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US and European stocks start week on back foot

Monday 15:45 GMT

Overview

US and European equities are moving lower, encouraging flows into sovereign debt, after Asian markets were rattled by North Korea firing missiles into the Sea of Japan.

US president Donald Trump’s latest spat with the country’s security services may also be damping the mood somewhat as markets continue to price in a rate rise by the Federal Reserve next week.

Hot topic

US index futures have been lower throughout the session, and the S&P 500 is down 0.3 per cent to 2,375.

The March S&P contract fell swiftly in early Asian trading after Pyongyang sent four ballistic missiles into the ocean.

The launches prompted South Korea’s acting president Hwang Kyo-ahn to reiterate Seoul’s commitment to deploying a US-owned missile shield — a prospect that has enraged Beijing.

South Korea’s Kospi Composite index fell as much as 0.5 per cent after news of the missile launch broke. Lotte Shopping, the retail arm of South Korea’s fifth-largest conglomerate, sank 4 per cent on reports that some of the company’s shops in China had been shut by authorities after it agreed last week to provide land to host a US missile defence system.

However, Lotte closed down just 0.5 per cent and the Kospi also recovered to trade up 0.2 per cent as stoic investors noted the actions by the North were just the latest in a long line of provocations. The Korean currency remains under pressure, however, weaker by 0.2 per cent to Won1,153.15 per US dollar.

Equities

The fall in US equity futures also came as traders got the first chance to react to news that President Donald Trump has accused the Obama administration of tapping his phones in the run-up to November’s election.

James Clapper, the top US intelligence official from 2010 to 2017, on Sunday said there was no wiretap of Mr Trump or his campaign during his tenure.

Paul Donovan, strategist at UBS, indicated that a Washington so febrile made a number of investors nervous. “There are some signs of deteriorating relations with [ Mr Trump and] Republican members of Congress — Congress is needed for the market-friendly parts of the policy agenda — and that’s relevant to markets.”

Consequently, after Wall Street hit a record high last week — partly it was claimed on the back of Mr Trump delivering a more “presidential” speech to lawmakers — the latest brouhaha is seen giving investors the opportunity for some more profit-taking after the strong bull run.

This is impacting Europe, where the Stoxx 600 index closed 0.5 per cent lower as dealers also welcome news of an £11bn merger in the asset management sector, but react negatively to Deutsche Bank’s plan to raise €8bn as part of a restructuring programme.

Asia-Pacific reactions to events on the Korean peninsula were ultimately muddled. In Tokyo the broad Topix index was off 0.2 per cent, led by declines in financial and utilities stocks, but Hong Kong’s Hang Seng index added 0.2 per cent as casinos pushed higher following data last week showing Macau gambling revenue increased more than expected.

On mainland China the Shanghai Composite gained 0.5 per cent after Beijing cut its growth target for 2017 to 6.5 per cent, compared with 2016’s target of 6.5 to 7 per cent.

Australia’s S&P/ASX 200 rose 0.3 per cent as shares in miners got a boost. Rio Tinto was firmer after the company said it had delayed bonuses to former chief executive Sam Walsh as authorities reviewed a questionable payment made to a consultant.

Forex

The US dollar is mixed after last week coming within about 2 per cent of a fresh trade-weighted 14-year high on surging expectations that the Federal Reserve will tighten policy next week.

The CME Group’s FedWatch tool sees a 86.4 per cent chance the central bank will raise interest rates by 25 basis points on March 15, the probability having more than doubled in recent weeks following supportive economic data and hawkish comments from Fed officials.

The dollar is up 0.4 per cent against the euro at $1.0585 as the single currency falters following news that Alain Juppé will not replace François Fillon as the centre right candidate in the French presidential election, which kicks off with a first round vote in late April.

Sterling is off 0.5 per cent to $1.2236 as Brexit concerns linger, while the Australian dollar is trading 0.2 per cent softer at US$0.7582, despite data showing Aussie retail sales returned to growth in January.

The Japanese yen is displaying a modicum of its traditional havens status amid the geopolitical stress, strengthening 0.1 per cent against the dollar to ¥113.96.

Fixed income

Sovereign bonds are also benefiting from the slightly sour broader market mood.

The yield on US 10-year Treasuries, which move opposite to the bond price, is up two 2 basis points to 2.49 per cent, while equivalent maturity German Bunds are easing 21bp to 0.33 per cent.

However, the monetary policy sensitive US 2-year yield, which on Friday hit a seven-year intraday high of 1.345 per cent as the rate hike expectations grew, is barely changed at 1.30 per cent.

Commodities

Gold is unable to feast on the geopolitical angst, nor the easing interest rates, and instead is hobbled by the recently firmer dollar, the bullion shedding 0.6 per cent to $1,227 an ounce.

Oil prices are rising in the New York morning. Brent crude, the international benchmark, shed earlier gains to trade flat at $55.91 a barrel and West Texas Intermediate, the US marker, is down 0.3 per cent to $53.19.

The nudging lower of China’s growth target is weighing on base metal prices.

Reporting by Jamie Chisholm in London, Hudson Lockett in Hong Kong and Joe Rennison in New York.

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