Signals the Federal Reserve will hike US interest rates again this year and begin the ‘Great Unwinding’ of a decade of aggressive stimulus, drove the dollar to a two-month high versus the yen yesterday and sent bonds and commodities lower.
Traders reacted predictably to what had been a heavily-flagged move from the Fed, which was then followed just as unsurprisingly in Asia as the Bank of Japan kept its monetary spigots open at full.
Along with the dollar bulls, European bank stocks cheered the prospect of higher interest rates which should help their profits. They rose over 1.5 per cent as a weaker euro helped the pan-European STOXX 600 generally too.
Since the start of 2014, Reuters analysis shows that the big three rating agencies – S&P Global, Moody’s and Fitch – have racked up more than 155 emerging market downgrades between them, which averages out a roughly one a week.
The likes of S&P also still have far more negative outlooks – effectively downgrade warnings – on EM sovereign ratings than positive ones too, which suggest further cuts are looming.
The Fed’s plan to start reducing its $4.2 trillion crisis-era stockpile of bonds and raise US rates again was still the driver though as US markets prepared to reopen.
The euro shed roughly 0.1 per cent to $1.1890 after dropping 0.8 per cent the previous day, when it reversed a four-session winning run. The yield on Germany’s 10-year government, the benchmark for the region, was 4 basis points higher at 0.47 per cent, its highest since early August.
It is still well below the 2.28 per cent US equivalent though.
The gap between US and German 10-year borrowing costs narrowed a touched to 179 bps having struck 184 bps – its highest in a month – on Wednesday.
Meanwhile, the higher dollar strained commodity markets, where the underlying raw materials are priced in the US currency.
Gold hit a three-week low of $1,293 per ounce, Brent and WTI oil eased away from multi-month highs, while industrial metals copper and nickel tumbled 1.2 and 3.8 percent to more than one-month lows.
Brent crude futures last stood at $55.83, down around one per cent from late US levels as United States benchmark West Texas Intermediate (WTI) fell to $50.14.