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Equities subdued as dollar advance stalls

Thursday 08:30 GMT. European and US equity gauges are subdued as government bond yields dip from multi-month highs and the dollar stalls after hitting its strongest level since 2003.

Following a muted Asia-Pacific session — encapsulated by Japan’s Nikkei 225 closing unchanged — index futures suggest the S&P 500 will dip 1 point to 2,176 when the opening bell rings later in New York, leaving the Wall Street barometer just 1 per cent shy of a record high.

The pan-European Stoxx 600 index was down 0.1 per cent, as energy stocks struggled to make headway in the face of Brent crude slipping 0.4 per cent to $46.43 a barrel. Miners were mostly firmer, welcoming higher copper prices and shrugging off news that iron ore prices in China recorded a third straight day of sharp declines.

However, it was the dollar that remained a focal point for investors, its recent move to a 13-year high a symbol of the “Trumpflation trade” that has been shaping markets since the Republican candidate secured a shock presidential election win just over a week ago.

Investors have bought the buck and sold government bonds in expectation that Mr Trump’s policies of a huge infrastructure spending programme, along with tax cuts, would boost the US economy, stoke inflation, and cause the Federal Reserve to raise interest rates at a faster pace than previously thought.

The dollar index (DXY) was 0.2 per cent weaker at 100.22, but closed on Wednesday at its highest level since April 2003, as futures markets saw a 94 per cent chance that the Fed would increase borrowing costs by 25 basis points at its December meeting.

“The recent rally in the USD may only be the beginning of the resumption of a broader uptrend over the next year,” Citi analysts said. “Big levels are now in focus on the DXY Index and a weekly close above the 100.50 area would signal a bullish break out of the multi-month consolidation”. ”

But some traders are wary that the greenback may be due a pullback given its latest surge. The DXY’s 14-day relative strength index, a closely watched momentum measure, is 73.9, above the 70 level that marks a supposedly “overbought” trend.

Another aspect of the “Trumpflation trade” was a big sell-off in the longer maturity portion of the fixed income market — a part of the bond sector most sensitive to inflation expectations.

The 10-year US Treasury yield, which moves inversely to the bond price, and which this week hit an 11-month high of 2.3 per cent having bounced from 1.8 per cent at the start of the month, was easing 3 basis points to 2.2 per cent.

A paring of the “Trumpflation trade” can also be seen in German Bund yields, which are off 2bp to 0.28 per cent, having brushed 0.40 per cent on Monday, the highest since January.

Dollar strength continued to pile pressure on many Asian currencies, notably the Malaysian ringgit, down 1 per cent, and the South Korean won, down 0.8 per cent.

The yen was firmer, however, after this week sliding to its weakest since June versus the greenback on expectations of more Bank of Japan monetary easing. The yen gained 0.1 per cent to ¥108.96 having experienced a fair degree of volatility during the Asian session after the BoJ unleashed its unlimited bond buying plan, a move that helped push 10-year JGB yields down 1bp to 0.01 per cent.

The buck’s strength has also created a notable milestone for China’s renminbi, as the country’s central bank fixed the midpoint around which the currency was allowed to trade weaker for a record-equalling 10th session in a row to Rmb6.8692 per dollar.

China’s Shanghai Composite rose 0.1 per cent but Hong Kong’s Hang Seng dipped 0.3 per cent.

Additional reporting by Peter Wells in Hong Kong

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