Market Overview: Poor data and political turmoil help US Treasuries move up

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US Treasuries rallied sharply on Tuesday on a mix of weak economic data and an investor retreat to safety after political turmoil in Thailand and Hungary.

News that Thaksin Shinawatra, the Thai prime minister, had declared a state of emergency added to a sense of investor unease over potential market risks. It came after the emergence of huge losses at Amaranth, the US hedge fund, and political turmoil in Hungary that has sparked riots.

“It’s been a long time since the word ‘contagion’ has been in use, but the events in Thailand . . . could prove to be just that if
players decide to take risk off the table by taking money off on their other emerging market trades,” said Divyang Shah, global strategist at IDEAGlobal.

“With month-end and quarter-end on the horizon, and a lot of the funds not having had a good quarter, the risks are even more acute.”

The declaration of the Thai state of emergency came after the local stockmarket had closed, but the baht slid 1.3 per cent to Bt37.815 on the news.

The Hungarian forint fell 0.9 per cent to Ft273.35 to the euro as the crisis engulfing Ferenc Gyurcsány, prime minister, deepened. The local market benchmark, the BUX Index, fell 1.2 per cent.

“Given very fragile economics, the last thing Hungary needs is political tumult,” said Maya Bhandari, economist at Lombard Street Economics.

“The currency and economy are at best vulnerable and at worst on the brink of crisis. Swollen fiscal and current account deficits, and large and rising levels of foreign currency debts, make a dangerous cocktail, now ‘spiked’ by politics.”

The political turmoil helped extend a rally in US Treasuries triggered by weak economic data that bolstered market expectations that the US Federal Reserve had finished raising rates for now.

The yield on the two-year note, which is most sensitive to interest rate expectations, fell by 6.8 basis points to 4.81 per cent. The yield on the 10-year Treasury fell 5.8bp to 4.75 per cent.

The US central bank is widely expected at its monetary policy meeting on Wednesday to leave its benchmark Fed funds rate at 5.25 per cent.

Softer than expected producer price inflation data and fresh evidence concerning the slowdown in the housing market further damped speculation that the Fed would be forced to lift rates as upward inflation pressures persisted.

Rick MacDonald, economist at Action Economics, said the data would help the Fed adopt a “more comfortable inflation spin” at the Federal Open Market Committee on Wednesday.

Headline producer prices rose 0.1 per cent in August, below the consensus forecast 0.3 per cent. However, the weaker underlying picture was even more of a surprise for markets.

Core price inflation, which excludes food and energy, dropped 0.4 per cent, compared with market expectations of a 0.2 per cent rise.

Other data showed August housing starts tumbled 6.0 per cent to 1.665m, well below expectations of 1.746m and the lowest level since April 2003.

While bonds rallied on the data, equities suffered on concerns over the extent of the US economic slowdown.

By midday, the S&P 500 was down 0.5 per cent, the Nasdaq Composite was down 1.1 per cent, and the Dow Jones Industrial Average dropped 0.5 per cent.

European shares also were weaker. The FTSE Eurofirst 300 index fell 0.6 per cent to 1,366.20, partly depressed by news of a sharp fall in German investor confidence.

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