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Dollar's advance puts squeeze on gold, Brexit blues sink sterling

Published 18/07/2018, 09:28
© Reuters. FILE PHOTO: The London Stock Exchange Group offices are seen in the City of London, Britain
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By Marc Jones

LONDON (Reuters) - The world's major stock markets were mostly firmer on Wednesday as a bullish outlook from the head of the U.S. central bank buoyed the dollar, lifted bond yields and sent safe-haven gold to a one-year trough.

Wall Street's jump back above the 2,600 points mark overnight (N) was also still lifting spirits early on in Europe.

London's FTSE (FTSE) made 0.5 percent as the pound continued to suffer the Brexit blues, while Germany's Dax (GDAXI) surged to a one-month high on hopes the European Union and United States could cut a deal on car tariffs.

In Asia, Japan's Nikkei (N225) had also hit one-month top as a weakening yen promised to fatten exporters' profits.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) added 0.1 percent and Australia (AXJO) 0.6 percent. Shanghai blue chips (CSI300) started firm only to flag as China's yuan lost ground to the advancing dollar.

Federal Reserve Chairman Jerome Powell stuck with an upbeat assessment on the U.S. economy while downplaying the impact of global trade risks on the outlook for rate rises.

"It basically means another rate hike in September and most likely another one after that in December," said Rabobank Market economist Stefan Koopman.

"He couldn't stay away obviously from the potential threats of protectionism, but he is still waiting to see how everything pans out so he wasn't really concerned about it - and that is giving the market another boost."

BofA Merrill Lynch's latest fund manager survey showed a trade war remained the biggest threat cited by no less than 60 percent of respondents.

For now, U.S. companies seem to be profiting mightily from tax cuts as the earnings season shifts into high gear. Analysts now see second-quarter S&P 500 earnings growth of 21.2 percent, up from 20.7 percent on July 1.

Of the 39 companies in the index that have reported so far, 84.6 percent have come in ahead of street expectations. The Dow (DJI) ended Tuesday up 0.22 percent, while the S&P 500 (SPX) gained 0.40 percent and the Nasdaq (IXIC) 0.63 percent.

"The S&P has finally broken to the upside through 2,800 out of the range that has confined it for most of this year, and this could now be the start of a grind higher in global equities over the next few weeks," wrote analysts at JPMorgan (NYSE:JPM) in a note.

Next stop is the all-time top of 2,872 from January.

POUND IN PERIL

Powell's support for more rate hikes sent two-year Treasury yields (US2YT=RR) to the highest in nearly a decade and lifted the dollar broadly.

Against a basket of currencies, the dollar was up at 95.251 (DXY), after jumping 0.46 percent overnight. It also climbed to its highest since January against the yen at 113.07 .

The euro slipped further to $1.1634 (EUR=), after weakening 0.4 percent on Tuesday.

The pound suffered another bout of Brexit blues after British Prime Minister Theresa May only just cleared the latest parliamentary hurdle to her leaving plans.

Wednesday's edition of the Times reported May threatened rebel lawmakers in her own party with a general election if they defeated the bill.

Bank of England Governor Mark Carney warned a no-deal Brexit would have "big" economic consequences and force a review of plans to raise interest rates.

Sterling was last huddled at $1.3081 , after sliding 0.9 percent on Tuesday.

The rising U.S. dollar coupled with the prospect of higher U.S. interest rates spelled trouble for gold, which crashed through major chart support to hit a one-year low.

Spot gold was hovering at $1,224.92 per ounce, having fallen to $1,223.78. The steadily less-precious metal is down more than 5 percent for the year.

© Reuters. FILE PHOTO: The London Stock Exchange Group offices are seen in the City of London, Britain

Oil prices also eased after an industry group reported an unexpected increase in U.S. crude inventories. Brent (LCOc1) fell 70 cents to $71.40 a barrel, while U.S. crude (CLc1) was quoted down 54 cents at $67.55 a barrel.

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