Global Stocks Slide As Bond Curves Steepen On Central Bank Concerns; Oil Falls

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Dave Shellock

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Friday 21.00 GMT

What you need to know

  • S&P 500 edges down 0.3 per cent
  • Dollar index heading for lowest close in a month
  • Brent trims weekly decline
  • Rupee and Indian bonds rally after Moody’s upgrades sovereign debt rating

Overview

Persistent uncertainty over US tax reform and the latest developments in the probe into Russian interference in the 2016 presidential election left US stocks and the dollar drifting lower, as a choppy week in the markets drew to a close.

Hot Topic

On Thursday, the US House of Representatives voted to pass its version of the tax reform bill — although analysts warned that the next steps were likely to be far more challenging.

“For starters, a tax plan will only land on the president’s desk once it has satisfied both chambers of Congress,” said strategists at TD Securities.

“Like the healthcare repeal plan, the passage through the House was quite easy but real lobbying efforts — and horse-trading — start in the Senate.”

Jim Reid at Deutsche Bank noted that overnight, the Senate Finance Committee had voted to approve its revised tax package.

“So a full chamber vote could come as early as the week after Thanksgiving,” Mr Reid said. “If passed, the two versions of the tax bill will need to be somehow reconciled.

“Our US economist believes there is a decent chance that some version of tax reform can be achieved, but this is likely to be a first-quarter event, with potential stumbling blocks along the way.”

Viraj Patel, FX strategist at ING, highlighted that the markets “haven’t batted an eyelid” in response to the House vote — “not least because the spotlight has been stolen by reports that US Special Counsel Robert Mueller has issued subpoenas to President Trump’s 2016 election campaign officials”.

Shaun Osborne, chief FX strategist at Scotiabank, said: “It is not clear that this represents a new twist in the saga but the Russia ‘cloud’ that has been hanging over Washington for some months refuses to go away and may yet hinder the administration’s legislative aims.”

Equities

In New York, the S&P 500 slipped 0.3 per cent to 2,578, leaving it 0.2 per cent down on the week and 0.6 per cent short of the record close set on November 8.

A midweek wobble — driven in part by concerns over valuations, plus a sharp sell-off for commodities — had pushed the US equity benchmark to its lowest intraday point since October 25.

The pan-European Stoxx 600 index fell 0.3 per cent on Friday for a five-day decline of 1.3 per cent.

Commodities

Falls for oil and metal prices were a major influence on stock markets this week as participants digested a report from the International Energy Agency in which it lowered its oil demand forecasts and said US crude output would rise sharply in coming years.

Brent dropped as low as $61.08 a barrel on Thursday, marking a slide of 5.5 per cent from a two-year high struck on November 7. On Friday, the international crude benchmark settled at $62.72 — up 2.2 per cent on the day but still down 1.3 per cent for the week, the first five-day decline since early October.

Meanwhile, uncertainty about the outlook for China’s economy helped unsettle industrial metal prices this week. Copper touched a one-month low on Wednesday while nickel traded at its cheapest for three weeks — although once again, the base metals complex staged a broad rally on Friday.

Gold was up $16 at $1,294 an ounce and $18 higher over the five days.

Forex and fixed income

The dollar index, a measure of the currency against a weighted basket of peers, was down 0.3 per cent at 93.63 — on course for its lowest close in a month and off 0.8 per cent for the week.

The euro was 0.3 per cent higher at $1.1801 — up from $1.1663 a week earlier but off Wednesday’s five-week peak of $1.1860. The dollar was 0.9 per cent softer against the yen at a one-month low of ¥112.03 and down 1.3 per cent over the week.

The single currency received a midweek lift from data showing that Germany’s economy had continued to grow at a fast pace in the the third quarter.

“In view of the very positive economic situation in the eurozone, the market is increasingly questioning whether the European Central Bank will be able to stick to its ultra-expansionary monetary policy for much longer,” said Thu Lan Nguyen, analyst at Commerzbank.

“On a political level, the situation [in the eurozone] also seems to have improved as far as the market is concerned.”

The focus in the Treasury market remained on the continued flattening of the yield curve.

The two-year yield was up 1 basis point at 1.73 per cent while the 10-year was 1bp lower at 2.35 per cent — keeping the spread between the two maturities around the lowest for a decade.

“Some investors are talking about the curve inverting in 2018, traditionally a leading recession signal,” said Dario Perkins at TS Lombard.

“Others disagree, arguing we are on the brink of a dangerous 1994-style sell-off. The resolution of this debate will have a powerful influence on a wide range of global asset prices.”

The Indian rupee was 0.4 per cent stronger at Rs65.01 against the dollar after Moody’s upgraded India’s sovereign debt rating to investment grade, at Baa2 from Baa3.

The country’s government bonds recorded their biggest rise in six months, pushing yields down 8.9bp to 6.974 per cent. India’s Sensex equity index finished up 0.7 per cent, led by financials.

Additional reporting by Michael Hunter in London and Alice Woodhouse in Hong Kong

For market updates and comment follow us on Twitter @FTMarkets

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Source : https://www.ft.com/content/a84659ca-cb4c-11e7-ab18-7a9fb7d6163e

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