Yields in Focus as Stocks Retest Record Highs

EghtesadOnline: Asian stocks advanced and futures pointed to higher starts to U.K. and U.S. equity trading as Treasuries steadied following a recent rally.

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19 July 2017

Concerns about the U.S. administration’s ability to enact fiscal stimulus after a crucial health-care bill was scuppered, as well as weak inflation data, left investors questioning the strength of the global economy, sending Treasuries, bunds and gilts higher. The dollar held at the lowest level in almost a year, Bloomberg reported.

With global equities at record highs, investors are assessing whether earnings results will be strong enough to warrant lofty prices and if economies are in a position to handle higher interest rates. The next clues come from meetings of central banks in Japan and Europe this week and profits due Wednesday at companies including Morgan Stanley and Qualcomm Inc.

The market-implied probability of a hike from the Federal Reserve by year-end has declined in the past two weeks with Treasury yields. The odds are now about 40 percent, down from 60 percent on July 7, based on the current effective fed funds rate and the forward overnight index swap rate. Part of that is due to signs that U.S. President Donald Trump’s health-care reform bill is effectively dead in its current form, after two more Republican senators announced their opposition to the plan.

Here are some key upcoming events:

The ECB meets Thursday. Bloomberg Intelligence expects no change then, and no rate increase before 2019. Reuters cited unidentified officials as saying the bank is keen to keep asset purchases open-ended.

The Bank of Japan is forecast to stand pat at its meeting Thursday.

Here are the main moves in markets:

Bonds and currencies

The yield on 10-year Australian government bonds slid three basis points to 2.72 percent.

The yield on 10-year U.S. Treasuries is up one basis point to 2.27 percent, though down seven basis points this week after dropping five basis points last week. The Bloomberg Dollar Spot Index hovered on Tuesday near its weakest level since August.

Gilts with a similar maturity saw yields fell six basis points to 1.21 percent on Tuesday as traders reduced bets on a U.K. rate increase this year following weak inflation data. The pound traded at $1.3029.

The euro was at $1.1538 after rising 0.7 percent amid speculation the ECB could signal its intent to scale back monetary stimulus at its meeting on Thursday.

The Australian dollar traded at 79.26 U.S. cents after surging 1.5 percent.

The Mexican peso erased earlier losses after S&P Global Ratings revised the Latin American nation’s outlook to stable from negative. The currency was up 0.1 percent at 17.4537 to the dollar.

Stocks

Japan’s Topix index was 0.2 percent higher, while South Korea’s Kospi index fell 0.1 percent.

Hong Kong’s Hang Seng Index gained 0.4 percent, while the Shanghai Composite Index was up 0.8 percent.

Australia’s S&P/ASX 200 Index rose 0.7 percent as bank shares climbed. Analysts said new capital requirements looked fairly benign. More on that story here.

Futures on the S&P 500 Index added 0.1 percent after the underlying gauge rose 0.1 percent to a record 2,460.61 on Tuesday, reversing a loss of 0.4 percent earlier in the session. The Dow Jones Industrial Average declined 0.3 percent. The Nasdaq Composite Index gained for a eighth day to reach an all-time high.

Commodities

WTI crude slipped 0.1 percent to $46.35 a barrel.

Gold was down 0.2 percent to $1,241.38 an ounce.