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Equity markets start week on sour note

Monday 08:30 GMT

Overview

The dollar and Wall Street equity futures are under pressure after data last week showed slower than expected US growth and as traders digest President Donald Trump’s executive order to clamp down on people entering the US from seven predominantly Muslim countries.

The sour tone is suppressing stock markets in Europe, though not lifting government bond prices or supporting gold to any great extent.

Hot topic

The US dollar index (DXY) is under pressure after President Trump over the weekend imposed the travel ban, which prompted a wave of protests and legal challenges in the US.

Paul Donovan, global chief economist at UBS Wealth management, said Mr Trump’s actions sent a “signal that has economic consequences”.

“If (regardless of intent) the signal is perceived as anti-Muslim, Middle Eastern investors may question the security of their US investments. Middle Eastern investors have already been selling US assets to fund the purchase of European goods and services. This flow could accelerate,” he added.

Investors also are continuing to absorb Friday’s news that the world’s biggest economy expanded in the fourth quarter by a weaker than expected 1.9 per cent, on an annualised basis.

The economy grew 1.6 per cent for the whole of 2016 — its weakest in five years, and a meagre performance that should provide some food for thought for the Federal Reserve, as it holds its first policy meeting of 2017 later this week.

The DXY, which measures the buck against a basket of its peers, surged to a 14-year high of 103.82 at the start of the year amid a wave of optimism that the new president’s mooted tax-cutting, deregulatory and infrastructure spending policies would boost the economy.

On Monday the DXY is off 0.1 per cent to 100.40 after data from the Commodity Futures Trading Commission for the week to January 24 showed that hedge funds had trimmed their net long positions on the US dollar for the third week in a row.

What to watch

German consumer price inflation is due for release at 13:00 GMT. Benchmark 10-year Bund yields, which last week hit 0.5 per cent for the first time in more than a year amid signs that inflationary pressures may be building in the eurozone, are adding 3bp to 0.49 per cent.

In the US, producer prices and personal income data are set for publication at 13:30 GMT. The US pending homes sales report should hit the news wires at 15:00 GMT.

In the meantime, the yield on 10-year Treasuries is a fraction of a basis point firmer at 2.50 per cent as the cautious broader market tone does not extend to helping sovereign bond prices.

Forex

The weaker buck initially prompted gains for Asian currencies across the board on Monday, although trading hubs such as Singapore and Hong Kong were closed for the lunar new year public holiday.

The Japanese yen, though it has pared some gains, is 0.3 per cent firmer at ¥‎114.67 per dollar ahead of the Bank of Japan’s monetary policy decision on Tuesday.

The euro is up 0.2 per cent at $1.0712, while the British pound is adding 0.1 per cent to $1.2563.

Equities

US index futures suggest the S&P 500 will fall 7 points to 2,288, leaving the Wall Street benchmark just 10 points shy of its record close hit last week.

European bourses are softer in sympathy — the Stoxx 600 index losing 0.3 per cent as resources stocks falter.

Owing to lunar new year celebrations, Japan and Australia were the only two major Asian stock markets open on Monday.

Japan’s Topix trimmed early declines to shed 0.4 per cent, with Toshiba shares off 3.7 per cent amid reports a number of trust banks including Mitsubishi UFJ were preparing to sue the company over its 2015 accounting scandal.

Australia’s S&P/ASX 200 lost 0.9 per cent. QBE Insurance gained 0.2 per cent but had risen as much as 5.2 per cent amid rumours Allianz was considering a $15.6bn takeover of the Australian insurer.

Commodities

Gold was initially a beneficiary of the weaker dollar, but as the buck has pared its losses the bullion has pulled back, now down 0.2 per cent to $1,190 an ounce.

Oil prices are softer, with Brent crude, the international benchmark, down 0.3 per cent at $55.35 a barrel, while West Texas Intermediate is off 0.1 per cent to $53.10.

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