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Stock markets firm and pound climbs above $1.25

Thursday 15:30 BST

What you need to know
● US and European stocks gain ground
● Shanghai Composite hits 6-week low amid liquidity concerns
● Sterling moves above $1.25 as traders ponder Brexit implications
● Dollar index above 100 after US Q4 GDP hits 2.1 per cent
● Oil prices add to Wednesday’s 2.1 per cent gain but gold dips
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Hot topic 1

The dollar is mostly higher after data showed the US economy grew more than expected at the end of last year.

The final reading of fourth quarter 2016 gross domestic product showed a 2.1 per cent expansion on an annualised basis, beating analysts’ forecasts of 2 per cent.

The news adds to evidence that president Donald Trump inherited an improving economy and dovetails with a flurry of recent more hawkish comments from Federal Reserve officials about the prospects for monetary policy.

This narrative contrasts with a Reuters report that the European Central Bank’s policy intentions from its March meeting had been misinterpreted as too hawkish and the monetary guardian was now wary of making changes to its upcoming April message.

Consequently the euro is down 0.3 per cent against the dollar at $1.0730 while the US unit is up 0.2 per cent versus the yen at ¥111.28.

Hot topic 2

Traders are keeping a wary eye on the action in China’s financial markets.

The mainland’s equity benchmark, the Shanghai Composite, fell for the fourth day in a row, losing 1 per cent to close at its lowest level since February 17.

The technology-focused Shenzhen Composite lost 2 per cent for its worst finish since February 21 and the caution spread to Hong Kong, where the Hang Seng index shed 0.2 per cent.

Analysts cited a number of factors behind the retreat. Property stocks were under pressure after a government think-tank urged the authorities to guard against speculative excesses in the real estate sector.

The concerns dovetailed with a midweek warning from Moody’s that said the risks to China’s economy from any property downturn continue to grow, given banks’ sensitivity to the sector.

In addition, worries are growing about financial market liquidity going into the end of the first quarter after the People’s Bank of China dismissed such concerns and drained funds from the system for the fifth day in a row.

Finally, sharp declines for some recently effervescent new issues were seen as hitting retail investor sentiment, Reuters reported.

Forex

After a choppy session on Wednesday when UK prime minister Theresa May formally triggered Brexit, the pound is notably more stoic.

Speculators have large short bets against the pound and so often a lack of negative news can see the UK currency rally as nervous bears worry it might recover from its near 31-year lows.

On Thursday, sterling is up 0.6 per cent to $1.2502 and 0.9 per cent firmer versus the euro at €1.1648 after German inflation cooled from a four-year high,

Fixed income

The comments from the various Fed speakers and the new GDP figures are pressuring US government bonds, pushing yields off session lows.

The more policy-sensitive US 2-year yield, which moves opposite to the bond price, is flat at 1.28 per cent and 10-year Treasuries are adding 1bp to 2.40 per cent.

The 10-year German Bund yield is down 1bp at 0.34 per cent as the ECB report encourages buyers. UK gilts are off 2bp at 1.14 per cent.

Equities

US equity futures took the GDP data in their stride and the S&P 500 is up 0.2 per cent at 2,365.

The pan-European Stoxx 600 is up 0.3 per cent while London’s FTSE 100 eases 0.2 per cent as strength for oil producers is counteracted by softness in financials and a stronger pound damps foreign currency earners.

Australia’s S&P/ASX 200 was 0.4 per cent higher, with solid gains in resources groups, but Tokyo took the wooden spoon with the Topix index slipping 0.9 per cent as exporters bemoaned the yen remaining near ¥111.0 per dollar.

Commodities

Relatively bullish data on US crude inventories pushed oil prices more than 2 per cent higher on Wednesday and that momentum is continuing on Thursday.

Brent crude, the international benchmark, is up 0.3 per cent to $52.60 a barrel and West Texas Intermediate is adding 1 per cent to $49.99.

Gold is under pressure as the dollar firms, the precious metal shedding 0.3 per cent to $1,248 an ounce.

Additional reporting by Peter Wells in Hong Kong

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