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Dollar Rally Fades Pre-Yellen, Euro Stocks Fall

Yellen

A dollar rally ran out of steam and moves in financial markets were generally slight ahead of a Friday speech by Federal Reserve Chair Janet Yellen that may shed light on the likely scale and timing of US interest-rate increases. European stocks fell for the first time this week.

The Bloomberg Dollar Spot Index snapped a four-day winning streak that was fueled by hawkish comments from Fed officials, while the Stoxx Europe 600 Index retreated from a one-week high. Fluctuations in the MSCI Asia Pacific Index over the past two weeks have been the most muted since 2012 and volatility gauges for US, European and Japanese equities are near their lows for the year. Crude oil traded near a one-week low following an unexpected rise in American stockpiles.

A rally that drove global equities to their highest level in a year fizzled out since the start of last week amid rising expectations the Fed will raise interest rates in 2016. Monetary tightening in the US risks destabilizing financial markets as central banks in the major economies of Asia and Europe lower borrowing costs and step up stimulus to bolster growth, policies that have led to negative 10-year bond yields in Germany and Japan.

“Everybody is waiting for Yellen, and I’m not sure whether Yellen will provide the impetus all traders are looking for,” said Nicholas Teo, a strategist at KGI Fraser Securities in Singapore. “The Fed rhetoric so far has been balanced although the last two weeks we’ve seen quite hawkish comments.”

US economic data on Thursday are forecast to show durable goods orders rebounded in July and services output picked up this month. Gauges of business sentiment in Germany and U.K. retail sales are also scheduled, while Brazil’s Senate opens an historic impeachment trial that is expected to result in President Dilma Rousseff’s permanent ouster.

Stocks

The Stoxx Europe 600 Index was down 0.8% as of 8:22 a.m. London time, after climbing 1.4% in the last three sessions.

The MSCI Asia Pacific Index moved less than 0.2% for the fifth day in a row. Japan’s Topix index declined 0.2% amid trading volumes that were 32% below average.

“It’s too scary to buy into Japanese shares” given the possibility markets will be whipsawed following Yellen’s speech, said Mitsushige Akino, a Tokyo-based executive officer at Ichiyoshi Asset Management Co. Shares will be sensitive to the yen, which could surge to 95 per dollar if Yellen indicates a rate increase is off the table, while it will plunge should she suggest a hike is imminent, he said.

The Shanghai Composite Index fell 0.6% amid concern the government will act to cool speculative activity in the nation’s financial markets.

Galaxy Entertainment Group Ltd. rose more than 1% in Hong Kong after Macau’s largest casino operator reported quarterly earnings that beat analysts’ estimates. PetroChina Co. slid for a seventh day after the country’s biggest oil and gas producer posted the smallest half-year profit since it was publicly listed in 2000. China Construction Bank Ltd. climbed to a 10-month high ahead of its results.

Futures on the S&P 500 Index fell 0.1% after the US benchmark dropped 0.5% on Wednesday. US stocks could face a significant correction over the next two months as a slew of technical signals suggest the summer rally will lose momentum, according to UBS Group AG.

Currencies

The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, declined less than 0.1%, after climbing 0.8% over the last four trading sessions. Fed funds futures indicate a 54% chance of a US interest-rate hike this year, up from 36% at the start of August. The yen was little changed at 100.45 per dollar and South Korea’s won gained 0.6%.

“The market’s just trying to get through the whole event risk” of Yellen’s speech, said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. “But after that, what’s driving the market is back to the search for yield and it’s good for emerging markets in general."

Goldman Sachs Group Inc. sees the pound, the yen and the kiwi as most vulnerable to a potential surprise from Yellen’s speech at the annual monetary-policy symposium in Jackson Hole, Wyoming.

Commodities

West Texas Intermediate crude oil rose 0.1% to $46.90 a barrel. It dropped 2.8% in the last session as data showed US inventories unexpectedly rose last week.

Iron ore dropped 2.8% in Singapore after Li Xinchuang, a vice chairman at the China Iron & Steel Association, said falling steel production in China should weigh on prices for the raw materials. The price is still up by about 40% for the year.

Copper added 0.4%, rising from its lowest close in more than two months. Barclays Plc flagged risks of a “sharp slowdown” in demand from China in the second half, after the world’s top user slashed imports to the lowest in 17 months. Inventories tracked by the London Metal Exchange have surged 21% over the past three days to the highest since November.

Gold gained less than 0.2%, after sliding 2.1% over the last four days.

Bonds

US Treasuries due in two years were little changed with their yield at a two-month high of 0.76%. The securities are the cheapest they’ve been relative to 30-year notes since the start of 2008 following a run of hawkish comments from Fed officials including Vice Chairman Stanley Fischer and the heads of the New York and San Francisco branches.

“The Fed is likely to hike this year, with December more likely than September,” said Jarrod Kerr, a senior rates strategist at Commonwealth Bank of Australia in Sydney. “There is some room for short-end US yields to push a little higher over 2017.”

(Source: Bloomberg)