Global Markets: Investors play policy split between US and Europe

Reuters: Financial markets showed the diverging path of U.S. and euro zone monetary policy on Wednesday with Wall Street breaking new ground and the dollar perched near a 14-year high, as German bond yields plumbed new record lows.

World stocks edged up and the Dow closed above 19,000 for the first time with investors expecting a growth boost under the policies of U.S President-elect Donald Trump and an imminent rate hike from the Federal Reserve that should be reinforced by minutes released later in the day.

With European rate setters leaning the other way, reaffirming their commitment to easy policy, the euro has been pushed near one-year lows. The split has been most stark in bond markets with yields on two-year German paper hitting record lows, stretching the gap to U.S. equivalents to an 11-year wide.

In Britain, sterling was a tad weaker at $1.2408 before a budget update where hopes for fiscal stimulus have been lowered as the government has stressed its limited borrowing room.

European stocks were flat, struggling to match the exuberance in Asia, where stocks gained 0.7% to strike a one-week high, or the U.S., where the Dow hit a record high up 0.35%, the S&P 500 gained 0.22% and the Nasdaq 0.33%.

With Japan on holiday, Australia’s main index led the action in Asia with a rise of 1.35% to a one-month top helped by strength in bulk commodity prices.

China’s blue-chip CSI300 index advanced 0.5% to a near 11-month peak as the yuan touched its lowest in six years.

With equities in demand, U.S. bonds were getting the cold shoulder. Two-year note yields rose as far as 1.107% on Tuesday, the highest since April 2010.

Euro zone yields were heading in the opposite direction and some solid growth data could not shake expectations for more monetary easing from the European Central Bank next month.

That saw yields on German two-year paper dive to record lows of minus 0.74%, which in turn expanded the yield premium offered by Treasuries to an 11-year peak.

The widening spread kept the euro pinned at $1.0611, not far from last week’s one-year trough at $1.0569. Against a basket of currencies, the dollar was up slightly at 101.12, very close to a 14-year peak.

The dollar also kept most of its recent hefty gains on the yen at 111.05, though it has met resistance around 111.35 in the last couple of sessions.

Emerging markets have struggled in recent days as surging U.S. bond yields sucked much-needed capital out of Asia. President-elect Donald Trump’s past talk of trade tariffs has also weighed on sentiment in the export-intensive region.

Dollar clings near 13-1/2-year high, pauses after rally

Reuters: The dollar hovered near a recent 13 1/2-year peak on Wednesday, taking a breather after surging on expectations that US interest rates will rise further than earlier anticipated due to prospects of increased fiscal stimulus under a Trump administration.

Against a basket of six major currencies, the dollar last stood at 101.05. That was up from Tuesday’s low of 100.65 and not too far from Friday’s high of 101.48, which was the highest for the dollar index since April 2003.

Data on Tuesday showed US home resales rose in October to their highest level in more than 9-1/2 years, helping to support the greenback.

Still, one factor that has blunted the dollar’s momentum this week is a pull-back in benchmark US 10-year Treasury yields from recent highs, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

“Bonds have settled down, and that’s a reason why dollar- buying hasn’t been so intense,” Okagawa said. The US 10-year Treasury yield stood at 2.319% at Tuesday’s US close, down from Friday’s one-year high of 2.364%. The greenback has gained broadly over the past couple of weeks, after Donald Trump’s win in the US presidential election.

The dollar has rallied on expectations that Trump’s incoming administration would boost fiscal spending, in turn elevating inflation and lifting US interest rates.

“Broadly speaking the reflation trade has taken a pause and you see that in US Treasuries and the dollar as well,” said Lee Jin Yang, macro research analyst for Aberdeen Asset Management in Singapore.

“In terms of the next catalyst, it really boils down to how equities perform, and getting further clarity on Trump’s policies,” Lee added.

Against the yen, the dollar eased 0.1% to 111.06 yen in holiday-thinned trade, with Japanese markets closed on Wednesday for a public holiday.

On Tuesday the dollar had risen to as high as 111.36 yen, matching Monday’s peak, which was the greenback’s strongest level against the yen since late May.

The dollar’s rise to the near six-month high against the yen amounted to a gain of 10% from its Nov. 9 trough near 101 yen.

The euro held steady at $ 1.0623, having set a near one-year low of $ 1.0569 last week.

Later on Wednesday, focus will turn to US durable goods orders, as well as the minutes of the Fed’s November policy meeting.