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Wall St struggles to maintain upward momentum

Thursday 19:00 GMT

What you need to know
● Dollar keeps falling in wake of Federal Reserve meeting
● Treasury yields stage modest rebound
● S&P 500 in retreat after nearing record high but FTSE 100 hits new peak
● Sterling bounces after Bank of England dissenter votes for rate hike
——————-

Overview

The dollar continued to retreat in the wake of the Federal Reserve’s “dovish” rate rise on Wednesday while US stocks struggled to maintain their upward momentum and Treasury yields staged a modest rebound.

Sterling outperformed most of its major rivals after the Bank of England left interest rates unchanged, as expected, but delivered a hawkish twist in the minutes of its policy meeting.

Meanwhile, relief at the poor performance of Geert Wilders’ Eurosceptic Freedom party in the Dutch election offered some support to the euro. Early gains for Dutch and French sovereign bonds reversed by the close, however.

Hot topic

The US Fed continued to dominate the markets agenda after it delivered a widely expected 25 basis point rate rise but stayed cautious regarding the pace of future tightening.

The central bank stuck to its original forecast of a total of three rate increases this year and three in 2018, disappointing some in the markets who had anticipated a more aggressive path.

“Markets took Ms Yellen as dovish — or perhaps more accurately, less hawkish than expected,” said Elsa Lignos, global head of FX Strategy at RBC Capital Markets.

“Markets are now discounting 1.5 more hikes for this year and a further two next year, well below the five more hikes by end-2018 signalled by the Fed.”

Albert Edwards, global strategist at Société Générale, said: “The Fed’s lack of verbal assertiveness means the market still cannot bring itself to believe the Fed’s own projections for interest rate hikes.”

Meanwhile, Hans Redeker, global head of FX strategy at Morgan Stanley, highlighted that relative to the improvement in financial conditions since November, the Fed had done very little.

“Even after this 25bp Fed rate hike, financial conditions are more accommodative by an equivalent of about a 60bp rate cut when compared to December,” he said.

The dollar index, a measure of the US currency against a weighted basket of peers, was down a further 0.3 per cent at 100.40, leaving it 1.3 per cent down from where it ended on Tuesday.

Forex

The dollar was down 0.1 per cent against the yen at ¥113.26 while the euro was up 0.1 per cent at $1.0743.

“A key plank in our euro depreciation view to parity looks less powerful after the disappointing result for the Freedom Party in the Netherlands general election,” said Derek Halpenny, analyst at MUFG.

“The Freedom Party gained seats but not to the extent polls were suggesting and will ease fears of opinion polls underestimating the true support for Marine Le Pen ahead of the French elections in April and May.”

Sterling stood out as it climbed 0.6 per cent to a two-week high against the dollar of $1.2358. The pound was also up 0.4 per cent versus the euro at €1.1497.

The BoE’s decision to leave its policy stance unchanged was not unanimous, the minutes of yesterday’s meeting showed, with Kristin Forbes — an external member of the Monetary Policy Committee who is due to leave at the end of June — voting for a 25bp rate rise.

“An out of consensus vote for a hike from an outgoing MPC member has little relevance to the overall outlook for BoE policy,” said Divyang Shah, global strategist at IFR Markets.

“However, what was important in the post-meeting statement today was the subtle shift in communication contained within the post-meeting statement. There is now a greater emphasis on what happens to demand and a focus on ‘some modest withdrawal of monetary stimulus over the course of the forecast period’.”

Fixed income

The yield on the 10-year UK gilt — which moves inversely to its price — rose as high as 1.29 per cent, before easing back to end at 1.25 per cent, up 4bp on the day.

Eurozone government bond prices ended lower across the board. The yield on Dutch 10-year debt rose 4bp to 0.54 per cent, and its French equivalent added 5bp to 1.09 per cent. The 10-year German Bund yield rose 4bp to 0.45 per cent.

Across the Atlantic, Treasury yields inched higher following the steep falls seen after the Fed’s rate announcement. The 10-year yield was up 2bp at 2.52 per cent, but some way short of Tuesday’s two and half year peak of 2.63 per cent, while the two-year US yield was 1bp higher at 1.32 per cent.

Equities

On Wall Street, the S&P 500 equity index gave back an opening rise to stand 0.3 per cent lower at 2,378 by mid-afternoon in New York.

It rose 0.8 per cent in the previous session to within easy striking distance of the record close set at the start of this month.

Healthcare and energy stocks were among the biggest fallers.

By contrast, the pan-European Stoxx 600 rose 0.7 per cent to a 15-month high, while Dutch stocks hit their highest levels in more than nine years and the French and German markets reached their best points since mid-2015.

Rallying miners helped drive London’s FTSE 100 up 0.6 per cent to a record high of 7,415.95.

In Asia, Hong Kong’s Hang Seng index climbed 2.1 per cent as energy shares rebounded after several difficult sessions, while on the mainland the Shanghai Composite added 0.9 per cent as investors shrugged off a rise in interbank interest rates.

Tokyo’s benchmark Topix index rose 0.1 per cent, climbing back from a fall at the open thanks to gains by energy and telecom stocks.

Commodities

US energy stocks on Wall Street retreated as oil prices came under fresh pressure, with Brent crude settling at $51.74 a barrel, down 0.1 per cent.

But metals prices rose as the dollar dipped, with gold up $8 at $1,226 an ounce and copper rising 0.7 per cent in London to $5,908 a tonne.

Additional reporting by Hudson Lockett in Hong Kong

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