Bonds, Stocks Fall on U.S. Data as Pound Sinks Amid Brexit Angst

  • Colombian assets tumble after voters reject rebel peace accord
  • Asian index futures mixed with China shut; crude extends rally

Foley: Brexit a Massive Wave of Uncertainty for Pound

Government debt fell with stocks after data showing expansion in U.S. manufacturing bolstered wagers that the Federal Reserve will raise interest rates this year. The pound slid on concern Britain may face a so-called hard Brexit.

Treasuries declined across maturities and the S&P 500 Index fell following three straight weekly gains. U.K. shares climbed the most among western-European markets as the weaker currency boosted exporters with Prime Minister Theresa May saying the country will begin to exit the European Union next year. Colombian assets sank as the government’s failure to gain popular support for a peace deal fueled speculation it won’t be able to deliver key tax reforms. Oil rallied as traders mulled last week’s shift in OPEC policy.

Traders are keeping a close watch on U.S. economic reports this week, scouring data for clues as to the timing of a potential Fed rate increase. New orders and production swung into expansion territory last month, indicating gradual improvement across America’s manufacturing landscape. At the same time, factories continued to focus on becoming leaner by trimming inventories and cutting employment. Later this week, a key jobs report could show a pickup in the pace of hiring, according to economists surveyed by Bloomberg.

“You’ve got to watch the bond markets, that’s been key,” said John Canally, chief economic strategist at LPL Financial in Boston, which oversees about $479 billion. “Markets are warming up to the idea that the Fed is going to hike rates.”

While the U.S. central bank decided last month to wait for stronger signs of growth before raising rates, some officials have since publicly endorsed a hike in the near term amid signs of a tightening labor market and expectations that inflation will move closer to the Fed’s 2 percent target. Traders are pricing in 60 percent odds of Fed action in December, up from 51 percent a week ago.

Fed Bank of New York President William Dudley suggested the central bank should be cautious in raising interest rates. Noting concerns from some economists that the risk of a recession is increasing, he told a central-banking seminar hosted at his bank that the Fed may have limited room to cut rates in the event of a downturn in the next few years. That may fuel the need to turn again to unconventional policies, such as purchasing bonds.

Stocks

The S&P 500 Index lost 0.3 percent to 2,161.20 as of 4 p.m. in New York. Financial shares in the benchmark index lost momentum after jumping the most in eight weeks on Friday.

“Data will matter,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “Earnings kick off in a couple weeks. I think people have their eyes on that.”

The reporting season unofficially starts in about a week, when Alcoa Inc. posts results. Analysts forecast a drop of 1.5 percent in S&P 500 company profits in the third quarter, which would mark a sixth consecutive decline.

Britain’s megacap stocks rose to their highest level in more than 16 months, with companies that get most of their revenue outside the U.K. contributing the most to gains in the FTSE 100 Index. HSBC Holdings Plc, Royal Dutch Shell Plc, GlaxoSmithKline Plc and British American Tobacco Plc all advanced at least 1 percent.

Henderson Group Plc surged 17 percent after agreeing to buy Janus Capital Group Inc. to create a $320 billion money manager, while peers Aberdeen Asset Management Plc and Jupiter Fund Management Plc advanced 5 percent or more. The Stoxx Europe 600 Index gained 0.1 percent.

Emerging-market shares extended their best quarterly performance since 2012 as a strong Chinese manufacturing reading eased anxiety over the world’s second-largest economy. Egyptian stocks soared as investors bet that policy makers may devalue the country’s currency, luring back foreign investors.

Saudi Arabia’s benchmark, which fell to the lowest level since 2011 on Sunday, has lost about $30 billion since the nation last week announced a series of cuts to government salaries and bonuses as part of efforts to slash spending.

Exchanges in China, Germany and South Korea were shut for holidays on Monday. Asian index futures foreshadowed a mixed picture for Tuesday, with contracts on Japan’s Nikkei 225 Stock Average diverging despite losses in the yen.

Bonds

Ten-year U.S. yields rose three basis points, or 0.03 percentage point, to 1.62 percent. The yields on two-year bonds, which are most sensitive to Fed expectations, advanced three basis points to 0.79 percent.

Benchmark securities posted their first back-to-back declines in two weeks. The U.S. manufacturing report will be followed by data on services and factory orders, while the non-farm payrolls numbers are due out Friday.

“The most important thing, of course, will be Friday’s payrolls data,” said Philip Marey, a strategist at Rabobank International in Utrecht, Netherlands. “Provided the data goes in the right direction, they will hike but there are considerable downside risks. The market has been prepared by the Fed for a December hike.”

Treasuries advanced last week as mounting concern over the financial health of Germany’s Deutsche Bank AG roiled financial markets and fueled demand for the safest assets. Those bond gains were pared Friday on a media report that the lender was nearing a settlement with the U.S. Department of Justice that was less than half the amount initially requested.

Italy’s yield spread with Spanish securities widened to the most in almost two years after an opinion poll showed that the constitutional referendum, on which Prime Minister Matteo Renzi’s political fate hangs, is too close to call.

Currencies

Sterling dropped 1 percent to $1.2842, the most among its 16 major peers. British financial-services companies will get no special favors in Brexit negotiations, according to three senior figures in Prime Minister May’s administration. The government will refuse to prioritize the protection of the sector after the U.K. has left the EU, the people said.

May told delegates at her Conservative Party’s annual conference at the weekend that she’ll curb immigration, stoking speculation the nation is headed toward a Brexit scenario that involved limited access to the EU’s single market.

“Hard Brexit is a sell for the pound,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd in London. “I know the government line is that they don’t see a need to differentiate between hard and soft Brexit, but the market certainly does.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.1 percent.

Colombia’s peso weakened 1.7 percent versus the dollar after citizens narrowly rejected a peace agreement with Marxist guerrillas by 50.2 percent to 49.8 percent in a weekend ballot.

Commodities

West Texas Intermediate crude climbed 1.2 percent to $48.81 a barrel after rallying 8.5 percent last week. It was the highest close since July 1 and followed a 7.9 percent jump in September.

While the Organization of Petroleum Exporting Countries outlined an accord to curb output by as much as 750,000 barrels a day last week, Libyan production rose and will advance further this month, according to an official of the state oil company. Independent crude producers are using the rally that followed the agreement to hedge their price risk for next year, banks and consultants said. Rigs targeting oil in the U.S. also rose to the most since February, Baker Hughes Inc. said on its website Friday.

“This looks like follow through from the OPEC accord last week,” said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida. “For all the holes in this agreement it’s still the first one that’s been reached in eight years.”

Gold futures for December delivery slipped 0.3 percent to settle at $1,312.70 an ounce on the Comex in New York as silver also slumped. Nickel slid 2.1 percent in London, leading losses among industrial metals.

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