 per cent at $48.45, after briefly slipping below $48 .

The prospect of supply disruptions helped the price of copper rally 1.1 per cent in London to $5,796 a tonne, after last week’s 3 per cent slide.

Gold was barely changed at $1,204 an ounce but still close to a five-week low.

Fixed income

Ahead of the Fed’s decision on Wednesday, the yield on the monetary policy-sensitive two-year US Treasury note was up 2 basis points at 1.38 per cent — not far from Friday’s seven-year intraday high of 1.39 per cent.

The 10-year US yield was 3bp higher at 2.61 per cent.

Divyang Shah, global strategist at IFR Markets, highlighted that one of the biggest investment themes at the moment was whether the rotation trade from bonds into equities was sustainable.

“This is important due to implications for whether US stocks have yet more record highs in store, as well as whether the secular bull market in US Treasuries has come to an end,” he said.

“Clearly there are a lot of moving parts to this discussion as we focus on the Fed policy outlook, animal spirits, fiscal stimulus, inflation and demographics.

“However, the price action since the US election has provided a lot of support to the rotation trade aided by an adjustment in positioning that still is underweight equities and overweight bonds.”

Equities

Wall Street on Monday appeared content to drift quietly with the S&P 500 equity index flat at 2,373 in mid-afternoon New York trade — about 1.2 per cent short of the record closing high set at the start of this month.

There was a little more confidence in Europe as the pan-regional Stoxx 600 index rose 0.4 per cent and the UK’s FTSE 100 edged up 0.3 per cent.

In Hong Kong, the Hang Seng index rose 1.1 per cent.In Tokyo the Topix index added 0.2 per cent. The Nikkei 225 index added 0.2 per cent.

In Seoul, the Kospi Composite rose 1 per cent as investors appeared to welcome the departure of Park Geun-hye from the presidential Blue House on Sunday, two days after a constitutional court unanimously upheld her impeachment.

Forex

Sterling was up 0.5 per cent against the dollar at $1.2227.

Analysts said Ms Sturgeon’s confirmation that she would seek a second Scottish referendum had not really come as any surprise but highlights that Brexit would be a politically messy and divisive process.

“If an independence vote goes ahead it looks like it will not be until autumn 2018-spring 2019, so there is a long way to go,” noted Michael Stanes, investment director at Heartwood Investment Management.

Additional reporting by Michael Hunter in London, Hudson Lockett in Hong Kong and Mehreen Khan

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