Bonds Rise as Clock Ticks Toward Fed, BOJ: Stocks Little Changed

Brown: Skip the Fed, Focus on the BOJ Instead
  • Analysts split on BOJ while odds of Fed rate hike at 22%
  • Most Asian index futures advance after S&P 500 meanders

Bonds climbed, while U.S. stocks ended little changed for a second day, as the countdown to policy decisions from the Federal Reserve and the Bank of Japan entered its final stretch. Oil rose.

Treasuries halted a two-day decline as traders saw 22 percent odds of an interest-rate hike from the Fed on Wednesday. The S&P 500 Index advanced less than 0.1 percent as about 100 more stocks fell as rose. The yen extended what’s shaping up to be the best performance among major currencies this year, climbing for a second day amid speculation the BOJ is running out of ammunition to spur inflation through monetary easing. Crude advanced after Algeria said OPEC may turn informal talks next week into a formal meeting. U.S. natural gas futures surged, while gasoline tumbled. Nickel jumped.

Global markets have oscillated amid an uptick in volatility the past two weeks, with concern mounting that central banks are becoming less committed to stimulus amid persistently mixed economic data. Traders have reduced bets on a Fed rate hike in September after U.S. employers added fewer jobs than forecast and growth in the services industry slowed. Meanwhile, a narrow majority of economists surveyed by Bloomberg News expect the BOJ to announce an expansion of its already unprecedented easing program come Wednesday.

“Investors are seeking affirmation that central banks are going to continue to be somewhat friendly,” said Jim Davis, regional investment manager for The Private Client Group of U.S. Bank in Springfield, Illinois.

For a guide to the BOJ’s decision, click here.

Traders are also awaiting the Fed’s fresh “dot plot” projections, which will probably show policy makers see one 25 basis-point rate increase by the end of the year. Such a forecast could be interpreted as a sign that a hike is coming at the December meeting, instead of at the November gathering, which comes a week before the U.S. presidential election. That said, the Fed regularly emphasizes that politics are not a consideration in their decison-making.

Bonds

Yields on Treasuries due in a decade fell two basis points, or 0.02 percentage point, to 1.69 percent at 4 p.m. in New York, trimming their advance in September to 11 basis points.

The extra yield investors demand to own 30-year rather than five-year securities narrowed for a third straight day. The measure of the yield curve had previously steepened for 11 consecutive sessions. Wagers that the BOJ may move to lift long-term yields helped push U.S. notes due in three decades to a 4.4 percent loss this month through Sept. 19.

“You’ve had a very large steepener going into effect globally over the past couple of weeks, and there’s a lot of position paring going on,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities (USA) LLC, one of the Fed’s 23 primary dealers.

Longer-dated bonds led an advance across the euro area. The securities pared losses that last week pushed yields on Germany’s 30-year debt relative to the nation’s shorter-term notes to the most since June.

Ten-year U.K. notes rose the most in six weeks amid increased demand at an auction of longer-dated gilts and as investors offered fewer securities to the Bank of England in its latest buyback operation.

Currencies

The Bloomberg Dollar Spot Index, which measures the currency against a basket of 10 peers, rose 0.1 percent following Monday’s 0.2 percent retreat.

The yen gained 0.2 percent to 101.70 per dollar, leaving it up 18 percent this year. Japan’s currency is set for three straight quarters of gains -- the longest rally since 2011 -- after BOJ’s left its bond-buying program unchanged in July and adopted negative interest rates in January.

For many, the biggest unknown this week is whether the BOJ is willing to increase the record scale of its asset purchases or cut rates further into negative territory. By doing neither at recent meetings, the bank fueled bets that its tools are losing their potency. Whether the BOJ decides to widen the gap between long- and short-term yields, or to cut rates, currency strategists say the biggest threat to the yen would be signs of hawkishness from Fed Chair Janet Yellen, who speaks after the decision on Wednesday.

“The message has been conveyed that the BOJ wants to steepen the long-end of the curve, but the baseline is the pace of U.S. rate hikes,” said Shinsuke Sato, head of the currency trading group at Sumitomo Mitsui Banking Corp. in Tokyo. “The dollar’s uptrend won’t resume if the Fed’s rate hike pace is once a year. A steepening Japanese yield curve, whether or not the BOJ deepens the negative rate, won’t bring back the yen weakening trend.”

South Africa’s rand extended its longest winning streak since June, and Brazil’s real climbed after President Michel Temer reinforced his commitment to reforms aimed at restoring growth. Mexico’s peso led losses among the most-traded currencies, sinking to a record and testing the central bank’s willingness to intervene.

The pound fell to a one-month low versus the dollar as European Union leaders hardened their rhetoric over the consequences of Britain voting to leave the bloc.

Stocks

The S&P 500 closed steady at 2,139.76, paring gains of as much as 0.6 percent. The U.S. benchmark, which was basically unchanged on Monday, is trading at 18.3 times estimated earnings, its most expensive level since 2002. About 5.9 billion shares traded hands on U.S. exchanges, 13 percent below the three-month average.

Consumer staples and drugmakers paced Tuesday’s advance, with biotechnology shares rallying after Allergan Plc agreed to buy Tobira Therapeutics Inc. for as much as $1.7 billion. Lennar Corp. led a decline in homebuilders after data showed U.S. housing starts dropped more than forecast in August.

European stocks erased gains as banks retreated, with Italian lenders Banca Popolare di Milano Scarl and Banca Popolare dell’Emilia Romagna SC falling 4.3 percent or more. LEG Immobilien AG led a rally in real-estate stocks after Societe Generale SA recommended buying shares in the German property company. The MSCI Emerging Markets Index rose for a second day.

Most Asian index futures foreshadowed gains for Wednesday, with contracts on Japan’s Nikkei 225 Stock Average rising at least 0.2 percent in Osaka, Chicago and Singapore. Futures on Hong Kong’s Hang Seng China Enterprises Index added 0.3 percent, while those on Australia’s S&P/ASX 200 Index dropped 0.2 percent. FTSE China A50 Index futures gained 0.1 percent.

Commodities

West Texas Intermediate oil for October delivery, which expired Tuesday, rose 0.3 percent to $43.44 a barrel on the New York Mercantile Exchange.

The 14-member Organization of Petroleum Exporting Countries may formalize this month’s talks as it seeks ways to cut crude supplies by 1 million barrels a day to re-balance markets and stabilize prices, Algerian Energy Minister Noureddine Bouterfa said. Prices dropped earlier in the session as Nigeria and Libya said they were boosting production.

“The comments that OPEC may hold an extraordinary meeting next week give the confab a heightened validity,” said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy.

U.S. natural gas futures rose to $3 per million British thermal units for the first time since May 2015 as late summer heat and production limits burned through a glut of shale supplies. Gasoline slumped after the projected restart of Colonial Pipeline’s Line 1 was moved forward to Wednesday.

Nickel for three-month delivery in London rose for a third day, gaining 1.6 percent $10,310 a metric ton and touching its highest price since Sept. 12. The London Metal Exchange LMEX Metal Index rose 0.5 percent to its highest close since Aug. 22.

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