Dollar Falls, Bonds Rise on Bets Fed to Move Slowly; Kiwi Jumps

  • Oil slides on unexpected increase in U.S. crude inventories
  • Most Asian futures drop as energy stocks drive S&P 500 lower

Gina Martin Adams: In Bubble of Central Bank Easing

The dollar weakened, boosting metals prices amid gains in government bonds, as the idea that U.S. policy makers are in no rush to raise interest rates solidified. U.S. stocks dropped with crude oil.

The greenback fell against major peers as currencies of commodity-exporting nations rallied with industrial metals. New Zealand’s dollar climbed after the country’s central bank signaled a more gradual easing path than some investors had anticipated as it cut rates to a fresh record low. Treasuries helped extend the global bond rally as the U.S. sold 10-year notes at their lowest yield in four years. Oil’s slide spurred a selloff in energy shares that dragged the S&P 500 Index down 0.3 percent from near its all-time high.

Wagers on the Federal Reserve hiking key borrowing costs this year are lingering below 50 percent as central banks elsewhere strive to stimulate growth and ignite inflation. Speculation the uneven global economy may stay the Fed’s hand this year has weighed on the dollar amid a rally in sovereign debt. Chicago Fed President Charles Evans said this month that one rate increase could be appropriate in 2016, in line with the median projection of officials. The Fed was considering four rate hikes at the start of the year.

“The market continues to doubt the Fed is ready to tighten monetary policy this year,” said Manuel Oliveri, a currency strategist at Credit Agricole SA in London. “In the short term, the dollar will remain under pressure.”

Currencies

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell 0.4 percent as of 4 p.m. in New York, its lowest point since June 23.

The Kiwi kicked off Thursday trade with a surge of as much as 1.9 percent, touching its strongest level since May last year after the Reserve Bank of New Zealand reduced rates by 25 basis points, or 0.25 percentage point, to a record-low 2 percent. On Wednesday, the futures market indicated traders were certain of a reduction and even saw 20 percent odds for a 50 basis point drop.

Norway’s krone climbed 1.5 percent on Wednesday, fueled by a surge in inflation that cast doubt on further rate cuts there. The MSCI Emerging Markets Currency Index rose a fifth straight day, climbing to its highest level in 13 months. The South Korean won climbed to its strongest point since May 2015, while Brazil’s real extended the best rally among major currencies this year to 27 percent.

“As long as the developed-market central banks remain dovish, high-yield currencies could continue to perform well,” Stephen Jen, a former economist at the International Monetary Fund and now chief executive officer at Eurizon SLJ Capital Ltd. in London, said in a note to clients dated Aug. 5.

The pound added 0.1 percent to $1.3010, ending a five-day run of losses sparked by expansion of the Bank of England’s quantitative-easing plan.

Bonds

Treasuries extended gains after the 10-year auction. Even as the $23 billion offering drew a yield of 1.503 percent, the lowest in four years for the maturity, demand from a group of buyers that includes foreign central banks and mutual funds was near record levels.

Benchmark 10-year yields fell four basis points, or 0.04 percentage point, to 1.51 percent, Bloomberg Bond Trader data showed.

In some ways, the demand flies in the face of warnings from investors such as Bill Gross and Jeffrey Gundlach that the bond market is in a bubble because of unprecedented monetary stimulus from Japan to Europe. Yet those central-bank policies, including bond purchases, are sending yield-seeking investors to the U.S., capping interest rates at a time when almost $9 trillion of sovereign debt worldwide yields less than zero.

“From a 50,000-foot view, you’d say they are bubbling over in the sense that rates are at levels that are not fair-market,” said Tom Tucci, head of Treasuries trading in New York at CIBC World Markets Corp. “But if central banks are continually taking supply out of the market, it’s very difficult for those rates to move up appreciably.”

Ten-year gilt yields dropped four basis points to 0.54 percent in London, after earlier falling to a record 0.512 percent. The BOE said it received sales offers for 4.71 times the debt it planned to buy at an operation Wednesday, in contrast to the previous day, when it failed to find enough sellers of longer-dated gilts.

New Zealand government bonds due in a decade fell after the rate cit, pushing yields up two basis points to 2.19 percent at the beginning of Thursday trading.

Commodities

Gold climbed as the dollar’s weakness bolstered the appeal of metals. Palladium touched a one-year high as stronger Chinese car sales added to concerns over insufficient supply of the commodity used to reduce pollution from vehicles. Silver also gained, as copper led a bounce in industrial metals.

West Texas Intermediate crude futures for September delivery dropped 2.5 percent to settle at $41.71 a barrel on the New York Mercantile Exchange. Total volume traded was 25 percent above the 100-day average. Crude inventories in the U.S. rose by 1.06 million barrels, according to an Energy Information Administration report. Analysts surveyed by Bloomberg had forecast a 1.5 million-barrel decline.

“Refineries are cutting back on crude runs and as a result inventories are rising again,” said Craig Bethune, a fund manager at Manulife Asset Management Ltd. in Toronto who focuses on energy and natural resources investments. “Refiners are doing what they have to do because gasoline and diesel supplies are so high. They’ll soon be performing seasonal maintenance, which will cut runs further.”

Stocks

The S&P 500 dropped to 2,175.49, after the measure closed one point away from an all-time high in the previous session. Exxon Mobil Corp. led declines among energy producers, and banks also dropped on speculation U.S. benchmark rates won’t rise this year.

“It’s not a good day for energy at all,” Mark Kepner, an equity trader at Themis Trading LLC in Chatham, New Jersey, said by phone. “With financials it’s about the 10 year, we’re back to 1.50 again. There’s that feeling the Fed is probably going to be on hold for September and that’s why I think financials are tailing off again.”

Traders also watched a batch of corporate earnings. Luxury seller Michael Kors Holdings Ltd. sank after its quarterly comparable sales fell more than expected, while drugmaker Perrigo Co. plunged after cutting its earnings forecast. More than 90 percent of S&P 500 members have posted quarterly results this season, with 78 percent beating profit predictions and 56 percent topping projections for sales.

The Stoxx Europe 600 Index fell 0.2 percent Wednesday, after reaching its highest close since Britain’s June vote to leave the European Union. Germany’s DAX Index slipped 0.4 percent after entering a bull market. EON SE dragged utility companies lower as it posted a first-half loss because of charges linked to the listing of its Uniper unit.

In Asia, futures on stock gauges in Japan, Australia and Hong Kong signaled losses for Thursday, while those on South Korea’s Kospi index added 0.1 percent.

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