The Daily Prophet: Wait -- Are Those Signs of Life in the Dollar?

Connecting the dots in global markets.

It's not much, but it's a start. After falling for six straight months in its longest slump since 2007, the Bloomberg Dollar Spot Index has a fighting chance of ending September higher than it started. At one point on Tuesday the gauge was up the most since January. Yes, the overall gains for the month are minuscule at about 0.2 percent and could still get wiped out before the week is over, but at this point the dollar bulls will embrace any signs of life, however insignificant. 

Things had gotten so bleak for the greenback that Bank of America Corp. strategists came out with a report asserting that the euro and yen have supplanted the dollar as the haven currency of choice in times of turmoil. While the naysayers will claim that the dollar's newfound strength is only due to weakness in the euro and emerging-market currencies as traders recalibrate positions following sizeable gains, there's no denying that the greenback has one big thing going for it: The Federal Reserve.

Fed officials have been more hawkish than expected this month, given the hits to the economy delivered by Hurricanes Harvey and Irma. Chair Janet Yellen reiterated Tuesday that raising interest rates gradually is the most appropriate policy stance even though inflation hasn't reached the Fed's targets. As such, yields on two-year Treasuries have risen to 2.16 percent, the highest since early March and a powerful lure to international investors faced with negative 0.72 percent yields on similar maturity German bunds and negative 0.12 percent yields on Japanese government bonds. "Maybe the dollar can get a bit more short-term traction" from here, Selena Ling, the head of Treasury research and strategy at OCBC Bank in Singapore, said on Bloomberg Television.


Who knew that, amid a worldwide glut of oil, crude would stage a pretty strong rebound to burst above the $50 a barrel mark for the first time since April? Well, God knew. He said so. Andy Hall -- the oil trader known to many in the industry as "God" -- wrote, with a hint of irony, in a farewell letter to his clients as he closed up shop in August that his conversion from a long-term bull into a bear could be signal to buy, according to Bloomberg News' James Herron and Javier Blas. Hall, who shot to fame after pocketing $100 million from a single year’s trading in the 2000s, quit the oil market after a rough first half of the year when his fund dropped 30 percent and returned money to investors on Aug. 31, just as prices really started to take off. Bloomberg News reports that some traders are talking about a return to $60 a barrel for oil as OPEC and Russia cut output deeper than ever, demand remains surprisingly strong and the threat of Middle East disruption once again looms. At the annual Asia-Pacific Petroleum Conference in Singapore, one of the global oil industry’s biggest events, the consensus was that demand will grow by 1.7 million to 1.8 million barrels in 2017, or 400,000 to 500,000 more than expected at the start of the year.

No debate on whether investors had become too complacent this year was complete without a mention of emerging markets. The MSCI Emerging Markets Index of stocks was flying higher and yields on bonds from developing nations were approaching their lowest on record relative to those offered on U.S. Treasuries. But it's as if someone has flipped a light switch in recent weeks, and bearish signals abound in almost every market, according to Bloomberg News' Srinivasan Sivabalan. Developing-nation equities are the most volatile relative to U.S. shares since Jan. 12, based on Chicago Board Options Exchange indexes. Analysts have reduced earnings estimates for companies in the MSCI Emerging Markets Index on eight of the past 10 days. The extra yield investors demand to own developing-nation sovereign bonds rather than U.S. Treasuries rose for a fifth day Monday, the longest streak since Nov. 2, before Donald Trump’s election victory. The iShares JPMorgan USD Emerging Markets Bond ETF has registered net outflows in seven of the past eight weeks, losing $256 million last week.


The Topix index of Japanese stocks has risen 25 percent over the past 12 months, outperforming the MSCI World Index, which has climbed 16 percent. Time for a breather? Not yet, says Richard Lacaille, who helps oversee $2.56 trillion in assets as the chief investment officer at State Street Global Advisors. Valuation measures show Japan is one of the most-attractive markets among developed countries, he told Bloomberg News' Chikafumi Hodo and Shigeki Nozawa. Improving corporate governance, increasing dividends and a weaker currency are helping Japanese companies deliver good earnings consistently. “When we look at the combination of relatively low interest rates and improving earnings growth, that’s a combination that leads us to conclude that we should be risk on,” Lacaille said. Japan’s snap election may support sentiment in the stock market, though it’s unlikely to generate much excitement, Lacaille said. Prime Minister Shinzo Abe told his coalition partner he will dissolve the lower house of parliament on Sept. 28 for a general election. So-called Abenomics has helped spur six consecutive quarters of economic growth -- the longest expansion in a decade.

U.S. government officials came out in force Tuesday to declare that help is on the way to Puerto Rico, which is in the midst of a humanitarian disaster following the devastation caused by Hurricane Maria. Trump said he'll travel to the bankrupt island next week to survey the damage. U.S. Senator Marco Rubio, a Republican, said Puerto Rico should have access to low-interest loans to finance rebuilding. The damage toll may be as much as $30 billion and some residents may be without power for as long as six months. Even so, the island’s fiscal agency told a bankruptcy judge Tuesday that the hurricane won’t derail a court process set up to restructure about $74 billion in debt, and that the island needs only a four-week extension of some court deadlines. General-obligation bonds due in 2035, one of Puerto Rico's most actively traded  securities, changed hands Tuesday at an average of 52.3 cents on the dollar, the lowest since they first sold in March 2014 and down from as much as 59.2 cents on Sept. 12, according to Bloomberg News'  Justina Vasquez.


Wednesday will be a pivotal day in markets, as  Trump heads to Indiana to help unveil what he called a “very comprehensive, very detailed” framework for tax legislation. The  prospects for tax cuts are what has arguably kept the bull market in stocks alive this year as the rest of the Trump administration's pro-growth agenda fell to the wayside amid partisan fighting in Washington. Bloomberg News reports that lobbyists, citing multiple leaks of the framework’s elements, say they include cutting the corporate tax rate to 20 percent or so, down from 35 percent, and taking the top individual tax rate down to 35 percent from 39.6 percent. Administration officials have said they’d offset the rate cuts by eliminating deductions and other tax breaks. Trump himself said the plan will simplify taxes, increase the child tax credit and cut taxes for the middle class “tremendously.”

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Bond Market Carves Path Back to Familiar Territory: Scott Dorf

The Fed Is Putting the Dollar Under Pressure: Jason Schenker

So Few Stock-Market Winners, So Much Dead Weight: Barry Ritholtz

Bank Investors Lean Too Heavily on Fed to Stoke Rally: Gadfly

Oil Faces $60 a Barrel. It's a Dangerous Moment for OPEC: Gadfly

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