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Most investment houses are also much more optimistic about the future. Some responded to the US figures by raising their estimates of second-quarter growth. “There’s a storm in the rear-view mirror, but much brighter sunshine ahead,” said Kit Juckes, a strategist with French bank Societe Generale in London. “The storm does matter, though. There is every reason to be optimistic about upcoming US data, and equally, every reason to expect policy to remain easy.”
European stock markets had retreated after the US figures on Wednesday, then rebounded. Shares in Barclays sank 3%, though, after New York’s attorney general filed a lawsuit against the UK lender.
Longer-dated bond yields fell and the dollar suffered as funds were forced to move out the yield curve. Investors were willing to accept just 1.26% to lend to Germany for 10 years.
US crude CLc1 added four cents to $106.54 a barrel, while Brent was unchanged at $114.00.
Top of the bill in Europe was the British pound and the impact on it of a Bank of England report on financial stability.
The report is expected to provide the bank’s newly founded Financial Policy Committee with a vehicle to announce more measures to curb a booming British housing market, which some worry may be overheating again, six years after the 2008 crash.
Such “macroprudential” steps, particularly if aggressive, might push back expectations of a rise in interest rates that have driven sterling 10% higher in a year.
“There’s quite a lot of uncertainty because this is all quite new for UK assets,” said Paul Robson, a currency strategist with RBS in London.
“The devil will be in the detail, but the rule of thumb is that the tighter macroprudential policy becomes, the looser conventional monetary policy can be – i.e., interest rates might not have to be raised quite as early or aggressively as they would have otherwise been.”
The prospect of the Fed keeping rates low for longer encouraged equity investors, though some were cautious in case a key measure of US inflation due later Thursday surprised on the high side.
The price index for personal consumption expenditures is the Fed’s favoured measure of inflation and looks likely to have reached its highest since late 2012 in May.
Most Asian markets ended in the black with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.08%. Japan’s Nikkei gained 0.3% and Australia 1.15%.
“You can make the argument that the weaker the number for Q1, the more that Q2 is going to pay back in terms of growth,” said Alessandro Tentori, global head of rates strategy at Citi.
“This is on the assumption that Q1 has been influenced by emerging markets weakness and weather related factors.”
Dollar ambushed by GDP, setback seen temporaryReuters: The dollar languished near one-month lows against a basket of major currencies early on Thursday, having been knocked back hard after revised US growth figures for the first quarter came in shockingly weak.
The dollar index .DXY fell as far as 80.091, a low not seen since May 22, as investors reacted negatively to data that showed the US economy contracted at a 2.9% annualised pace, the sharpest decline in five years.
The result was far worse than anyone had expected and sent the benchmark US 10-year yield skidding to a three-week low of 2.529%. It has since recovered to 2.561%. While more recent data suggested the US economy is still on the recovery path, the extent of the slowdown was large enough to spur dollar bears into action.
That saw the euro bounce to a three-week high of $ 1.3652 EUR=, while the Australian dollar popped back above 94 US cents AUD=D4 from a one-week low of $ 0.9354.
Sterling climbed to $ 1.6984 GBP=D4 from a one-week low of $ 1.6952 and the Canadian dollar came within a hair’s breadth of a 5-1/2 month peak of C$ 1.0716 per USD CAD=D4 set earlier in the week.
Analysts at BNP Paribas said the GDP shock was only a temporary setback for the dollar.
“We would not want to over-emphasise the importance of this backward-looking report, especially as the Fed has already highlighted it sees Q1 growth as distorted by weather and with more current measures of economic activity broadly pointing to a rebound in activity in Q2,” they wrote in a note to clients.
“Although there are clear headwinds for the USD at the moment...the fact that market positioning is overall flat on the USD suggests risks of a large dollar sell-off are quite limited.”
The data, however, brought some excitement to a market that has been suffering from something of a summer lull and the World Cup fever.
Unfortunately for Asia, another quiet session is in the making given an absence of any significant economic news.
The next interesting piece of data comes again from the United States, where a measure of consumer inflation watched by the Federal Reserve will be released.
In Europe, the Bank of England is expected to announce tough measures to rein in fast-rising British house prices, which Governor Mark Carney has warned are the biggest domestic threat to financial stability.
The EU summit also starts on Thursday with a working dinner on the EU’s long-term policy agenda before the contentious decision on the Commission presidency on Friday. |
