Dollar Gains, Stocks Fall as Fischer Adds to Fedspeak; Oil Sinks

Davies: Need a Clear, Coherent Message From Yellen
  • Energy companies lead losses in S&P 500; drugmakers advance
  • Treasuries climb as commodity slide spurs search for haven

Traders pushed up the dollar, while sending stocks and commodities down as comments from a Federal Reserve official bolstered speculation that U.S. borrowing costs will rise this year.

Most major currencies fell against the greenback after Fed Vice Chairman Stanley Fischer said the world’s largest economy is close to meeting the central bank’s goals and that growth will pick up. While he gave no indication on the timing of a rate hike, his remarks echoed signals from officials last week indicating the market is underestimating the likelihood of tightening. The Fedspeak initially sent Treasuries slumping, a move that didn’t last long as a slide in commodities drove investors into haven assets. Energy shares dragged down the S&P 500 Index after oil halted its longest gain in four years.

Global markets have been whipsawed by comments from regional Fed presidents including William Dudley and John Williams that indicated U.S. borrowing costs may rise as early as next month. Their remarks set the stage for Chair Janet Yellen, who speaks Friday at an annual symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming. Futures prices indicate about a 52 percent chance the central bank will increase rates this year, up from a 45 percent probability a week ago, according to data compiled by Bloomberg.

“Stan Fischer’s comments clearly raised the risk of a more hawkish tone from Yellen on Friday,” said Dennis Debusschere, a senior managing director and global portfolio strategist at Evercore ISI in New York. “So that’s impacting the dollar, risk assets and commodity prices.”

Allianz SE’s Mohamed El-Erian said that Fed officials need to consider the costs of keeping interest rates low, warning that it could create distortions in financial markets, punishing savers and encouraging trades by bond investors looking for better yields.

“There is also the risk of financial instability down the road” because of extraordinary monetary policy, El-Erian, Allianz’s chief economic adviser, said Monday in an interview on Bloomberg Radio. “And that, I think, is the strongest argument for trying to slowly normalize rates, because otherwise you contribute to excessive risk taking.”

Currencies

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 peers, rose 0.2 percent as of 4 p.m. in New York as speculation on higher borrowing costs boosted the currency’s appeal. It strengthened 0.1 percent to 100.32 yen, and was little changed at $1.1322 per euro. The British pound gained.

Any potential U.S. rate increase would buck the trend of monetary easing by central banks in developed markets. Bank of Japan Governor Haruhiko Kuroda told the Sankei newspaper that there is “sufficient chance” the BOJ will add to its unprecedented easing at next month’s policy meeting and that “technically” there is room for deeper negative rates. The European Central Bank meanwhile is also weighing whether to increase its stimulus package in the wake of the U.K.’s vote to leave the European Union.

Most emerging-market currencies fell, led by Russia’s ruble. Turkey’s lira slumped after Fitch Ratings cut the outlook on the nation’s debt as a failed coup attempt last month increased the political risks in the country.

Bonds

Benchmark Treasury yields declined across maturities, after initially rising as Fischer indicated that an interest-rate increase by year-end was still under consideration. Yet he also questioned whether the Fed had the power to stimulate worker output, asking whether the economy is “doomed to slow productivity growth for the foreseeable future.”

The shift in how bond traders interpreted the remarks highlights the challenge of parsing Fed officials’ comments. Policy makers have signaled time and time again that they want to raise interest rates, yet remain on hold after liftoff eight months ago.

“The implication is that Fed officials don’t really know what to do next,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The tools they’re discussing today to stimulate inflation, at some point in the mysterious future may or may not be successful.”

The U.S. 10-year note yield dropped four basis points, or 0.04 percentage point, to 1.54 percent, according to Bloomberg Bond Trader data. Two-year note yields fell one basis point to 0.74 percent after earlier reaching the highest since June 23 -- the day Britain voted to leave the European Union, and before the result of that referendum sparked a buying spree in the safest government debt.

Benchmark German 10-year bunds advanced on Monday with their euro-area counterparts, after sliding last week.

Stocks

The S&P 500 Index fell 0.1 percent after rising to a record high last week. Marathon Oil Corp. sank after announcing the departure of its chief financial officer. Medivation Inc. jumped 20 percent after Pfizer Inc. agreed to buy the company for about $14 billion. Intersil Corp. also surged after a person familiar with matter said the chipmaker is in talks to be acquired by Japan’s Renesas Electronics Corp. for about $3 billion.

A rally that has brought equities to a series of all-time highs since early July lost momentum as investors mulled extended valuations, skepticism over a recovery in corporate profits and mixed signals from policy makers over the timing for higher rates.

“This is dog days for sure,” said Alan Gayle, a senior strategist at Atlanta-based RidgeWorth Investments, which has about $37 billion in assets. “This is a market that is waiting for something to happen and, in the meantime, it’s drift lower after decent gains.”

The slide in commodity producers also weighed on European equities, which pared gains to 0.1 percent. Heavyweight Syngenta AG jumped 11 percent as China National Chemical Corp. received approval from U.S. national security officials for its $43 billion takeover of the Swiss chemical company.

The MSCI Emerging Markets Index fell 0.7 percent. Brazil’s Ibovespa dropped the most among the world’s biggest stock markets. Shares in Shanghai had the largest decline in three weeks.

Commodities

Oil slumped as Iraq sought to increase exports amid a global oversupply and Nigerian militants called an end to hostilities. West Texas Intermediate for September delivery, which expires Monday, slid 3 percent to settle at $47.05 a barrel on the New York Mercantile Exchange.

“Certainly, the news out of Nigeria, Iraq was a catalyst to get this market a bit lower,” said Bart Melek, head of global commodity strategy at TD Securities in Toronto. “We had a nice, robust rally into bull market territory. With that, I think the market is somewhat uncomfortable to take it much higher.”

Oil entered a bull market last week, having climbed more than 20 percent since sliding below $40 a barrel earlier in August. Speculation that informal talks with members of the Organization of Petroleum Exporting Countries in September may lead to action to stabilize the oil market helped push prices higher, even though a previous meeting in Doha in April between the world’s biggest producers ended with no agreement.

Gold futures for December delivery slid 0.2 percent to settle at $1,343.40 an ounce at 1:39 p.m. on the Comex in New York, a third decline in four sessions. Silver futures for September delivery fell to a seven-week low.

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