Dollar Falls, Bonds Climb on Fed Wagers; Oil Enters Bull Market

EM Set to Benefit from Weaker Dollar, Says Dryden
  • S&P 500 closes near record high as energy companies rally
  • Nikkei 225 futures mixed amid yen gains; nickel advances

Bets U.S. interest rates will remain low amid unprecedented global stimulus sent the dollar to its weakest level in eight weeks against the euro, spurring bond gains. American stocks closed near record highs as oil entered a bull market.

The greenback retreated against most of its major peers as the probability of a U.S. rate increase by year-end slipped to 47 percent, futures data compiled by Bloomberg show. That outlook was also felt in the bond market, where Treasury yields declined as Morgan Stanley said investors are overestimating the odds of higher borrowing costs. Energy companies led gains in the S&P 500 Index as oil capped a 22 percent advance from its early August low in New York, while Brent crude topped $50 a barrel in London. Base metals also rose.

Speculation that developed economies will keep monetary policy loose amid uneven growth propelled global equities to a 2016 high this month, while weighing on the dollar. Minutes of the Federal Reserve’s last meeting out Wednesday struck a more dovish tone compared with recent comments from regional Fed chiefs, who flagged prospects of higher rates as soon as next month. U.S. officials have twice cut projections for their rate-hike path as economic weakness and market volatility undermine efforts to tighten policy.

“Central banks are going to remain quite accommodating,” said Benno Galliker, a trader at Switzerland’s Luzerner Kantonalbank AG. “Rates are going down and down and down.”

Currencies

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, fell 0.6 percent as of 4 p.m. in New York.

The euro strengthened 0.6 percent to $1.1354, climbing for a fifth day. The gains came even as meeting minutes showed the European Central Bank “widely” agreed that their immediate reaction to the outcome of the U.K.’s referendum shouldn’t fuel excessive speculation about more stimulus. The pound strengthened 1 percent on an unexpected surge in retail sales for the month after the nation voted to leave the European Union. The dollar also dropped versus the yen, losing 0.4 percent.

“The U.S. dollar has remained under pressure across the board,” Jennifer Hau, a foreign-exchange strategist at Credit Agricole SA in London, said in a note. “The Federal Open Market Committee minutes disappointed those looking for a more explicit hawkish signal.”

The MSCI Emerging Markets Currency Index rose following Wednesday’s slump. Brazil’s real posted the biggest decline among major currencies as a delay in voting on a budget bill raised concern that it may take longer than expected to rein in the fiscal deficit.

Mongolia’s tugrik fell for a record 24th day even as the central bank raised its key rate.

Bonds

Benchmark 10-year Treasury yields fell one basis point, or 0.01 percentage point, to 1.54 percent, according to Bloomberg Bond Trader data, while two-year yields slipped two basis points to 0.71 percent.

Bond bulls have been on a roll this year as mixed domestic data, coupled with signs of slowing growth around the world, stayed the Fed’s hand in raising rates following liftoff from near zero in December. From coin-flip odds of a rate increase by December, Morgan Stanley’s strategists predict the probability will drop to 30 percent in coming weeks as inflationary pressures remain absent. The Fed minutes showed officials saw little risk of a sharp uptick in consumer prices.

“Inflation holds the key to further Fed rate hikes,” Matthew Hornbach and Guneet Dhingra wrote in a note to clients. “The market should take a September hike off the table and adjust lower the probability of a December hike accordingly.”

Yields on Ukrainian bonds maturing Sept. 2019 climbed 18 basis points to 8.37 percent after President Petro Poroshenko said in a televised speech the probability of an escalation in the conflict with Russia remains “very significant.”

Commodities

The Bloomberg Commodity Index posted the longest rally in more than two months as the dollar weakened.

West Texas Intermediate crude extended its longest advance in more than a year amid speculation major producers may act to curb output and as U.S. oil and gasoline inventories declined. WTI for September delivery rose 3.1 percent to settle at $48.22 a barrel on the New York Mercantile Exchange, while Brent for October settlement climbed 2.1 percent to close at $50.89 on the London-based ICE Futures Europe Exchange.

Russian Energy Minister Alexander Novak said that the nation was open to discussing a production freeze after Saudi Arabian Energy Minister Khalid Al-Falih said informal talks next month may lead to action to stabilize the market. A deal to cap production was proposed in February but a meeting in April ended with no accord.

“This whole rally has been based off of OPEC jawboning, which to their credit, has been quite effective,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.9 billion. “The Saudis are sort of sending a signal that the low $40s for WTI is probably going to be a floor.”

Gold, copper and silver also advanced.

Stocks

The S&P 500 rose 0.2 percent to 2,187.02, after swinging between gains and losses throughout the session. The benchmark hit an all-time high on Aug. 15.

Chesapeake Energy Corp. led a rally in energy shares, and Wal-Mart Stores Inc. jumped after boosting its earnings forecast. NetApp Inc. soared 17 percent as its results beat estimates. Harley-Davidson Inc. slid after regulators sued the company over sales of an engine device the government said violates the Clean Air Act.

American stocks have risen in six out of the past eight weeks on better-than-estimated corporate results, an improving labor market and optimism central banks will stay supportive of growth. The gains have pushed the equity benchmark’s valuation relative to future earnings to the highest in more than a decade.

“The Fed is in neutral while other central banks are accommodative, so that will keep the market sideways,” said Jim Davis, regional investment manager for The Private Client Group of U.S. Bank. “The second half of this year is going to be about earnings, but we’re in a bit of a dead spot there.”

European stocks climbed for the first time in five days as miners led the increase in the Stoxx Europe 600 Index amid a rally in commodities. Vestas Wind Systems A/S jumped after raising its annual guidance. Dutch insurer NN Group NV, spun off by ING Groep NV through an initial public offering two years ago, rallied after reporting an improved capital position. Denmark’s Jyske Bank A/S advanced as it raised its share buyback program, while DFDS A/S surged after the shipping company posted earnings that beat projections.

MSCI’s gauge of emerging-market shares climbed to the highest since July 2015 as Tencent Holdings Ltd. jumped to an all-time high after earnings beat analysts’ estimates. Samsung Electronics Co. also surged to a record.

In Asia, futures on equity gauges in Australia, South Korea, Hong Kong and China foreshadowed gains, while those on Japan’s Nikkei 225 Stock Average diverged amid the yen’s advance.

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