Bond yields steady and dollar down ahead of Yellen comments

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Stock markets are struggling to extend recent highs on Tuesday, while government bond yields are steady and the dollar lower as the latest bull run, encouraged by hopes for a US fiscal stimulus, loses momentum.

Adding to the tentative tone is a reluctance to take fresh bold positions ahead of comments by Federal Reserve chair Janet Yellen, though the slightly sour mood is emboldening buyers of supposed haven assets like gold and the Japanese yen.

Hot topic

Investor focus once again will be on Washington as Ms Yellen delivers testimony to the Senate Banking Committee.

Newly emboldened Republican lawmakers are expected to give Ms Yellen a bit of a hard time on issues ranging from banking regulation to Fed transparency and structure

If the session is too hostile, it may reignite traders’ concerns about Fed independence and the prospect of Ms Yellen later being replaced by a more hawkish candidate.

Regarding current policy, investors will be keen to hear whether Ms Yellen stresses that the March Federal Open Market Committee meeting is “live” and there could still be a rate hike next month should data support it.

Futures markets are pricing in just a 30 per cent chance that the Fed will increase borrowing costs by 25 basis points in March.

One factor that may encourage the Fed to pull the rate hike trigger is evidence of building inflationary pressures — and investors have a global batch of prices data to consider on Tuesday.

China producer prices, long a main contributor to global deflation, rose at their fastest pace in 5 years, a report released earlier in the session showed. German consumer price inflation rose in January at an annual pace of 1.9 per cent — the same as the country’s 2016 GDP growth. UK factory gate and consumer price numbers are due for release at 09:30 GMT, and a US producer price report is scheduled for 13:30 GMT.

Ms Yellen is expected to start her testimony at 15:00 GMT.

Fixed income

As sovereign bonds await Ms Yellen and consider the inflation data, they are getting support from the more cautious mood across markets.

Yields and equities have risen in recent sessions as the post US election “Trumpflation trade” clicked back into gear on hopes the White House will soon unveil its tax cutting proposals.

However, the resignation of Mr Trump’s national security adviser seems to have reminded investors of the difficulties facing the fledgling administration, encouraging perhaps some paring of recent bullish bets.

The yield, which moves inversely to price, on 10-year US Treasuries is little changed at 2.44 per cent, as the more policy-sensitive 2-year note adds a fraction of a basis point to 1.21 per cent.

The German 10-year Bund yield is down 1bp to 0.33 per cent and equivalent maturity UK gilts are stable at 1.30 per cent.

Forex

The buck is on the back foot. The dollar index, which tracks the US currency against a basket of peers, is down 0.1 per cent to 100.83 as the euro adds 0.1 per cent to $1.0609.

The UK pound is gaining 0.1 per cent to $1.2541 and the Japanese yen, which tends to strengthen when the broader market is more risk averse, is gaining 0.3 per cent to ¥113.46 per dollar.

China’s renminbi is 0.1 per cent firmer at Rmb6.8686 after the central bank set its dollar trading band weaker by 0.1 per cent on Tuesday morning.

Equities

Stock markets are seeing some profit taking after a strong run.

US index futures suggest the S&P 500, which finished on Monday at a record high of 2,328, will dip 2 points.

The pan-European Stoxx 600, which closed the previous session at its best level since December 2015, is retreating 0.2 per cent as miners shed a portion of recent gains.

Asia bourses were primarily cautious, too, with Australia’s S&P/ASX 200 giving up an initial advance to finish off 0.1 per cent and the stronger yen leaving Japan’s exporter-sensitive Topix down 1 per cent. The mood in Tokyo was not helped by another slide in Toshiba shares after the troubled nuclear-to-electronics conglomerate failed to publish its quarterly results as scheduled.

In Hong Kong the Hang Seng index was flat, while China’s Shanghai Composite index rose less than 0.1 per cent.

Commodities

Oil is steady following a tumble on Monday after the Energy Information Administration estimated that US crude production would rise by 80,000 barrels a day in March, as more US drillers bring rigs back online in response to stabilising prices.

The price of Brent crude, the international benchmark, is off just 1 cent to $55.58 a barrel after dropping 2 per cent on Monday. West Texas Intermediate, the US marker, is flat at $52.93 after falling 1.7 per cent the previous day.

The price of gold is getting a boost — up 0.2 per cent to $1,227 an ounce — as equities drift and the dollar and bond yields pull back.

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