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Dollar jumps as US growth hits 2-year high

Tuesday 15:15 GMT

Overview

The dollar and Treasury yields are steadying, but US equities are edging lower, as stronger-than expected US GDP data raise concerns that the Federal Reserve may quicken the pace of interest rate rises.

The firmer buck is adding to pressure on commodity prices, with gold selling off and oil prices sliding on scepticism over an Opec deal to curb output.

Hot topic

It looks like the “Trumpflation trade”, for the greenback and Treasuries at least, is back on — albeit on a less frenetic basis than in recent weeks.

A fresh reading of GDP data on Tuesday showed the US economy grew at an annualised rate of 3.2 per cent in the third quarter, beating expectations of 3 per cent.

It is the fastest pace of expansion in two years and is adding to concerns that the world’s biggest economy has little spare capacity to absorb president-elect Donald Trump’s mooted $1tn tax cut and infrastructure-spending stimulus package.

Treasury yields have resumed the rally that was sparked by Mr Trump’s election victory three weeks ago, as traders add to bets that the incoming Republican president’s policies will further boost growth, raise inflation expectations, and cause the Fed to accelerate the tightening of monetary policy.

The US currency is trading more cautiously, however. The dollar index (DXY), which measures the buck against a basket of its peers, is fractionally firmer at 101.37, some way clear of the near 14-year high of 102.05 it hit last week.

The US 2-year bond yield, which is particularly sensitive to monetary policy expectations, is up 1 basis point to 1.12 per cent, eyeing the intraday 6-year high of 1.17 hit on Friday. The 10-year Treasury yield is up 2bp to 2.34 per cent, while the equivalent maturity German Bund yield is adding 4bp to 0.23 per cent.

US equities have also benefited of late by the prospect of Mr Trump’s policies lifting corporate earnings, but the latest rise in the bond yields and the dollar finds investors in cautious mood. Futures at one point indicated the S&P 500 may start Tuesday’s session with a 6 point gain, but the Wall Street barometer is barely changed at 2,201, recovering none of Monday’s 12 point retreat from record levels.

What to watch

European markets remain wary of the Italian constitutional referendum this weekend.

“A No vote on Sunday is a major event risk for the European financial sector,” says Kathleen Brooks at City Index.

“Up to eight Italian banks could fail, as Matteo Renzi’s bank bailout programme is likely to be scrapped if he resigns. It is not known what would replace it, or if the European authorities would step in to save the Italian financial system. If not, then the creditworthiness of some of the larger more systemic banks, such as Deutsche Bank, could be at risk.”

The Euro Stoxx 600 Banking index is down 15 per cent this year, against a 7 per cent decline for the region’s market as a whole. By Monday’s close the FTSE MIB, the Italian equity benchmark, had shed 24 per cent in 2016.

But on Tuesday, the MIB is recovering 1.6 per cent as the banking sector rallies. The Stoxx 600 Bank index is up 0.6 per cent.

The yield on 10-year Italian government bonds is down 8 basis points to 1.99 per cent, meaning Rome must pay a premium of 176bp above German yields. On Monday that spread touched 192bp, around the most since October 2014.

Equities

The pan-European Stoxx 600 is recovering from initial losses to advance just 0.1 per cent, with financials attracting a spot of “bargain hunting” but energy groups under pressure.

Japanese stocks were lower after the decline in the dollar caused the yen to strengthen overnight. The Topix benchmark dipped 0.1 per cent, ending 12-day’s of gains that were powered by the yen being the main casualty of recent dollar strength. The Nikkei 225 fell 0.3 per cent.

Much of Asia noted the soft lead from Wall Street, causing Australia’s S&P/ASX 200 to ease 0.1 per cent, while Hong Kong’s Hang Seng was down 0.4 per cent. However, China’s Shanghai Composite, bucked the trend, adding 0.2 per cent even though the technology-focused Shenzhen Composite lost 0.7 per cent as investors absorbed news that Beijing is to restrict the flow of outward investment.

Forex

The yen again weakened as European trading got under way, and after the US GDP data is now off 0.7 per cent to ‎¥‎112.68 per dollar. The currency strengthened briefly following the release of retail sales and household spending data that showed a less severe contraction in October.

Sterling is one of the few major currencies to be gaining versus the buck, up 0.7 per cent to $1.2501 after stronger-than-expected mortgage lending data. Speculative net-short positions for the pound are at a four-month low as traders trim their post-Brexit vote bearish bets.

A notable major Asian currency on Tuesday was China’s renminbi, up by one-third of 1 per cent at Rmb6.892 per dollar as the greenback weakened and the country’s central bank fixed the currency’s trading range with the US dollar stronger.

The South Korean won is 0.1 per cent firmer at 1,170.09 per greenback — and the stock market was barely changed — after the country’s scandal-mired president offered to stand down.

Commodities

Oil prices are sharply weaker ahead of Wednesday’s much-anticipated meeting between Opec members that markets hope will result in supply cuts.

Brent crude, the international benchmark, is down 3.9 per cent at $46.34 a barrel, while West Texas Intermediate is slipping 3.7 per cent to $45.34. Prices jumped 2 per cent on Monday on hopes that the Opec meeting would yield a deal.

Base metals are generally softer after their recent good run, while gold is down $4 to $1,189 an ounce.

Additional reporting by Peter Wells in Hong Kong

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Via FT