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Why Wall Street listens when Janet Yellen speaks

Nov 152013
 

Why Wall Street listens when Janet Yellen speaksWhen Janet L Yellen speaks, Wall Street listens – and investors liked what they heard Thursday.

The stock market reversed an early loss and moved steadily higher in the morning as Yellen, President Barack Obama’s nominee to head the Federal Reserve, testified at her Capitol Hill confirmation hearing. Monitoring her poised performance from desks around the world, traders concluded that she would stick with policies that have sent shares soaring. The Standard & Poor’s 500-stock index closed at yet another nominal high Thursday, up 25.6 per cent this year.

Despite the run-up, Yellen also said she did not believe that the trillions in stimulus money the Fed has injected into the financial system since the near collapse of the global economy had created a bubble, another very good sign of her supportive views as far as Wall Street is concerned.

“Stock prices have risen pretty robustly,” she said, but at current valuations, “you would not see stock prices in territory that suggests bubble-like conditions.”

Some Republicans on the committee did not take such a sanguine view.

Noting the market’s current level, Senator Mike Johanns, R-Neb, said, “I think the economy has gotten used to the sugar you’ve put out there, and I just worry that we’re on a sugar high.”

Senator Patrick J Toomey, R-Pa, used a more seamy metaphor.

“What happens when this morphine drip starts to end?” he asked.

While there is considerable debate about just how much of the rally can be attributed to Fed policies, there is no doubt that Wall Street wants to see it continue. When Ben S Bernanke, the outgoing chairman of the Fed, hinted in the spring that $85 billion in monthly purchases of Treasury securities and mortgage-backed bonds might soon be scaled back, stocks promptly plunged.

Since mid-September, when Bernanke and Fed policymakers surprised Wall Street by not beginning the taper, stocks have surged once again. By taking a more accommodative, or dovish, stance on monetary policy and focusing on the need to bring unemployment down, Yellen essentially is saying the Fed will not take its foot off the gas until it believes the economy can race ahead on its own.

More hawkish policymakers and some senators worried, however, that a highly accommodative policy had spurred excessive risk-taking as money managers reach for yield, or borrow at low interest rates to bid up stocks and other assets.

Going into Thursday’s hearing, some traders feared Yellen would take a slightly more cautious stance, said

Tobias Levkovich, chief US equity strategist at Citi. But she did not do anything of the kind, Levkovich said.

Nerves are on edge, too, because many fund managers are sitting on big gains for the year and they do not want to see anything disrupt that, or cost them their bonuses.

“The focus isn’t about long-term investing,” Levkovich said. “It’s about making your year. And she provided a continued feeling that there is no liquidity door being slammed in their faces.”

Yellen’s position on the stock market also created some unusual ideological alignments Thursday.

Historically, the GOP has been considered sympathetic to Wall Street, but several Republicans, including Johanns and Toomey, criticized the Fed for propping the market up.

Yellen, a Democratic appointee who is considered dovish on monetary policy, was in the position of essentially saying the stock market is fine and not to worry.

She did not provide unconditional support, though. In an exchange with Senator Bob Corker, R-Tenn, Yellen said she would not hesitate to prick a bubble if it did develop – a view that puts her somewhat at odds with her two most immediate predecessors, Bernanke and Alan Greenspan – and would use the Fed’s regulatory powers to police the banks as well, to avert a repeat of 2008.

“No one who lived through that financial crisis would ever want to risk another one,” she said.

To be sure, even if the Federal Reserve does begin tapering as soon as its next meeting in December, or more likely waits until early 2014, there are signs Wall Street might not react as negatively as it did in the spring.

For one thing, last week’s better-than-expected data on economic growth and job creation have raised hopes that the government shutdown in October did not do much harm to the economy. And the expansion might pick up speed next year. Moreover, Yellen suggested Thursday that other elements of monetary policy would remain accommodative as well, even if the monthly bond purchases were pared back.

For example, the Fed has said that short-term interest rates will remain near zero at least until unemployment, now at 7.3 per cent, fell to 6.5 per cent. Many economists, like Jan Hatzius of Goldman Sachs, now expect the Fed to lower its threshold to 6 percent, meaning rock-bottom rates are likely to continue at least into 2016.

“There’s a sense she’s putting even more focus on labour markets,” Levkovich said. “All that’s good for a near-term stimulus.”

Asian shares, emerging currencies tumble on Fed anxiety

Nov 132013
 

Asian shares, emerging currencies tumble on Fed anxietyTOKYO: Emerging Asian currencies took a battering and regional shares tumbled to six-week lows on Wednesday as mixed signals from Federal Reserve officials raised fresh concerns about an imminent rollback of the U.S. central bank’s asset-buying stimulus.

The dour mood looked set to carry over into Europe, where financial spreadbetters predicted Britain’s FTSE 100 to fall as much as 0.7 percent, Germany’s DAX off 0.4 percent and France’s CAC 40 to fall 0.3 percent.

Jakarta’s Composite Index stumbled 2 percent to a two-month low as the Indonesian rupiah hit its weakest in more than four-and-a-half years. Foreign banks sold the currency despite the central bank’s surprise rate hike in the previous session, sending it down as much as 0.7 percent to 11,670 per dollar.

The Indian rupee slumped to a two-month low after surging consumer prices sparked fears the central bank would continue to raise interest rates and undermine economic growth at a particularly vulnerable time for the currency.

The Reserve Bank of India is likely to have stepped in to prop up the rupee via state-run banks, to keep it from falling further, traders said.

“Pockets of firm U.S. data will reignite QE (quantitative easing) tapering concerns, pulling dollar higher and vulnerable Asian currencies lower,” said Radhika Rao, economist with DBS in Singapore.

“After a brief respite, the headwinds for the Indian rupee are back at the fore by way of rate tightening fears and elevated inflation,” she added.

MSCI’s broadest index of Asia-Pacific shares outside Japan

lost about 1.4 percent to its lowest levels in more than a month, on track to mark a fifth straight decline. Japan’s Nikkei stock average ended down 0.2 percent.

Chinese shares underperformed after the initial communique from a key Communist Party policy meeting to set a blueprint for the coming decade’s reform agenda offered them few concrete details.

The China Enterprises Index of the top Chinese listings in Hong Kong was down more than 2 percent, while Hong Kong’s Hang Seng Index fell 1.4 percent.

U.S. S&P E-mini futures dipped 0.3 percent in Asian trade on Wednesday after the Standard & Poor’s 500 Index posted modest losses in the previous session.

Atlanta Fed President Dennis Lockhart told reporters on Tuesday that a reduction of the central bank’s quantitative easing program remains a possibility at the Federal Open Market Committee’s next policy meeting on Dec. 17-18, although he did say policy should remain very easy.

Data on Friday showed an unexpected surge in U.S. jobs growth in October, suggesting the labour market could be strong enough for the Fed to begin to pare its $85 billion-a-month bond-buying programme sooner rather than later.

Global markets have been buffeted since May over speculation of an imminent end to cheap dollars, a major driver of assets in recent years. Indonesia and India, which have sizable current account deficits, seem particularly vulnerable to an exodus of capital toward more attractive dollar assets.

Signals from central bank officials have been mixed, with Narayana Kocherlakota, president of the Minneapolis Fed, speaking about the need for aggressive action to foster growth.

Euro stays above ECB-triggered lows

The U.S. dollar wobbled but stuck close to recent ranges. It was off about 0.1 percent at 99.45 yen after rising as high as 99.79 yen on Tuesday, its strongest level since Sept. 13. The dollar faces resistance at 100 yen, above which it has not traded since Sept. 11.

The euro was slightly up from U.S. levels, holding well above lows set last week, when it suffered a heavy selloff on Thursday after the European Central Bank stunned investors by unexpectedly cutting its main rate to a record-low 0.25 percent.

The common currency bought $1.3442, well above its two-month low of $1.3295 hit on Thursday, but still down nearly 3 percent from a two-year peak of $1.3833 set last month.

The dollar index inched down about 0.1 percent to 81.113, moving away from a two-month peak of 81.482 struck on Friday.

In commodities markets, gold gained 0.4 percent to $1,273.11 an ounce but remained not far from the previous session’s four-week low.

U.S. crude for December delivery edged up to $93.16 a barrel after flirting with 4-1/2 month lows, while the benchmark three-month copper contract fell 0.9 percent to $7,055 a tonne on the heightened speculation that the Fed will taper its stimulus.

Fed taper talk sends emerging stocks to 2-month lows, hits vulnerable currencies

Nov 132013
 

Fed taper talk sends emerging stocks to 2-month lows, hits vulnerable currenciesLONDON: Emerging stocks dropped more than 1 percent to two-month lows and currencies fell on Wednesday on renewed speculation of a withdrawal of risk-supporting U.S. monetary stimulus.

The Indian rupee hit two-month lows before suspected central bank intervention, and the Indonesian rupiah hit 4-1/2 year lows.

Risk aversion grew after Atlanta Federal Reserve President Dennis Lockhart said a reduction of the full Fed’s bond-buying programme remained a possibility at the next policy meeting in mid-December, although he did say policy should remain very easy.

Minneapolis Fed President Narayana Kocherlakota said, however, there was a need for aggressive action to foster growth.

Emerging markets have been buffeted by the on-off expectations of Fed tapering over the past six months, and are down 7 percent on the year, underperforming developed markets.

The Fed’s stimulus has generally pumped world markets with cheap cash, particularly driving emerging markets.

The MSCI emerging stock index was down 1.25 percent on Wednesday at its lowest since early September.

Chinese stocks fell nearly 2 percent to two-month lows, suffering their worst one-day loss in four months, after a perceived lack of details on highly-awaited reforms from a key Communist Party policy meeting.

“The announcement may have been a small disappointment for markets since so much attention was placed on the release,” said analysts at SEB in a client note.

Emerging sovereign debt spreads widened by 1 basis point to 359 basis points over U.S. Treasuries.

In currency trading, India and Indonesia are two of the “fragile five” economies seen most vulnerable to higher U.S. Treasury yields, along with Brazil, South Africa and Turkey.

“Investor concern about macro-fundamental deterioration … and pressure on emerging market external accounts in the midst of U.S. removal of policy accommodation continue to provide headwinds,” said Morgan Stanley analysts in a client note.

The Turkish lira also hit two-month lows after Turkey’s current account deficit came in at a wider than expected $3.28 billion in October.

The Romanian leu hit one-month lows and the Hungarian forint hit six-week lows against the euro, and the rouble hit two-month lows against its euro-dollar basket.

The Czech crown hovered at 27 per euro, the target set by the central bank following crown-selling intervention last week. The central bank will likely hold the crown at that rate for at least the next 18 months, governor Miroslav Singer was quoted as saying on Wednesday.

Share gains flag as China plan awaited, dollar firm

Nov 122013
 

Share gains flag as China plan awaited, dollar firmLONDON: A rally in world shares paused on Tuesday as investors awaited China’s new 10-year economic plan, while revived speculation about the timing of U.S. stimulus withdrawal drove the dollar towards 100 yen.

China’s leaders will unveil a reform agenda for the next decade later which could include plans for slower growth as it seeks to rebalance the world’s second largest economy while preserving stability.

Markets will scrutinise the blueprint for clues to likely infrastructure spending, which is key to commodity demand, and for any monetary policy measures to dampen a property boom.

“It’s a 10-year plan of course, so it’s one thing to announce it but another thing to implement it,” said Josh Raymond, market strategist at City Index.

Ahead of the announcement, shares in China had advanced 0.8 percent, while MSCI’s main index of Asia-Pacific shares outside Japan added 0.1 percent in a choppy session.

A broader gauge of global equity markets, the MSCI world equity index, was largely unchanged while European shares drifted lower in early trade, weighed down by a spate of disappointing company updates.

Half of the 80 percent of Stoxx Europe 600 companies that have reported so far have missed profit forecasts, and nearly two-thirds have missed revenue forecasts, according to data from Thomson Reuters StarMine.

“Earnings in general have been OK, but it’s not a blowout, and the revenues have been disappointing,” said Mike Harris, partner at TJM Partners.

Dollar Differential

The dollar meanwhile has rallied to a seven-week high against the yen, driving Japan’s Nikkei index to a three-week high, as investors bet the U.S. Federal Reserve will start scaling back its stimulus sooner than had been expected.

The prospect of a early policy shift has led to a sharp rise in U.S Treasury yields as central banks in the euro zone and Japan pursue looser policies to support growth, widening the interest rate differential in favour of the greenback.

U.S. 10-year note yields were up 3.5 basis points at 2.78 percent in European trading, resuming their rise after a Veterans’ Day holiday on Monday.

Traders said if the benchmark U.S. yield stayed above 2.75 percent for a sustained period it could herald a move towards 3 percent, last seen in early September, when markets initially anticipated the Fed would begin to reduce its asset purchases.

German 10-year government bonds yields were being dragged higher by the move in Treasuries, rising 2.4 bps to 1.78 percent .

A thin economic data calendar left the debt market awaiting speeches from Fed officials Dennis Lockhart and Narayana Kocherlakota for further hints on when the U.S. central bank might start trimming its $85 billion-a-month of bond-buying.

China’s dominance as a consumer of many raw materials meant commodities trading was cautious ahead of the announcement of Beijing’s new economic plan.

Three-month copper on the London Metal Exchange slipped 0.3 percent to $7,150 a tonne, while gold hovered just below $1,300 an ounce.

Brent crude oil slipped 0.3 percent to below $106 a barrel, under additional pressure from expectations for a rise in U.S. stockpiles in data due out later in the day.

European shares pegged back by weak revenue updates

Nov 122013
 

European shares pegged back by weak revenue updatesLONDON: European shares edged lower on Tuesday, drifting away from near five-year highs, after a spate of disappointing company updates confirmed the trend of weak demand and poor revenues in the quarterly earnings season.

German chip maker Infineon fell 5 percent after flagging a revenue drop at all of its units for the current fiscal quarter, even though earnings came in above estimates.

Vodafone, the world’s second-biggest mobile operator, dropped 0.6 percent after reporting a 4.9 percent drop in quarterly organic service revenue, hit by very weak trading in Europe.

Building materials company CRH managed a 4 percent gain, the top riser on the FTSEurofirst 300, after revenues rose, although the increase was based on demand from the United States as trading in Europe remained weak.

While half of the 80 percent of Stoxx Europe 600 companies that have reported so far have missed profit forecasts, nearly two-thirds have missed revenue forecasts, according to data from Thomson Reuters StarMine.

“Earnings in general have been OK, but it’s not a blowout, and the revenues have been disappointing,” said Mike Harris, partner at TJM Partners.

“I would be a seller of European equities in this zone, or at least not a buyer.”

The pan-European FTSEurofirst was down 0.3 percent at 1,294.38 at 0840 GMT, 1.4 percent down from five-year highs hit last Thursday, but still up 16.5 percent since June.

The index has traded in a sideways range since giving away gains made on the back of an European Central Bank Rate cut last week, with public holidays in France and the United States on Monday hitting volumes.

“Some are getting nervous about the lack of volume so, if you’ve got any decent performance, you’re probably not going to get much more upside from here,” said Ioan Smith, managing director of KCG Europe.

“The risk/reward will be skewed to shutting up shop and booking those gains.”

The top individual faller was Norwegian aluminium producer Norsk Hydro, down 5.7 percent after Brazilian miner Vale sold most of its stake in the group.

European share markets flat, focused on ECB

Nov 072013
 

European share markets flat, focused on ECBLONDON: European shares opened marginally lower on Thursday as investors adopted a cautious stance before a policy update in which the European Central Bank is expected to signal monetary easing ahead.

The ECB is likely to leave interest rates at a record low at 1245 GMT, though there is an outside chance of cut after surprisingly weak euro zone inflation data.

Markets are also processing a heavy slate of corporate earnings and will keep a close eye on upcoming US data.

The Bank of England also holds a policy meeting on Thursday. “There is a lot for investors to digest today and tomorrow, with some potentially choosing to take profit,” Keith Bowman, equity analyst at Hargreaves Lansdown, said.

By 0815 GMT, the FTSEurofirst 300 was down 0.95 of a point at 1,295.63, still within touching distance of five-year highs reached amid an equity-friendly monetary policy backdrop.

But traders said valuations are beginning to look stretched. Europe’s STOXX 600 trades on a 12-month forward price-to-earnings (PE) of around 13.6 times, well above its 10-year average.

“Markets are looking tired and in the short term we may see a correction with a euro zone rate cut priced in,” Jawaid Afsar, sales trader at SecurEquity, said.

U.S. July-September GDP data, due at 1330 GMT, and Friday’s nonfarm payrolls report for October will be scrutinised for insight into the potential timing of the Federal Reserve’s eventual move to trim its stimulus.

“U.S. jobs data this Friday may provide a catalyst for a minor pullback but overall one should look to buy the weakness for a year-end rally,” Afsar said.

EARNINGS Nearly 200 European companies announce results on Thursday. Among them, HeidelbergCement shed 2.6 percent after warning 2013 targets would be tougher to achieve.

The world’s largest maker of switches and sockets, Legrand, also slipped 2.6 percent after nine-month profit dipped.

Schroders fell 2 percent on valuation worries – the fund firm trades on a PE of 17.1 times, compared with peers on 13.3 times – despite reporting net inflows of 1 billion pounds.

“Whilst this morning’s update no doubt points to the distribution and sales capability of Schroders, we believe this operating excellence is very much in the price,” Shore Capital says in a note.

Rebounding firmly was Commerzbank, up 7.2 percent after posting a 15 percent rise in quarterly net profit and saying a strategic overhaul was on track.

ArcelorMittal, the world’s largest steelmaker, rose 3.4 percent after it reported strong third quarter profits and said it was through the bottom of the cycle.

Global No. 2 reinsurer Swiss Re added 3 percent after announcing it would consider a special dividend as a way to return excess capital to shareholders.

According to Thomson Reuters StarMine data, 64 percent of firms on the STOXX Europe 600 have reported results so far, of which 49 percent have met or beaten earnings expectations and 34 percent reported above-forecast revenues.

China shares fall as investors await policy meeting

Nov 062013
 

China shares fall as investors await policy meetingHONG KONG: China shares struggled on Wednesday in weak volume ahead of a key Communist Party policy meeting that starts this weekend, with strength in oilfield services counters offsetting weakness in auto makers after Beijing cut sales quotas in that sector.

The CSI300 of the leading Shanghai and Shenzhen A-share listings finished down 1.3 percent at 2,353.5 points, while the Shanghai Composite Index slipped 0.8 percent.

Hong Kong shares end flat, key China meeting awaited

Nov 062013
 

Hong Kong shares end flat, key China meeting awaitedHONG KONG: Hong Kong shares struggled on Wednesday with many investors staying on the sidelines ahead of a fresh batch of Chinese macroeconomic data due from Friday and a key Communist Party policy meeting that will start this weekend.

The Hang Seng Index ended flat at 23,036.9 points, while the China Enterprises Index of the top Chinese listings in Hong Kong slipped 0.7 per cent.

Shares firm, euro dips on confidence in ECB move

Nov 052013
 

Shares firm, euro dips on confidence in ECB moveLONDON: European shares touched a fresh five-year high and the euro dipped on Tuesday with speculation mounting that the European Central Bank will signal an easing of monetary conditions at its policy meeting this week.

Still sluggish economic growth across the 17-nation currency bloc and a sharp dip in inflation has increased confidence among many investors that the ECB will at least lay the groundwork for a policy shift at Thursday’s gathering.

“We definitely think they are going to signal something,” said Luca Jellinek, head of European interest rates strategy Credit Agricole CIB. “For the markets that’s the equivalent of doing it really.”

The pan-European FTSEurofirst 300 index set a five-year high for the third time in a week in early trading before steadying again near its previous close as traders worried about extending the rally further.

“We shouldn’t see much action before Thursday” when the European Central Bank meets, said Guillaume Dumans, co-head of research firm 2Bremans.

The euro eased 0.2 percent to trade just under $1.35, hovering not far from a seven-week trough of $1.3442 set on Monday when economic data pointing to broadening but still weak recovery across the region.

A report from the European Commission later in the day on the fiscal position and growth outlook for the 17-nation currency bloc could prompt some action. As could producer price data for the region which may add to evidence of a weaker inflation outlook.

CENTRAL BANKS RULE

The likelihood of looser policy from the ECB comes as markets increasingly price in the prospect of the U.S. Federal Reserve maintaining its huge equity and commodity friendly stimulus into next year.

Public comments by Fed officials on Monday stressed that the U.S. central bank was in no hurry to taper its asset purchases and would only begin when the U.S. economy showed clear signs of improvement.

The prospect of both euro zone and U.S. central banks supporting the global economy helped keep MSCI’s world equity index near its best level since 2008, though the broad gauge of global equity markets was flat on Tuesday.

It also saw the dollar index, which measures the greenback against six major currencies, hold largely steady, just above a nine-month low of 78.998 hit on Oct. 25.

Against the Japanese currency, the dollar fell about 0.3 percent to 98.25 yen following a reaffirmation by Japan’s central bank on Monday that it would do everything necessary to reflate its economy. [ID:nL3N0IQ2IQ}

Only China looked likely to buck the tend for more monetary policy support. New Premier Li Keqiang said in a speech published in full late on Monday that adding extra stimulus would be more difficult since printing new money would cause inflation.

“His comments are different from what people were expecting. This is a shift from what he said earlier this year about bottom-line growth,” said Hong Hao, chief strategist at Bank of Communications International.

Asian shares struggled as a result slipping about 0.2 percent, though Japan’s Nikkei stock average bounced off its lows and managed a 0.2 percent gain.

However, Australian shares bucked the downtrend to head back toward last month’s five-year high after the Reserve Bank of Australia kept its cash rate steady at a record low of 2.5 percent as widely expected.

In commodity markets the ultra-loose monetary policy prospects helped gold edged up 0.1 percent to $1,315.59 an ounce. Copper added 0.2 percent to $7,165 a tonne.

Brent crude was slightly firmer at $106.23 a barrel but close to the four-month low touched on Monday on worries over a prolonged outage from key oil exporter Libya.

Stocks hit 3-week lows on China worries, South Africa at record peak

Nov 052013
 

Stocks hit 3-week lows on China worries, South Africa at record peakLONDON: Emerging stocks hit three-week lows on Tuesday on worries about the direction of Chinese monetary policy, though South African stocks hit record peaks, helped by upbeat manufacturing data.

Chinese stocks made modest gains, recovering from earlier losses after Premier Li Keqiang warned the government against further expanding already loose money policies.

The possibility of tighter Chinese policy is a worry for broad emerging markets, which have been hostage this year to on-off expectations of a withdrawal of U.S. monetary stimulus. A dampening in those expectations has supported emerging markets in recent weeks.

“The market has run out of steam,” said John-Paul Smith, head of emerging equities strategy at Deutsche.

“Emerging markets had recovered 17 percent off lows and most people are now fully invested. There is a huge amount of anticipation ahead of the party plenum in China.”

The MSCI emerging equities index fell 0.33 percent to its lowest since Oct. 14.

The key Communist Party policy meeting starts this weekend.

South African stocks, which have been supported by domestic institutional buying, hit record highs following PMI data showing the biggest manufacturing expansion in 10 months in October as producers recovered from labour strikes.

The Turkish lira hit a five-week low against the dollar, with investors betting that higher-than-expected October inflation data on Monday would still not be enough to spur the central bank to raise interest rates.

The Romanian leu was slightly lower after an expected 25 bps interest rate cut, to a record low 4 percent.

Emerging sovereign debt spreads tightened by 2 basis points to 332 bps over U.S. Treasuries.

Sovereign borrowers have started a new wave of borrowing before the year-end.

Serbia has hired Citi and Deutsche for an investor roadshow before a potential Eurobond, according to Thomson Reuters news and information service IFR.

The Turkish treasury mandated banks for a euro-denominated Eurobond maturing 2021.

“Emerging market borrowers are seizing the opportunity currently afforded by the market to pre-fund 2014 external obligations,” analysts at Morgan Stanley said in a client note.