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Wall St struggles as dollar hovers near 5-week low

Monday 18:15 GMT

What you need to know
● Dollar index hovers around five-week low
● Two-year US bond yield edges back amid Fed caution
● US equities struggle as analysts’ earnings optimism wanes
● London’s FTSE 100 inches up to record close
● Gold at two-week high as greenback falters afresh
——————-

Overview

Wall Street struggled for direction and the dollar spent most of the day with a weaker bias as participants adopted a cautious stance following the weekend G20 meeting and awaited a heavy schedule of “Fedspeak” in coming days.

The hesitant tone displayed by US equities helped encourage a firmer showing for Treasury bonds while oil prices remained under pressure but gold hit a two-week high.

Hot topic

The dollar had a choppy session with the dollar index — a measure of the currency against a basket of peers — touching 100.02, the lowest for nearly six weeks, before rallying to 100.34, slightly higher on the day.

The euro was up marginally at $1.0739 while the US unit was down 0.1 per cent versus the yen at ¥112.64.

The meeting of G20 finance ministers in Germany concluded with a communiqué that was notable in that the commitment to eschew trade protectionism had been dropped — a clear reflection of the Trump administration’s stance.

“From an FX perspective, at the margin it may strengthen the expectations that the US will move toward a ‘border adjustment tax’ that would certainly have a positive impact on the dollar,” said Derek Halpenny, currency analyst at MUFG.

“However, it may also merely mean the US will implement specific tariffs on a very small number of countries that are deemed to be breaking trade rules. Or finally it might merely mean that the US continue to use the threat of tariffs to strengthen its negotiation power ahead of bilateral trade negotiations the US intends to conduct with countries like Mexico, Canada and China.”

Jim Reid, macro strategist at Deutsche Bank, highlighted that it was still early days for the new Trump administration.

“So for now, it seems that markets will wait and see before becoming too scared by the implications,” he said.

“Indeed the more significant meeting may be the G20 meeting in Hamburg in July, by which time some of that uncertainty around the new US administration may have started to clear up.”

What to watch

The dollar has been under pressure for the past few days after the Federal Reserve raised interest rates, as expected, but stuck to its forecasts regarding the pace of future tightening.

A number of Fed policymakers are due to speak this week — including Janet Yellen, chair of the US central bank.

“While it would be natural to assume that Ms Yellen’s appearance should be the one carrying the most weight, we are very doubtful that her remarks will be useful to markets,” said Anthony Karydakis, chief economic strategist at Miller Tabak.

“She already had ample time just a few days ago to explain her thoughts on the economic landscape at considerable length and share with markets her — and the Federal Open Market Committee’s — way of approaching monetary policy ahead.

“It would be safe to assume that she has nothing new to add just a week later in the context of a generic keynote address at a Fed-sponsored conference on Community Development research.”

Forex

Sterling slipped 0.4 per cent against the dollar to $1.2342 — and 0.4 per cent versus the euro to €1.1495 — after news that Theresa May, UK prime minister, would trigger the two-year Article 50 EU exit process next week.

“Until now, we can regard the UK economy and politics as having enjoyed a honeymoon period following the June referendum on EU membership last year,” said Divyang Shah, global strategist at IFR Markets.

“Once Article 50 is triggered, the hard task begins as the EU and UK gather around the negotiating table and divorce proceedings begin.”

Equities

In early afternoon trade in New York, the S&P 500 equity index was down 0.1 per cent 2,375, although Apple’s 1.1 per cent rise to a record high helped drive the technology-heavy Nasdaq Composite to a fresh all-time intraday peak.

The mood in Europe was downbeat, with the pan-regional Stoxx 600 index falling 0.2 per cent from Friday’s 15-month closing high.

The Xetra Dax in Frankfurt shed 0.4 per cent as Deutsche Bank tumbled 3.7 per cent ahead of an €8bn cash call.

London’s FTSE 100 edged up 0.1 per cent to a record closing high.

Trading in Asia was thinned by Japan’s closure for a public holiday. Singapore’s Straits Times index fell 0.4 per cent, weighed down by banks and the energy sector. Over the weekend Ezra Holdings, a Singapore-listed oilfield services company that counts Singaporean banks DBS and Oversea-Chinese Banking Corporation among its biggest lenders, filed for bankruptcy in the US.

Australia’s S&P/ASX 200 fell 0.4 per cent as financials and real estate stocks struggled.

Greater China stocks were outperformers, however. The mainland’s Shanghai Composite added 0.4 per cent, while in Hong Kong the Hang Seng index rose 0.8 per cent to touch its highest point since August 2015, and taking its gain so far in 2017 to more than 11 per cent.

The Hang Seng China Enterprises Index, which tracks mainland companies listed in Hong Kong, is up more than 10 per cent, putting the two among the best-performing indices in the world this year.

Fixed income

The yield on the 10-year UK government bond — which moves inversely to its price — fell 2bp to 1.23 per cent while that on the equivalent-duration German Bund rose 1bp to 0.44 per cent.

By contrast, the 10-year US Treasury yield was down 2 basis points at 2.48 per cent. The two-year US yield was also 2bp lower at 1.30 per cent.

Commodities

Energy stocks fell on both sides of the Atlantic as concerns about US crude inventories continued to weigh on oil prices. Brent was down 0.1 per cent at $51.73 a barrel but off a three-month intraday low of $50.25 struck last week.

Gold extended its run of gains to a fourth day as the metal rose $5 to a two-week high of 1,233 an ounce.

Additional reporting by Peter Wells in Hong Kong

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