Michelle ThompsonA day before the release of critical U.S. inflation statistics that may determine when or whether the Federal Reserve hikes interest rates further, global equities stabilized on Tuesday, losing some of their momentum as the dollar recovered some of its overnight losses.
After UK labor market statistics helped confirm the idea that the Bank of England’s anticipated rate rise next week would be its last, traders still had a lot to monitor on Tuesday ahead of the important U.S. numbers and Thursday’s European Central Bank meeting.
The STOXX 600 index for Europe gave up early gains and fell 0.2% (.STOXX), under pressure from falling SAP (SAPG.DE) shares, which coincided with rival Oracle’s (ORCL.N) 10% premarket plunge after the latter provided a Q2 sales forecast that fell short of analysts’ expectations.
London’s FTSE 100 (.FTSE) was a standout performance, increasing 0.3% as a result of positive British jobs statistics that caused the pound to weaken and increased the appeal of British equities to international investors.
According to data released on Tuesday, the labor market in Britain continued to show symptoms of cooling in the three months leading up to July. This suggests that a weaker economy is causing inflation to moderate, reducing pressure on the Bank of England to hike interest rates significantly.
“I think (the data) underscores the likelihood of just one more and then done for the Bank of England and more of a bull steepening in the gilt market (British government bond), while we have had bear flattening elsewhere where higher oil prices have dominated the narrative,” said Chris Scicluna, head of research at Daiwa Capital Markets.
Bond yields move in the opposite direction of bond prices, and bull steepening describes the decline in shorter-dated rates relative to longer-dated rates.
Early in the day, the two-year gilt yield decreased by as much as 8 basis points, while the 10-year yield only decreased by as much as 6 bps. The two-year yield was recently at 5.04%, down 4 basis points on the day.
The dollar resumed its advance across the board following a wobble a day earlier on the back of movements in Asian currencies, and both the pound and the euro saw losses at their most recent prices of $1.0714 and $1.2467, respectively.
Following comments by Bank of Japan Governor Kazuo Ueda that policymakers might have enough economic data by year’s end to decide that short-term rates would need to increase, the yen on Monday had its biggest one-day advance against the dollar in two months.
The dollar was up 0.2% against the yen at 146.91 by early Tuesday U.S. time.
On Monday, after officials promised to rectify one-way moves and Reuters reported that the central bank had increased inspection of dollar buying, the Chinese yuan likewise registered its highest daily gain in six months.
But both are still very close to their lowest points of the year.
Investors in China received some solace from the news that Country Garden (2007.HK), the nation’s largest private property developer, received consent from creditors to postpone repayment on six onshore notes by three years.
FED AND ECB
The U.S. CPI and the meeting of the European Central Bank, the two major macroeconomic events of the week, are still to come.
The headline number is projected to rise to 3.6%, but the markets anticipate the U.S. numbers, which are coming on Wednesday, to show annualized core inflation declining to 4.3% in August.
A higher report may potentially unnerve risk sentiments as it would strengthen market expectations for additional rate hikes, which might fuel dollar strength, according to OCBC strategist Christopher Wong. A lower-than-expected print could halt the U.S. currency’s increase.
By year’s end, there is a 45% likelihood that U.S. interest rates would increase again, according to interest rate futures markets.
This week will also put investors’ willingness to take on risk to the test when British chip designer Arm Holdings lists in New York with an eye toward raising about $5 billion.
Meanwhile, the ECB meets on Thursday. Although the possibility of a 25 bps rate increase is still very much on the table, the markets believe it is more likely that the central bank will maintain current rates.
Brent crude futures were up 0.45% at $91.05 per barrel on the commodity markets. Gold held steady at $1,920 per ounce.
