Stock markets eye record run as yen comes under pressure

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Stock markets are mostly on the front foot as Wall Street looks to extend its run of record highs, leaving perceived safety plays such as Treasuries and the yen under pressure.

Global economy optimism and concerns about supply are boosting copper, but precious metals are struggling.


Hot topic
The Japanese yen is retreating across the board after a summit between US president Donald Trump and Japan’s prime minister Shinzo Abe seemed to go well, suggesting little tension over the weak yen.

The meeting is seen as further evidence that Mr Trump of late has been adopting a more traditional diplomatic stance, an interpretation by traders that is easing market tensions, and this also weighing on the “haven” yen.

The Japanese currency is down 0.3 per cent per cent against the dollar to ¥113.53 and off 0.3 per cent versus the euro to ¥120.81.

The yen is also under pressure following news that Japan’s economy closed out 2016 with growth of 0.2 per cent in the fourth quarter, below estimates of 0.3 per cent. The quarterly reading brought full-year GDP growth for 2016 to 1 per cent, broadly in line with analysts’ expectations.

Marcel Thieliant, senior Japan economist at Capital Economics, said the data “suggest that spare capacity was broadly unchanged last quarter, but the current level of the output gap remains consistent with consumer prices rising by around 1 per cent per annum . . . As such, the Bank of Japan will likely leave policy settings unchanged for a prolonged period, but any speculation on policy tightening should prove premature.”

Equities
The softer yen helped the exporter-sensitive Japanese stock market shrug off news that North Korea had fired a missile into the Sea of Japan. with the Topix index up 0.5 per cent to close a fraction shy of its best level in 14 months.

Also underpinning sentiment across stock markets is Wall Street’s move to another record at the end of last week. US index futures suggest the S&P 500 will add 2 points to 2,318, extending deeper into virgin territory when trading gets under way later in New York.

European equities are thus chipper, the Stoxx 600 index up 0.2 per cent, close to its best level since December 2015.

Australia’s S&P/ASX 200 rose 0.7 per cent, led by a gain in the materials segment, while in Hong Kong the Hang Seng index added 0.5 per cent, pushed higher by information technology stocks. In mainland China the Shanghai Composite index gained 0.6 per cent while the tech-heavy Shenzhen Composite index climbed 0.7 per cent.

Forex
The dollar index, which measures the US currency against a basket of peers, is barely changed at 100.81 as the euro holds steady at $1.0638. The UK pound is an outperformer as Brexit fears wane, adding 0.2 per cent against the dollar to $1.2513.

China’s renminbi was 0.1 per cent softer against the dollar at Rmb6.8830 after the People’s Bank of China set the currency’s daily trading band weaker by the same amount.

Fixed income
The generally positive tone across equity markets is crimping demand for sovereign bonds, nudging up yields.

The 10-year US Treasury yield is adding 1 basis point to 2.42 per cent and the more policy sensitive 2-year note is climbing 1bp to 1.21 per cent.

Futures markets are pricing in a 48.6 per cent chance that the Federal Reserve will raise interest rates by 25 basis points at its policy meeting in May. Fed chair Janet Yellen is due to give testimony in Washington on Tuesday.

The 10-year German Bund yield is 1bp to 0.33 per cent and equivalent maturity French paper is adding 1bp to 1.06 per cent as concerns linger about the outcome of this spring’s election.

Commodities
Copper is leading the base metal sector higher as a strike at Chile’s Escondida mine pushes the price of the red metal’s London-based contract up 1.1 per cent to $6,157 a tonne, its most expensive since May 2015. China copper futures have hit their highest since 2014.

Oil prices are paring an initial dip made after an IHS Markit report showing there were just 174 oil and gas discoveries worldwide last year, suggesting the world is likely to become more reliant on “unconventional” resources such as US shale oil and gas.
Brent crude, the international marker, is down 0.1 per cent at $56.62 per barrel, after gaining 1 per cent on Friday. West Texas Intermediate, the US marker, is off 0.1 per cent at $53.77 per barrel. Gold is slipping 0.2 per cent to $1,232 an ounce.

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