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Wall Street steps back from record highs

Thursday 19:45 GMT

Overview

US stocks eased back following their strong advance to record highs this week, although the dollar and “core” government bond yields marched ever higher as expectations for a Federal Reserve interest rate rise this month continued to build.

Snap’s market debut attracted plenty of attention on Wall Street as the social media group’s shares opened at $24, compared with its initial public offering price of $17, and were last trading at $25.74.

But the strong start for Snap failed to deter participants from taking profits after Wednesday’s impressive global equity market performances. By mid-afternoon in New York, the S&P 500 was down 0.4 per cent at 2,387, while the pan-European Stoxx 600 ended fractionally lower.

Hot topic

The S&P’s 1.4 per cent rise in the previous session — its biggest one-day rise since just before the US election last November — followed a speech by Donald Trump to Congress in which the president struck an “optimistic and co-operative tone”, according to Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch.

But he added: “The bigger picture is that the speech was lacking key details on the new administration’s policies.

“Again corporate tax reform for us remains the key policy to follow in the coming weeks/months — and, in addition, the replacement of Obamacare, as that appears the first priority of the new administration and could delay tax reform.

“On the border adjustments we learnt little new information.”

Stock markets appeared unfazed by the lack of policy clarity — and also shrugged off a chorus of comments by Fed officials indicating that a rate rise was imminent.

Indeed, interest rate futures moved to price in a 90 per cent probability of the US central bank acting at its meeting on March 14-15, up from 80 per cent on Wednesday, according to Bloomberg — although CME Group’s FedWatch Tool put the current likelihood at 75 per cent.

The heightened speculation came after Fed governor Lael Brainard — a noted policy dove — said the risks to the economic outlook were “as close to balanced as they have been in some time” and that a rate rise “will likely be appropriate soon”.

“The gulf between Fed hawks and doves evident during 2016 has been bridged,” said Divyang Shah, global strategist at IFR Markets.

“The implication of tax/spending desires of the new administration has seen the doves shift their position closer to the hawks.

“This shift in tone from the doves is important and a rate hike at the March meeting would be confirmation that we are now set for a more accelerated tightening than that envisaged by the December ‘dot-plots’ [rate projections] as well as current market pricing.”

Forex

Reflecting the mounting talk of an imminent rate rise, the dollar index — a measure of the currency against a basket of peers — was up 0.5 per cent at 102.25, the highest since January 11.

The euro was down 0.5 per cent at $1.0499 and sterling was off 0.3 per cent at $1.2251, while the dollar was up 0.7 per cent versus the yen at ¥114.51.

Esther Reichelt, currency analyst at Commerzbank, agreed that after Ms Brainard’s comments, the forex market considered a US rate rise this month to be increasingly likely.

“The fact that this isn’t reflected even more clearly in the dollar exchange rates is largely due to the market remaining sceptical as to whether the Fed will be able to maintain a more aggressive rate hike speed over the coming year,” Ms Reichelt said.

“Or whether it will want to — as a largely new policy board and a new Fed chair will decide on the Fed’s monetary policy next year.”

Fixed income

US Treasury prices remained under pressure, driving the yield on the 10-year note up 3 basis points to 2.49 per cent. Meanwhile, the more policy-sensitive two-year paper was up 4bp to a seven-year high of 1.32 per cent.

The 10-year German bond yield rose 3bp to 0.31 per cent, as the market digested preliminary data showing that the annual rate of headline eurozone inflation hit 2 per cent last month.

That was the fastest pace since the start of 2013 and technically above the European Central Bank’s price stability target of close to, but below, 2 per cent, noted Daiwa Capital Markets.

Commodities

The renewed rise in the dollar and bond yields helped drive the price of gold down $16 to $1,232 an ounce, the lowest for more than a week.

Oil prices fell sharply amid further concerns about record levels of US crude stockpiles. International benchmark Brent was down 2.3 per cent at a three-week low of $55.08 a barrel.

Equities

Earlier in Asia the mood initially was buoyed by Wall Street’s new record. Japan’s Topix rose 0.8 per cent, though it had been as much as 1.5 per cent higher.

Australia’s S&P/ASX 200 ended a five-day losing streak with its best gain since late November, as miners helped push the index 1.3 per cent higher. Aluminium-focused plays were on the front foot on reports that China planned to curb output at steel and aluminium producers in an effort to cut winter smog.

The region’s gains waned as the day progressed, leaving Hong Kong’s Hang Seng off 0.2 per cent and mainland China’s Shanghai Composite down 0.5 per cent.

Additional reporting by Peter Wells in Hong Kong

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