Dollar maintains its firmer tone

Thursday February 22: Five things the markets are talking about

Yesterday’s FOMC minutes suggest that the Fed is on track with its previously stated plan to continue raising interest rates this year.

To date, the Fed has hinted at three +25 bps rate increases in 2018 and two more hikes in 2019.

Note: Dealers are pricing in a March hike – the first meeting to be led by its new chairman, Governor Powell.

Wednesday’s FOMC minutes noted that officials last month believed that the U.S economy was set to grow faster than when they met in December.

Ahead of the U.S open, global stocks are under pressure on a tighter U.S monetary policy, while the ‘mighty’ dollar remains somewhat supported with Treasuries edging higher and Euro bonds slipping.

1. Stocks see ‘red’

In Japan, the Nikkei share average fell overnight on across-the-board selling after U.S stocks finished in negative territory on speculation about faster U.S interest rate hikes. The Nikkei declined -1.1%, while the broader Topix fell -0.9%.

Down-under, Aussie shares reversed earlier losses to finish slightly firmer overnight, with financials and materials leading the gains as investors worked through a flood of earnings reports. The S&P/ASX 200 index rallied 0.1%. In S. Korea, the Kospi fell -0.6% with Samsung again providing the most pressure to stocks.

In Hong Kong, equities pulled back from Wednesday two-week high hit as investors took profit from sectors such as tech and financials. At close of trade, the Hang Seng index was down -1.48%, while the Hang Seng China Enterprises index fell -1.25%.

In China, stock indexes scored their best single-day gains in more than 18-months, as investors played catch-up buying after the weeklong Lunar New Year holiday. At the close, the Shanghai Composite index was up +2.17%, while the blue-chip CSI300 index was up +2.10%.

In Europe, regional indices are trading lower across the board following on from a lower close stateside Wednesday.

In the U.S, stocks are set to open in the ‘red’ (-0.1%).

Indices: Stoxx600 -0.8% at 378.0, FTSE -1.0% at 7207, DAX -1.0% at 12349, CAC-40 -0.5% at 5276, IBEX-35 -0.1% at 9814, FTSE MIB -0.6% at 22526 , SMI -0.7% at 8930, S&P 500 Futures -0.1%

2. Oil prices fall on firmer U.S dollar, gold little changed

Ahead of the U.S open, oil prices trade under pressure, pulled down as a firmer dollar outweighs a report of a decrease in U.S crude inventories.

Brent crude futures have fallen -48c, or -0.7%, from Wednesday’s close to +$64.94 per barrel. U.S West Texas Intermediate (WTI) crude futures are at +$61.15 a barrel, down -53c or -0.9%.

Yesterday’s API data reported an unexpected drop in U.S crude oil inventories by -907k barrels to +420.3m barrels for the week to Feb. 16.

Nevertheless, despite yesterday’s inventory fall, oil markets remain well supported due to demand-growth coinciding with production restraint led by the OPEC and Russia.

Gold prices are trading relatively flat, weighed down as the FOMC minutes showed U.S policymakers remain somewhat confident in the need to keep raising interest rates. Spot gold is largely flat at +$1,323.73 an ounce, a day after it fell to its lowest in a week at +1,322.20. The precious metal has dropped -1.7% so far this week.

3. Sovereign yields mixed

Yesterday’s FOMC minutes noted that U.S officials saw few signs of a broad pickup in wage growth and agreed that the gradual rate hikes approach was still appropriate.

The yield on U.S 10-year Treasuries has dipped -2 bps to +2.93%.

In Germany, the 10-year German Bund yield has dropped slightly to +0.71% after the release of weaker-than-expected Ifo business confidence data (see below) for February from +0.73% before.

In the U.K, the 10-year Gilt yield 10-year yield climbed +1 bps to +1.555%.

4. Dollar maintains its firmer tone

The USD remains a tad better bid in the aftermath of yesterday’s FOMC minutes, which has helped to push Treasury yields higher.

The ‘buck’ caught a bid as the majority of Fed members viewed that stronger U.S economic growth would raise the likelihood of further rate hikes.

GBP/USD (£1.3863) has continued its soft tone for the fifth consecutive session as UK Q4 GDP was revised lower in its second reading for its slowest annual pace since in five-years.

The EUR/USD (€1.2290) remains steady, holding just below the psychological €1.23 level but in the middle of this years +400 pip trading range.

Expect the market to focus on ECB Jan minutes for clarity and timeline on potential forward language change (07:30 EDT).

5. German business sentiment posts sharp drop, U.K GDP revised

Data this morning showed that German business sentiment dropped in February from last month’s record high, as manufacturers scaled back their expectations for the next six-months.

The Ifo’s business climate index fell to 115.4 points in February from 117.6 points in January. The market consensus was looking for a 117.0 print.

But despite the decline, Germany – Europe’s largest economy – had a good start to 2018. GDP is expected to expand at a quarterly rate of +0.7% in Q1.

Elsewhere, in the U.K, Q4 GDP was revised lower in its second reading for its slowest annual pace since 2012 – y/y it was +1.4% vs. +1.5%e.

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