Hawkish Fed, China Surprises Curtail Risk Appetite: Markets Wrap

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June 14, 2018 7:04 am Published by

European and Asian stocks dropped with U.S. futures after a raft of key Chinese data painted a picture of a softening economy, hours after the Federal Reserve struck a hawkish tone in its latest policy statement. The dollar dipped along with Treasury yields.

The Stoxx Europe 600 Index followed the MSCI Asia Pacific Index, which extended losses as a risk-off mood took hold, sending the yen higher. Chinese economic indicators including retail sales and industrial output missed economist estimates for May, appearing to usher in a long-awaited slowdown in the world’s second-largest economy.

The U.S. yield curve flattened after the Fed signaled it may raise rates a total of four times this year, with the gap between two-year and 10-year rates the narrowest since 2007. Fed Chairman Jerome Powell said with the economy in “great shape,” further gradual tightening is warranted.

In Asia, attention turned to China, where growth is slowing even before any hit from trade tensions with the U.S. The People’s Bank of China didn’t follow the Fed in raising market interest rates, unlike in March, and some economists predicted it will relax reserve-ratio requirements for the nation’s banks.

Meanwhile, the White House is debating whether to carry though $50 billion of tariffs on Chinese goods after talks between the U.S. and China failed to agree on a trade deal.

“The protracted trade negotiations will dampen sentiment,” Raymond Cheng, JPMorgan Private Bank head of Asia equity strategy, told Bloomberg Television. “China just has to loosen in terms of liquidity and adjust to boost the domestic economy just enough in order to counter the negative forces of trade friction.”

Next, investors move on to the European Central Bank, which will decide rates on Thursday. While no change is expected, investors are bracing for news on a potential end to the region’s quantitative-easing program. The Bank of Japan reports Friday.

Raymond Cheng, Asia equity strategy at JPMorgan’s private bank unit, on trade and markets.

Source: Bloomberg

The BOJ cut some bond purchases in its regular operations. The Australian dollar slid after employment data came in below expectations. South Korea’s Kospi index was the worst-performing equity market in the region after a holiday and the won tumbled.

Terminal users can read more in Bloomberg’s Markets Live blog.

These are some key events to watch this week:

  • The European Central Bank rates decision comes Thursday with a briefing from President Mario Draghi.
  • The Bank of Japan June monetary policy decision and news conference is Friday.
  • FIFA expects more than 3 billion viewers for the World Cup that begins this week in Russia.

And these are the main moves in markets:

Stocks

  • The Stoxx Europe 600 Index sank 0.5 percent as of 8:01 a.m. London time, the largest decrease in two weeks.
  • Futures on the S&P 500 Index dipped 0.2 percent to the lowest in more than a week.
  • The U.K.’s FTSE 100 Index decreased 0.6 percent to the lowest in more than two weeks on the largest dip in more than a week.
  • Germany’s DAX Index gained 0.4 percent to the highest in almost three weeks.
  • The MSCI Emerging Market Index sank 1.1 percent to the lowest in two weeks.
  • The MSCI Asia Pacific Index sank 1 percent to the lowest in almost two weeks on the biggest dip in more than two weeks.

Currencies

  • The Bloomberg Dollar Spot Index dipped 0.2 percent, the largest decrease in more than a week.
  • The euro gained 0.2 percent to $1.1818, the strongest in a month.
  • The British pound increased 0.3 percent to $1.341, the strongest in a week on the largest increase in more than a week.
  • The Japanese yen rose 0.3 percent to 110.05 per dollar, the biggest advance in a week.
  • The Turkish lira jumped 0.3 percent to 4.6319 per dollar.

Bonds

  • The yield on 10-year Treasuries fell one basis point to 2.96 percent, the first retreat in a week.
  • Germany’s 10-year yield increased less than one basis point to 0.49 percent.
  • Britain’s 10-year yield gained one basis point to 1.369 percent.
  • Italy’s 10-year yield climbed three basis points to 2.837 percent.

Commodities

  • West Texas Intermediate crude was unchanged at $66.64 a barrel, the highest in two weeks.
  • Gold climbed 0.3 percent to $1,302.96 an ounce, the highest in three weeks on the largest increase in more than a week.
  • Brent crude fell 0.4 percent to $76.40 a barrel.

— With assistance by Sarah Ponczek, Janine Wolf, and Cormac Mullen

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