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Categorized | Currencies

Dollar rises as markets turn eyes to Opec

Posted on November 30, 2016

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members.

Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in New York, leaving the Wall Street barometer less than 0.3 per cent shy of its record high hit last week.

Hot topic
Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna.
The crude market has been volatile this week — rising 2 per cent on Monday and falling around 4 per cent on Tuesday — on the fluctuating hopes that big producers will agree to curb output and help correct the state of oversupply in the market.

The new session sees Brent crude, the international benchmark, up 1.2 per cent to $46.92 a barrel, while West Texas Intermediate is adding 1.2 per cent to $45.76 as traders await news of any developments out of the Austrian capital.

The oil price’s ability to influence sentiment in the broader market has diminished since the start of the year, when Brent’s plunge below $30 a barrel caused shares in explorers and producers to tank and rattled banking stocks on worries about bad loans to the energy sector.

But there is a concern among some investors that the oil/stock market correlation could tighten again if Opec’s failure to reach a credible deal causes prices to fall back sharply.

The CBOE Crude Oil Volatility Index, a gauge of stress in the energy market, is up from 38.0 at the start of the month to 55.1, its highest since March, when Brent crude was trading around $40.

What to watch

The ADP private sector jobs report for November is due for release at 13:15 GMT. Analysts expect a net 165,000 new positions to have been created, according to Reuters consensus forecasts.

The ADP is the precursor to the all-important monthly non-farm payrolls data coming up on Friday. Both reports would have to be pretty weak to stop the Federal Reserve from raising borrowing costs next month.

Futures markets are placing a 100 per cent probability on the central bank increasing interest rates by 25 basis points on December 14.

Indeed, the two sets of jobs data probably provide a greater risk if they are stronger than expected, for that may cause the markets to raise bets on a faster pace of Fed tightening.

The pan-European Stoxx 600 index is down 0.2 per cent as miners lead the declines.

The UK’s FTSE 100 is off 0.1 per cent as Royal Bank of Scotland
retreats after being singled out for struggling in the latest banking system stress tests.

Italy’s FTSE MIB index is recovering 0.2 per cent ahead of the constitutional referendum this weekend. Asian trading was muted and mixed. Japan’s Topix benchmark closed barely changed and Australia’s S&P/ASX 200 fell 0.3 per cent, weighed down by materials and energy stocks after the drop in commodity prices later on Tuesday.

Greater China markets exemplified the muddled mood, with Hong Kong’s Hang Seng gaining 0.3 per cent in response to Wall Street’s overnight advance, but the Shanghai Composite shed 1 per cent as resources stocks fell on fears that the central bank’s attempts to support the renminbi by reducing liquidity in the financial system would hit trading in commodity assets.

The US dollar index is up 0.2 per cent to 101.16, just below last week’s near 14-year peak of 102.05, as the buck continues to be supported by Tuesday’s economic data, which included annualised third quarter GDP growth of 3.2 per cent and US consumer confidence hitting a nine-year high in November.

The yen is 0.3 per cent weaker at ¥112.63 per dollar and the euro is off 0.1 per cent to $1.0632 even though German retail sales enjoyed a bumper October, data showed.

Sterling is off 0.1 per cent to $1.2473 after Bank of England governor Mark Carney said the UK’s economic outlook faced “continued uncertainty” as Brexit jostling drags on.

The New Zealand dollar was a notable gainer among Asian currencies, up 0.3 per cent against the greenback to $0.7142 after the country’s finance minister said it seemed interest rates there had “hit a floor”, although he did not see a situation in which rates would rise sharply.

Fixed income
Monetary policy divergence is driving the yields between US and eurozone benchmark bonds further apart.

The US 10-year Treasury yield, which moves opposite to the bond price, is up 1 basis point to 2.31 per cent as the Fed rate hike looms.

The equivalent maturity German Bund is slipping 2bp to 0.21 per cent after European Central Bank president Mario Draghi said monetary policymakers will make a decision on the third leg of quantitative easing in early December.

A stronger dollar and the market’s broadly cautious tone is weighing on many commodity prices.

Further downward pressure comes from a sell-off in China-traded futures after the concerns about Beijing tightening liquidity caused investors to close bullish bets.

Coking coal and rebar futures dropped by the most on record, according to Reuters, while lead, zinc, and rubber also fell sharply.
Gold is steady at $1,188 an ounce.