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Tuesday 18:30 BST
● Oil prices slide to seven-month lows
● FTSE All-World equity index slips from record
● Dollar firm as participants digest “Fedspeak”
● Investors await MSCI decision on China
● Pound and gilt yields fall after Carney’s dovish comments
Global equity indices came off the boil as crude oil prices sank to seven-month lows and Monday’s rally for the tech sector stalled, while the dollar rose as participants digested a further round of “Fedspeak”.
By contrast, sterling and UK government bond yields came under pressure following a dovish speech by Mark Carney, governor of the Bank of England. Gold touched a five-week low.
Energy was easily the worst-performing equity sector on both sides of the Atlantic as Brent oil sank 2.8 per cent to $45.59, the lowest since November.
The latest leg lower for oil came amid continued doubts that output cuts by major producers would be sufficient to reduce an oil glut.
“The global oversupply narrative is back in play with reports of rising production from Libya and Nigeria, Opec members that are exempt from the supply cut accord,” said Action Economics.
Brent has now dropped more than 20 per cent from its January high of $58.37, the usual definition of a bear market. Industrial metals were also lower with US copper futures down 1.3 per cent.
The FTSE All-World equity index hit an intraday high of 310.49 in early trade before easing back to 309.10, down 0.4 per cent on the day.
On Wall Street, the S&P 500 — which closed at a record 2,453.46 in the previous session — was down 0.5 per cent at 2,441 by midday in New York. The technology-focused Nasdaq Composite was 0.4 per cent lower.
In Europe, the Xetra Dax in Frankfurt retreated from an intraday peak of 12,951.54 to close 0.6 per cent lower, while the pan-regional Stoxx 600 — which had its best day for two months on Monday — fell 0.7 per cent.
In Japan, the Topix index rose on Tuesday by 0.7 per cent to its highest mark since August 2015, as telecoms, financials and the information technology sectors saw solid gains.
However, not everywhere was chipper. Shares in Australia’s “Big Four” banks were under pressure a day after Moody’s cut its credit ratings on the quartet and a handful of other domestic lenders, citing “elevated risks” in the household sector. This contributed to a 0.8 per cent fall for Sydney’s S&P/ASX 200 index.
What to watch
Chinese equities were mixed — the Shanghai Composite eased 0.1 per cent and the Shenzhen Composite, a tech-heavy gauge, rose 0.1 per cent — ahead of MSCI’s decision on whether to include mainland stocks in its benchmark indices.
MSCI, the index provider, for the past three years has delayed including Chinese A shares in its emerging market indices, expressing concerns about regulation and the degree of accessibility for foreign investors.
But many market watchers think MSCI later on Tuesday will say it is now ready to add Chinese stocks to its widely-tracked indices. This would have implications for global markets because many fund managers will be obliged to expose sizeable chunks of their portfolios to Chinese shares.
Forex and fixed income
Currencies of major oil producers came under pressure. The dollar was up 2 per cent against the Russian rouble, 0.9 per cent versus the Brazilian real and 0.7 per cent against the Norwegian krone.
More broadly, the dollar index — a measure of the US currency against a weighted basket of peers — was 0.3 per cent firmer at its highest point for more than four weeks, and up 0.9 per cent from a seven-month low struck last week just before the Federal Reserve raised interest rates.
Yesterday’s rise was largely driven by a 0.2 per cent dip for the euro to $1.1124. The dollar was up 0.1 per cent versus the yen at ¥111.58.
“The dollar has potential to rally further, helped by hawkish Fed commentary, rising US bond yields and — last but not least — investors adjusting their super-bearish dollar book,” said Hans Redeker, strategist at Morgan Stanley.
Esther Reichelt, analyst at Commerzbank, highlighted comments on Monday by Bill Dudley, governor of the New York Fed, who sounded “pleased with the rate hikes so far and was against a pause in the tightening cycle”.
“Mr Dudley’s comments are seen as important by the market — he is seen as somebody who represents the majority view of the Federal Open Market Committee,” Ms Reichelt said.
“That is why the much more pessimistic view of his notoriously dovish colleague, Chicago Fed governor Charles Evans [on Monday night] did not put significant pressure on the dollar.”
Tuesday was the turn of Boston Fed chief Eric Rosengren, who said low interest rates posed financial stability issues, making fighting future recessions more difficult.
Sterling, meanwhile, was down 0.9 per cent against the firmer dollar at $1.2617 — with the euro up 0.7 per cent at £0.8811 — after Mark Carney distanced himself from the hawks on the BoE’s Monetary Policy Committee who last week voted to raise rates.
“In today’s speech the governor outlines his personal perspective which appears to imply the decision for him to hold policy steady was not balanced, in contrast with some of his colleagues,” said Victoria Clarke, economist at Investec.
“Governor Carney appears keen to wait and see the extent to which weaker consumption growth is offset by other elements of demand, whether wage growth firms, and how the Brexit negotiations impact the economy.”
The yield on the 10-year UK government bond, which moves inversely to its price, fell 3 basis points to 1 per cent.
The 10-year Treasury yield, meanwhile, was down 3bp at 2.16 per cent, while that on the two-year note was 2bp lower and the 30-year fell 5bp.
“Curve flattening is the trend in global bond markets amid the meltdown in energy and metal prices,” Action Economics said. “The long end of the Treasury complex is leading the drop in yields on the bearish inflation implications.”
Gold hit $1,241 an ounce, the lowest since May 17, before rallying to $1,244, up $1 on the day.
Additional reporting by Hudson Lockett in Hong Kong
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