Fed Outlook Hits Bonds to Emerging-Market Currencies; Oil Climbs

Anxiety over the prospect of a U.S. interest-rate hike as soon as June dominated global trading, battering government debt and most developing-nation currencies.

Emerging-market currencies extended losses from Friday, on track for their worst month since August against the dollar after Federal Reserve Chair Janet Yellen signaled Friday that a rate increase is likely some time in the coming months. Gold fell for a ninth day in its longest slump in a year, while Mexican bonds sank with German bunds amid a tumble in 10-year treasury futures. A gauge of global stocks held near a four-week high with trading volumes in the Americas and Europe more than 50 percent below their daily average amid market closures in the U.S. and the U.K. The yen slumped a second day.

Traders are pricing in a more than 50 percent chance of the Fed boosting borrowing costs in July, after Yellen affirmed sentiment already pushed by a number of her officials. The Fed has indicated a rate increase is possible as soon as next month following a string of improved U.S. economic data. The prospect of tighter policy has underpinned a resurgence in the dollar, with a gauge of the currency versus major peers headed for its best month since September 2014. Reports this week on incomes and U.S. payrolls will be scrutinized as investors try to determine whether the Fed’s June meeting in truly in play.

For details of Yellen’s comments on Friday, read here.

“The Fed continues to set the tone, preparing the market for an eventual rate hike,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil. “Job data this week will be determinant for investors to have a clear path and be able to position themselves. People are adjusting bets on when that will happen and trying to take some profits in a slow day such as today.”

Bonds

Ten-year Treasury futures contracts for September delivery slid 12/32, or $3.75 per $1,000 face amount, to 129 10/32 as of 5 p.m. New York time, according to electronic trading in Chicago. Yields on Mexican peso-denominated government bonds due 2026 rose three basis points, or 0.03 percentage point, to 6.14 percent.

German bunds due in a decade fell, with yields rising three basis points to 0.17 percent, erasing their three-basis point drop in the previous week. Yields on similar-maturity French bonds rose three basis points to 0.50 percent. Germany’s annual inflation rate moved to zero in May, the Federal Statistical Office said Monday, exceeding a median analyst forecast for a contraction of 0.1 percent.

In Asia, debt from Australia to South Korea retreated following the two-basis point spike in 10-year Treasury yields after Yellen’s comments on Friday.

Currencies

The MSCI Emerging Markets Currency Index declined 0.4 percent Monday, leaving it down 3 percent in May after three straight months of gains.

The currencies of Chile, Peru and Argentina weakened, while Brazil’s real bucked the trend. The real rose 1.1 percent, the most among major currencies, after the national treasury reported a primary budget surplus that beat all economists’ expectations. The gains trimmed the real’s losses this month to 3.9 percent.

The yuan dropped 0.3 percent to a four-month low in Shanghai after the People’s Bank of China weakened the currency’s daily fixing rate by 0.45 percent. With the U.S. poised to raise rates and pressure building on China to ease monetary policy, cash outflows will accelerate, said Song Yu, China economist for Goldman Sachs/Gao Hua Securities Co. in Beijing.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, climbed 0.1 percent, bringing its advance in May to 3.6 percent.

The euro strengthened after a report showed economic confidence in the 19-nation currency bloc rose for a second month in May to a four-month high. The currency climbed 0.2 percent to $1.1138, paring its decline this month to 2.8 percent.

The yen was the worst performer among major currencies after the Korean won, falling 0.7 percent to 111.12 per dollar after an aide to Prime Minister Shinzo Abe said an increase to the sales tax will probably be delayed. Retail sales data Monday indicated growth has stalled in Asia’s second-biggest economy, bolstering the case for the planned tax hike to be postponed.

Commodities

Gold for immediate delivery dropped as much as 1 percent to $1,199.80 an ounce, a level last seen in February, and is down 6.9 percent in May, its biggest monthly decline since June 2013.

Money managers’ cut bullish bets on the precious metal by the most this year during the week ended May 24, according to U.S. Commodity Futures Trading Commission data. Silver slid 1.4 percent, while platinum retreated 0.7 percent as the prospect of higher U.S. yields damped the appeal of non-interest-bearing assets.

Copper futures slipped 0.8 percent in New York, snapping a four-day advance. The London Metal Exchange was closed on Monday for a holiday.

West Texas Intermediate crude oil rose 0.6 percent to $49.6 a barrel before this week’s meeting of the Organization of Petroleum Exporting Countries and as fights flared up near Libya’s largest oil shipping port. The total volume traded was about 86 percent below the 100-day average.

Issues including a production freeze will be discussed at the June 2 OPEC talks, said Iraq’s Deputy Oil Minister Fayyad Al-Nima, who will head his ministry’s delegation. Oil is headed for fourth monthly gain, its longest rising streak since April 2011.

Stocks

Brazil’s Ibovespa stock index rose 0.2 percent, trimming its monthly loss to 9.2 percent, still the biggest since September 2014. State-run oil producer Petroleo Brasileiro SA contributed the most to the advance, tracking oil prices higher.

Mexico’s equity index was little changed after earlier fluctuating between gains and losses. The MSCI Emerging Markets Index dropped 0.1 percent, leaving it down 3.9 percent in May, the most since January.

Futures on the S&P 500 Index climbed 0.2 percent, after the U.S. benchmark rallied 0.4 percent on Friday to close the week up 2.3 percent. The Stoxx Europe 600 Index rose 0.1 percent, amid trading volumes 61 percent below the 30-day average, according to data compiled by Bloomberg.

Asian index futures were mixed following gains in most markets on Monday. Contracts on Japan’s Nikkei 225 Stock Average fell 0.2 percent to 17,040 in Osaka, while futures on equity gauges in Hong Kong were up at least 0.2 percent in most recent trading. Contracts on Australia’s S&P/ASX 200 Index slipped 0.1 percent amid a 1.7 percent drop in prices for iron ore, the nation’s biggest export.