Global shares were within a whisker of a record high yesterday as markets traded on expectations of a third US interest rate hike this year and waited to hear from the Federal Reserve how many more are likely in 2018.
Solid gains in Asia overnight had inched MSCI’s 47-country world index up for a fifth day running and while the pre-Fed lull meant Europe’s main bourses and US futures barely budged, there was action elsewhere.
Reports that Italy will hold an election in March saw its bond yields jump, while the dollar suffered its biggest fall in three weeks after US President Donald Trump saw his already wafer-thin US Senate majority cut further.
The US currency fell as far as 113.12 yen as Democrat Doug Jones won a bitter fight for a Senate seat in deeply conservative Alabama, in a race marked by sexual misconduct accusations against Republican candidate Roy Moore.
S&P e-mini futures were down as much as 0.3 per cent after the election outcome, though they clawed their way back to flat in European trading even as the region’s STOXX 600 index took a minor slip.
The dollar index, which tracks the greenback against a basket of six rival currencies, was down 0.25 per cent at 93.86, pulling away a high of 94.219 touched on Tuesday, which was its highest since November 14.
Against the euro it was off 0.1 per cent at $1.1760, while the 10-year Treasury yield slide back to 2.385 per cent having been as high as 2.41 per cent in early European trade.
Divergence between Fed and ECB policy was supposed to be bullish for the dollar, given it had widened the premium offered by US two-year yields over German yields to 256 basis points from 188 basis points this time last year.
The last time the spread was that stretched was in 1999.
Yet the euro is currently up 12 per cent on the dollar this year while the dollar is down 8 per cent on a basket of currencies – an indication interest rate differentials aren’t everything in forex.
In Italy, yields jumped on reports a long-anticipated national election will be held on March 4, with the anti-establishment 5-Star Movement expected to take the biggest share of the vote.
In commodity markets, oil was nudging back towards two-and-a-half year highs hit in the previous session on an unplanned closure of the pipeline that carries the largest volume of North Sea crude oil.
Brent crude added 0.5 per cent, or 30 cents, to $63.65 a barrel, after shedding two per cent on Tuesday. US crude added 0.7 per cent, or 42 cents, to $57.57, after slipping 1.4 per cent overnight.
Gold was near its weakest level in almost five months at $1,242.18 an ounce. It is often seen as a safe-haven play and can perform poorly when central bank’s like the Fed feel confident enough to raise interest rates.