US dollar retains gains, stocks flat after Fed minutes

New York (Jan 9) The dollar gained while a gauge of global equity markets was little changed yesterday after the release of minutes of the Federal Reserve’s meeting in December, when policymakers decided to trim the US central bank’s asset purchases. Equity markets’ early gains were subdued as investors awaited the minutes of the Fed’s meeting, when Chairman Ben Bernanke said it would begin trimming its stimulative bond purchases to US$75 billion (RM245 billion) a month from US$85 billion (RM278 billion) a month. The yield on the benchmark US 10-year Treasury note fell just below 3 per cent before the minutes were released, and remained there afterward.

“The dollar reaction has been fairly muted to this, and I think that’s because for the most part, the information that we’ve received is not significantly different from what (Bernanke) has been saying over the past few weeks,” said Brian Dangerfield, currency strategist at RBS Securities in Stamford, Connecticut. The dollar and US stocks mostly rose after payrolls processor ADP said US private employers added a higher-than-expected 238,000 jobs in December, the strongest increase in 13 months.

ADP’s National Employment Report also revised November’s job gains higher, just two days before the government’s closely watched monthly nonfarm payrolls report. That data is more comprehensive as it includes both public and private sector employment. Investors are looking to tomorrow’s payrolls report to assess whether the pace and size of the Fed’s scaling back of its bond buying either quickens or increases at a meeting later this month.

Economists polled by Reuters have forecast 196,000 nonfarm jobs were added to the US economy in December. “If we get a 200,000 or north jobs report tomorrow, it increases the likelihood, along with that improving data, the Fed continues its tapering process at the January meeting,” said Darrell Cronk, regional chief investment officer of Wells Fargo Private Bank in New York. MSCI’s world equity index, which tracks shares in 45 countries, pared its early gains to trade flat, just below a six-year high. Overnight in Tokyo, the Nikkei jumped 1.9 per cent to approach its own six-year peak.

On Wall Street, the Dow Jones industrial average ended down 68.2 points, or 0.41 per cent, at 16,462.74. The S&P 500 lost 0.39 point, or 0.02 per cent, to 1,837.49 and the Nasdaq Composite added 12.43 points, or 0.3 per cent, to 4,165.611. European stocks seesawed around 5-1/2-year highs as equity markets in the euro zone periphery extended a rally on rising confidence their economies are starting to recover from the region’s debt crisis.

German exports rose for the fourth consecutive month in November and industrial orders surged more than expected - mostly based on overseas demand - a sign that Europe’s largest economy is benefiting from a nascent global upturn. Spanish bond yields hit fresh four-year lows as markets took an increase in Madrid’s planned 2014 debt issuance in stride, confident that rising growth would ensure sales go smoothly. The pan-European FTSEurofirst 300 index of leading regional shares closed up 0.11 per cent at 1,321.19. The blue-chip Euro STOXX 50 index closed flat, losing 0.01 per cent. The US dollar gained broadly against the yen, the euro and a basket of currencies.

The dollar rose 0.17 per cent to 104.78 yen and firmed against the euro, with the single currency last trading 0.26 per cent lower at US$1.3579. Against a basket of six major currencies, the dollar index reached a six-week high of 81.048 and was last up 0.24 per cent on the day at 81.029. Crude oil prices fell. Brent crude for delivery in February slipped 20 cents to settle at US$107.15 a barrel. US crude fell US$1.34 to US$92.33 a barrel. US Treasury debt prices fell on the ADP report. The 10-year Treasury note slid 15/32 in price to yield 2.9931 per cent, just over a week after hitting a near 2-1/2-year high yield of 3.041 per cent, according to Reuters data. Signs of a US recovery have reassured some investors that the world’s largest economy can withstand the Fed’s decision to scale down its bond-buying program. The program drove many investors into equities by curtailing returns on cash and bonds, helping to fuel much of last year’s stock market rally. Markets are hoping the Fed minutes show a clear commitment to keeping rates low for a long time.

“What investors were expecting is a confirmation from the Fed in line with the announcement made late last year,” said Putri Pascualy, credit strategist at fund of funds Pacific Alternative Asset Management Co. in Irvine, California. “It seems that the Fed’s intent is no surprises. They have stuck to their goal of telegraphing their intent before the minutes came out and the minutes confirmed a lot of the decisions that were made,” Pascualy said.

The European Central Bank meets today and analysts doubt it will do more than flag its readiness to act when needed, despite another surprising fall in euro zone inflation.