Caution was the watchword in financial markets on Monday as investors turned their gaze to the release on Tuesday of US trade data for February and the minutes of the Federal Reserve’s last monetary policy meeting.
The market also reacted to unsettling news from the US carmaking sector after Ford Motor slashed its earnings forecast for 2005 and warned it would not achieve its 2006 profits target. The announcement came barely a month after General Motors said it would report a first-quarter loss because of weak US demand.
Even another decline in oil prices failed to lift sentiment toward equities. By midday in New York, the Dow Jones Industrial Average was down 0.1 per cent and the Nasdaq Composite index was 0.2 per cent lower.
Europe fared little better, with the FTSE Eurofirst 300 index falling 0.2 per cent to 1,101.08. Asian markets were also broadly lower, with Tokyo’s Nikkei 225 Average shedding 1.1 per cent.
But Andrew Teufel, director of research at California-based Fisher Investments, said his company remained optimistic about global equity markets, in spite of their failure to make progress in recent weeks.
“In all the major markets the earnings yield on the benchmark equity index is higher than the yield on the 10-year government bond. That is very unusual,” he said. Historically, this had proved an “exceptionally reliable” buying signal, based on a one-to-two year horizon, he added.
US Treasuries on Monday were a shade lower, with the yield on the 10-year bond holding steady at 4.48 per cent, as investors prepared to give the minutes of the Fed meeting some scrutiny. The US central bank set alarm bells ringing in the markets at the time of the last meeting on March 22 after it highlighted its concerns about inflation.
Koray Yesildag, economist at Dresdner Kleinwort Wasserstein, said: “It seemed to the markets that the Fed had built in a little more flexibility to be more aggressive with monetary policy should inflation become a problem.”
He noted that while there had been a marked pick-up in consumer price inflation over the past year, other inflation indicators had been less worrying.
“So, while a 50 basis-point rate increase cannot be totally ruled out at some point in the future, the likelihood is for the succession of 25 basis-point moves to continue and we believe this will be the case until a 3.75 per cent Fed funds rate is reached in September,” he said.
The dollar retreated further from last week’s multi-month highs against the euro and the yen as attention returned to the US’s external deficit problems.
Ashraf Laidi, chief currency analyst at MG Financial, sees the US trade deficit rising to a new record high of $63bn from January’s $58.3bn.
“The principal reason for our higher than consensus forecast is the cumulative 18 per cent rise in oil prices in January and February, which is expected to spill over into February oil imports,” he said. However, Mr Laidi said he expected any deficit-inspired sell-off in the dollar to be short-lived, in part due to the recent decline in oil prices.
By midday on Monday, Nymex WTI for May delivery was down 77 cents a barrel to $52.55, almost $6 below the all-time high hit a week ago.
There was some pressure on oil prices from weekend assurances by the president of the Organisation of the Petroleum Exporting Countries that the cartel was on track to boost supplies to world markets by 500,000 barrels a day next month.
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