FX interventions to curb dollar strength feed its rise

July 12 (Reuters) – Currency interventions aimed at curbing the dollar’s strength are feeding its rise because most central banks selling dollars to limit big drops in the value of their currencies are loathe to see their currency reserves depleted and so are buying those dollars back.

When emerging market central banks sell dollars it’s versus less high profile and less traded currencies, but when they buy them back it’s versus the most liquid and popularly traded currencies like euro, yen, pound and yuan.

The selling of dollars attracts much less attention than the subsequent reserve rebalancing that has a big impact on sentiment, supporting the dollar for a bigger audience.

Those intervening could let reserves drop but they were built up in order to protect emerging markets currencies against past shocks. Should reserves drop, these illiquid currencies may come under greater pressure. Since they are prone to big movements that’s an eventuality central banks want to avoid, so the cycle of intervention feeding a dollar rise should continue.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)

European shares rise on aero, luxury stocks boost

July 12 (Reuters) – European shares rose on Tuesday led by beaten-down aerospace, luxury and travel stocks, although worries about an energy supply crunch and a potential global recession capped gains.

The pan-European STOXX 600 index ended 0.5% higher after opening lower and breaking a three-day winning streak in the previous session.

LVMH (LVMH) and L’Oreal (OREP) rose 1.1% and 2.8%, respectively, while planemaker Airbus (AIR) jumped 3.9%, helping the France’s CAC 40 climb 0.8%.

Travel and leisure stocks added 1.6% as crude prices slumped below USD 100 a barrel on growing concerns about a global economic slowdown.

Meanwhile, worries mount that a maintenance shutdown of the Nord Stream 1 pipeline from Russia to Germany could get extended because of the Russia-Ukraine war, affecting the region’s energy supplies.

Investors worry that Russian President Vladimir Putin could weaponize gas in retaliation to Western sanctions over its invasion of Ukraine, said Andrea Cicione, head of strategy at TS Lombard.

“This could get worse and people kind of expect it, but it’s not fully in the price yet,” he said.

Indeed, data this morning showed German investor sentiment plunged below levels at the outset of the coronavirus pandemic due to major energy concerns, supply bottlenecks and anticipated monetary tightening by the European Central Bank.

The ECB, which is lagging behind the US Federal Reserve and other major central banks in rate-hike cycle, is expected to raise interest rate by at least 25 basis points this month.

However, recession fears have prompted money markets to scale back their bets on how much the ECB will raise rates this year and next.

The STOXX 600 index has fallen in five out of the last six months on recession fears. Asset manager BlackRock said on Monday it had reduced its exposure to developed market equities as it expects volatility amid central banks’ attempts to temper inflation.

In the United States, June inflation data is expected to come in hot on Wednesday, cementing bets on another 75 bps interest rate hike later this month.

Among individual stocks, power giant EDF (EDF) jumped 6%, after sources said the French government was poised to pay more than 8 billion euros (USD 8.05 billion) to bring the company back under full state control.

Italy’s Saipem (SPMI) plummeted 48.6% after the energy services group said investors had subscribed for only around 70% of the new shares it was issuing in a 2 billion euro cash call.

Spanish blue chip index IBEX 35 closed 0.6% lower dragged by banks, hit by government plans to impose extraordinary taxes on financial institutions and power companies to help Spaniards cope with soaring inflation.

(Reporting by Susan Mathew in Bengaluru; Editing by Rashmi Aich, Arun Koyyur and Tomasz Janowski)

US urges China to end ‘provocative’ behavior in S. China Sea

July 12 (Reuters) – Washington will defend treaty ally the Philippines if its forces are attacked in the South China Sea, US Secretary of State Antony Blinken has said, urging China to follow international law and cease “provocative behavior” in the busy waterway.

Blinken made the comments on Monday, the sixth anniversary of a ruling by an international tribunal that invalidated China’s sweeping claims to the South China Sea, a conduit for about USD 3 trillion worth of ship-borne trade each year.

“We re-affirm that an armed attack on Philippine armed forces … would invoke US mutual defense commitments,” Blinken said in a statement, referring to the provisions of a mutual defense treaty between the allies dating from 1951.

“We call again on the People’s Republic of China to abide by its obligations under international law and cease its provocative behavior,” he added.

The statement came the day that Chinese foreign minister Wang Yi told a meeting of the Association of Southeast Asian Nations (ASEAN) in the Indonesian capital that regional nations should avoid being used as “chess pieces” by global powers.

China’s claim to almost the entire South China Sea, citing what it says are historical maps, puts it at odds with some countries in the grouping, which say the claim is inconsistent with international law.

(Reporting by Shivam Patel in Bengaluru; Editing by Clarence Fernandez)

Dollar marches higher, euro teeters on brink of parity

TOKYO, July 12 (Reuters) – The U.S. dollar hit a fresh two-decade peak versus major peers on Tuesday, hoisted by safety bids and expectations of further aggressive rate hikes by the Federal Reserve, while the euro was pinned close to a 20-year low near parity to the greenback.

The dollar index, a measure against six counterparts, with the euro most heavily weighted, was 0.25% higher at 108.43. It had earlier climbed to 108.47, its highest since October 2002.

“Haven demand for USD, coupled with an upside surprise in last Friday’s payrolls release, likely contributed to the latest bout of dollar strength,” said analysts at Maybank.

That dollar bullishness was showcased across much of the currency markets, with the euro falling as low as $1.0006 on Tuesday, the weakest since December 2002. It last changed hands down 0.29% at $1.0013.

Sterling was similarly down 0.25% to $1.18645, after earlier sinking to a fresh two-year low at $1.186.

“EUR depreciation of late appears to have been largely driven by the market reassessing the potential for a more significant growth downturn in the Euro area, amplified by energy woes, war dragging on longer than expected and doubts over ECB’s anti-fragmentation tool,” the Maybank analysts said.

The biggest single pipeline carrying Russian gas to Germany, the Nord Stream 1 pipeline, began annual maintenance on Monday, with flows expected to stop for 10 days.

Governments, markets and companies are worried Russia might extend the shutdown because of the war in Ukraine, exacerbating the continent’s energy supply crunch and potentially speeding a recession.

“All eyes will just be on whether Russian gas flows will return via the Nord Stream 1 pipeline following the end of maintenance next week,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“But in the meantime, I think concerns about a potential shut off of Russian gas flows will continue to keep the euro/ dollar heavy and that would in turn mean the dollar will keep strengthening.”

Euro weakness has been a big part of the dollar index’s push higher, with the safe-haven U.S. currency also supported by worries about growth elsewhere too, with China in particular implementing strict zero-COVID policies to contain fresh outbreaks.

Arguably the biggest factor in the dollar’s rise, however, is the view the Fed will hike rates faster and further than peers.

The Fed is expected to lift rates by 75 basis points for a second straight time at its July 26-27 meeting. Fed funds futures are pricing for its benchmark rates to rise to 3.50% by March, from 1.58% currently.

Investors are keenly watching U.S. consumer price data due on Wednesday, with economists polled by Reuters expecting the index to print an 8.8% annual rate for June.

Elsewhere, the dollar edged 0.09% lower to 137.28 yen, following Monday’s jump to a fresh 24-year high at 137.75.

The Philippine peso declined as much as 0.59% to its lowest since September 2005 at 56.38 per dollar. And the South Korean won slipped to its lowest level since April 2009 at 1,315.2 per dollar

The Australian dollar gave up 0.22% to $0.6728, and earlier matched the two-year low of $0.6716 reached on Monday amid a commodity price drop and fresh Chinese COVID curbs.

(Reporting by Kevin Buckland; Editing by Sam Holmes & Shri Navaratnam)

Oil slides as renewed China COVID curbs temper fuel demand outlook

SINGAPORE, July 12 (Reuters) – Oil prices fell on Tuesday as fresh COVID-19 curbs in China, the world’s biggest crude importer, and fears of a global economic slowdown weighed on the fuel demand outlook.

Brent crude futures for September fell USD 1.35, or 1.3%, to USD 105.75 a barrel by 0305 GMT, while US West Texas Intermediate crude for August delivery was at USD 102.64 a barrel, down USD 1.45, or 1.4%.

“Growing fears of a recession and continued sluggish demand in China are pulling oil prices lower, though the current supply-demand balances remain precarious,” analysts from consultancy Eurasia Group said in a note.

Multiple Chinese cities are adopting fresh COVID-19 curbs, from business halts to lockdowns, to rein in new infections as the highly infectious BA.5.2.1 sub-variant has been detected in the country.

“While China may take a more targeted approach in trying to squash any outbreak, we will need to see how this plays out given the country’s COVID zero policy,” said Warren Patterson, head of commodity research at ING.

“Overall, demand concerns are still driving price action. However, fundamentals are constructive, given the tight supply situation which is set to continue for at least the remainder of the year. As a result, we expect downside in prices will be limited.”

Western sanctions on Russia over the war in Ukraine, which Russia calls a “special military operation”, have disrupted trade flows for crude and fuel.

There have also been other curtailments of energy supply routes from Russia, a major supplier of oil, fuel and natural gas to Europe, that have traders and utilities on edge.

Worries of a disruption at the Caspian Pipeline Consortium’s system (CPC) eased after a Russian court Monday overturned an earlier ruling suspending operations at the pipeline for 30 days.

However, traders and analysts remain fearful that Russia will suspend the pipeline, which carries oil from Kazakhstan to the Black Sea, potentially disrupting 1% of global crude supply.

Additionally, spare capacity at the Organization of the Petroleum Exporting Countries is running low with most of the producers pumping at maximum capacity.

US President Joe Biden will make the case for greater oil production from OPEC when he meets Gulf leaders in Saudi Arabia this week, White House national security adviser Jake Sullivan said on Monday.

“Saudi Arabia is not expected to add significant volumes in the near term, despite President Joe Biden’s impending visit, as Riyadh will prioritize its commitment to market management and keeping spare capacity for emergency losses,” the Eurasia analysts said.

In the United States, crude and gasoline inventories were seen down last week, while distillate stockpiles likely rose, a preliminary Reuters poll showed on Monday.

(Reporting by Florence Tan in Singapore, additional reporting by Emily Chow in Kuala Lumpur; Editing by Christian Schmollinger)

Gold hits nine-month trough on dollar strength

July 12 (Reuters) – Gold hit a new nine-month low on Tuesday, as the US dollar at a 20-year high stifled demand for bullion, but a slight recovery in the euro against the greenback limited further losses.

Spot gold was up 0.1% at USD 1,734.97 per ounce as of 0229 GMT, after hitting its lowest since Sept. 30 of USD 1,722.36 earlier in the session.

US gold futures firmed 0.2% to USD 1,734.20.

“Gold looks like it is trading in direct correlation with EUR/USD in Asia,” finding some support as the euro recovered slightly, but if EUR/USD falls through 1.0000 in Asia, gold could drop toward USD 1,700, OANDA senior analyst Jeffrey Halley said.

The euro was near parity to the dollar amid concerns that an energy crisis could tip Europe into recession, while the US Federal Reserve continues to aggressively tighten policy to curb inflation.

Strength in the dollar USD= makes greenback-priced gold more expensive for buyers holding other currencies.

US consumer price index data, a key measure of inflation, is due Wednesday, and is expected to show prices rose 8.8% in June from a year earlier.

Recent inflation data has not been encouraging, Atlanta Fed president Raphael Bostic said on Monday, saying the lack of month-to-month improvement in the pace of price increases warrants another 0.75 percentage point increase in the federal funds rate when policymakers meet later this month.

Higher interest rates increase the opportunity cost of holding bullion, which yields no interest.

Benchmark US 10-year Treasury yields eased, somewhat buoying demand for gold.

“Gold seems to have found a few friends near USD 1,730 over the last couple of days, without ever seriously looking like it would reverse its recent selloff,” Halley said.

Spot silver rose 0.3% to USD 19.14 per ounce, platinum dipped 0.7% to USD 863.82, and palladium dropped 1% to USD 2,140.80.

(Reporting by Bharat Govind Gautam in Bengaluru; Editing by Amy Caren Daniel and Rashmi Aich)

Asian stocks at lowest in two years, euro near par with dollar

HONG KONG, July 12 (Reuters) – Asian shares fell on Tuesday, weighed down by the prospect of further monetary policy tightening by central banks, China’s renewed COVID outbreak and Europe’s energy shortage, which also left the euro a whisker from parity with the safe haven dollar.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8% to its lowest level in two years, while Japan’s Nikkei lost 1.75%.

The euro fell as low as USD 1.0006 against the US dollar, moving ever closer to parity for the first time since December 2002, as investors worry an energy crisis will tip the region into a recession.

“Risk-off sentiment is dominating global markets,” said Yuting Shao, macro strategist at State Street Global Markets.

“The dollar is the go-to international reserve currency. So when there is a recessionary risk or there’s pickup of volatility, the greenback is the currency that people rush to because that is the safest,” Shao added.

The dollar index, which tracks the currency against a basked of six peers rose to 108.47, the highest since October 2002.

The focus for this week will be macro data including the Consumer Price Index from the US on Wednesday, and comments from Federal Reserve Officials as investors look for clues for the outcome of the Fed’s upcoming policy meeting before officials enter the pre-meet blackout period.

A high inflation reading would add pressure for the Fed to step up its already aggressive pace of interest rate increases.

Also high on investors’ list of worries is the fact multiple Chinese cities, including the commercial hub Shanghai are adopting fresh COVID-19 curbs starting from this week to rein in new infections after finding a highly-transmissible Omicron sub-variant.

Additionally, the surging cost of energy in Europe is a major fear as the biggest single pipeline carrying Russian natural gas to Germany entered annual maintenance, with flows expected to stop for 10 days.

Investors are worried the shutdown might be extended because of the war in Ukraine, restricting European gas supply further and tipping the struggling eurozone economy into recession.

The yield on benchmark 10-year Treasury notes was at 2.9668% having dropped back below 3% overnight as investors bought safe haven Treasuries amid a sell-off on Wall Street.

The three major US stock indexes ended lower on Monday on investor concerns about rising inflation and corporate earnings before the start of results season. International equities also largely fell, as did oil prices and bond yields.

Growth fears were also weighing on oil, despite concerns about the tight supply.

US crude dipped 1.14% to USD 102.9 a barrel. Brent crude fell to USD 106.04 per barrel

Gold was slightly higher. Spot gold was traded at USD 1,734.6434 per ounce.

US recap: Dash for safety sends EUR/USD tumbling toward parity

July 11 (Reuters) – The dollar rallied on Monday on a wave of global risk-aversion brought on by renewed China lockdown fears, anxiousness regarding Western Europe’s energy supplies and fallout from accelerated Fed rate-hike pricing.

EUR/USD fell 1.2% to new 20-year lows close to parity on fears that a July 11-21 maintenance shutdown of the biggest single pipeline carrying Russian gas to Germany, Nord Stream 1, might be extended due the war in Ukraine.

With ECB yet to hike rates and the Fed seen doing back-to-back 75bp rate hikes, EUR/USD support at parity may prove short-lived, opening a door to support at 0.9625/595, particularly if this week’s US inflation and retail sales data reinforce the Fed’s aggressive rate hikes.

Overnight reports of broadening Chinese COVID restrictions gave the dollar its initial boost, weighed on commodities prices and sent USD/CNH 0.5% higher.

Sterling fell 1% to its lowest since early 2020’s pandemic plunge lows, as the brief relief rally following Prime Minister Boris Johnson’s announcement that he planned to resign just offered up better levels to sell.

Bank of England Governor Andrew Bailey said he thought the BoE’s most recent forecast for inflation, showing it was likely to fall sharply next year, remained valid. His other comments suggested not wanting to pre-commit to specific rate hikes, with the market now pricing in a 68% chance of the 50bp hike on Aug. 4.

The BoE, like many other central banks, faces rising imported inflation risk due to the dollar gains, while fearing rate hikes to defend the pound and fight inflation will simply heap more troubles on the economy.

USD/JPY gained 0.9% and hit a new 24-year high at 137.75 on EBS, as demand for the haven dollar outmatched demand for the haven yen.

If COVID-related disruptions in China — Japan’s biggest trading partner — persist, Japan’s economy could struggle more, keeping the BOJ’s ultra-loose policy in place.

For now, USD/JPY looks set to test resistance at 138.62 and near 139 if this week’s US data meet or beat forecast.

AUD/USD and the Canadian dollar fell 1.6% and 0.25%, respectively, with the Canadian dollar trading much more like the US dollar and Aussie having finally broken recent lows and major supports.

Bitcoin and ether’s modest losses almost looked like a victory given broader derisking.

On the US data front, Monday’s New York Fed consumer survey tended to reinforce market pricing in fed funds peaking by Q1 and falling thereafter. Wednesday’s CPI and Friday’s retail sales are the next major releases.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Dollar strength, looming rate hikes pin gold near 9-month low

July 11 (Reuters) – Gold was pinned near a nine-month low on Monday as bets for aggressive interest rate hikes by the US Federal Reserve and the dollar’s ascent dimmed appeal for bullion.

Spot gold fell 0.3% to USD 1,735.91 per ounce by 2:00 p.m. ET (1800 GMT). US gold futures settled down 0.6% at USD 1,731.70.

Despite recession risks, lately investors have opted for dollar over gold, pushing the currency to a near two-decade peak, also eroding appeal for bullion among overseas buyers.

Interest rate hikes, meanwhile, raise the opportunity cost of holding bullion since it pays no interest.

“Gold is under pressure as the dollar is making major runs and there is expectations of a fairly large interest increase after the (recent US) federal report highlighted a strong labour market,” Edward Moya, senior analyst with OANDA, said.

“Gold prices could tentatively breach below the USD 1,700 level and then see strong support around USD 1,670.”

US data on Friday showed labour market powered ahead with strong job gains, giving the Fed ammunition to deliver another 75-basis-point rate hike this month.

Meanwhile, Fed’s Esther George, a dissenter at the central bank’s 75 bps increase last month, said abrupt changes in rates “could create strains” in economy.

But growing pessimism over the state of some economies in Asia, and geopolitical instability to some extent, are limiting gold’s losses, as bullion remains the go-to safe haven during times of trouble, said Ricardo Evangelista, senior analyst at ActivTrades.

Spot silver fell 0.7% to USD 19.16 per ounce.

Despite the fall in silver prices, the retail cost of American Silver Eagle coins stayed high at around USD 35/ounce, a premium of about 80% on the spot price, which appears to be high enough to impact demand, Heraeus Precious Metals wrote in a note.

Platinum dropped 2.6% to USD 873.50 and palladium was down 1.3% at USD 2,154.99.

(Reporting by Ashitha Shivaprasad and Arundhati Sarkar in Bengaluru; Editing by Krishna Chandra Eluri and Shailesh Kuber)

Wall Street banks’ Q2 trading revenue likely to surge, softening blow from deal slump

NEW YORK, July 11 (Reuters) – A surge in trading revenue powered by volatile markets should partially offset a slump in M&A and equity and debt deals when Wall Street banks report second-quarter earnings this month.

Russia’s invasion of Ukraine, a surge in the price of oil above USD 100 a barrel and Federal Reserve rate hikes contributed to upheaval in the markets with the S&P 500 index .SPX recording its third-worst half year since 1945.

While that has been bad for deals which drove bumper profits for investment banks last year, it has been good news for Wall Street traders, boosting transaction fees and brokerage commissions as investors rushed to rebalance portfolios and hedge their risks.

“This is the type of quarter that justifies Wall Street’s reason to exist: getting in the middle of many counterparties to help them manage and trade their risk,” said Mike Mayo, senior banking analyst at Wells Fargo. “We’ve already had guidance for trading to be up 15% to 25% year over year for the largest banks.”

RBC Capital Markets analysts said they expect markets revenue at the big US banks to increase 17% year-on-year, driven primarily by fixed-income commodities and currencies, or FICC, business.

Citigroup Inc.’s global head of markets, Andy Morton, told a conference last month that while he expected the investment banking business to be down in the second quarter, the bank’s market business revenue would be up over 25%.

Barclays has projected trading revenue for Goldman Sachs (GS), a Wall Street powerhouse, to be up 21% year-on-year in the second quarter with FICC business up 28% and equities up 14%.

The FICC business has benefited in particular because the Ukraine conflict has pushed up commodities prices, sending investors scrambling to cover their exposure, while central bank rate hikes aimed at dampening inflation have also driven fixed-income and currency trading.

“Looking out, we expect trading activity levels to remain elevated,” Barclays’ banking analysts, led by Jason Goldberg, wrote in a note.

DEALS DOWNER

The anticipated trading gains are a bonus for Wall Street banks which, prior to the Ukraine conflict, were expecting trading revenue to settle somewhere between the highs of the past two years, which had been driven by massive Fed monetary easing, and pre-pandemic levels.

In contrast, Wall Street bank investment bank revenue is expected to suffer from a slump in global equity capital market transactions, which dropped nearly 69% to USD 263.8 billion in the first half of the year on the same period in 2021, while debt deals slumped by nearly 26%, data from Dealogic showed.

Mergers and acquisitions had a mixed first half with the impact of Russia’s invasion felt more severely in the second quarter when the value of announced deals dropped 25.5% year-on-year to USD 1 trillion, according to Dealogic.

“We’ve already seen a stall in M&A and CEO confidence is near an all-time low,” said Kenneth Leon, research director, industry and equities, at CFRA Research.

“The ability to get higher fees from (initial public offerings) has been very difficult so I would say more of the same for the second half of the year for investment banking.”

Goldman Sachs and Morgan Stanley overall are expected to report a 51% and 17% drop in profit, respectively, partly due to the decline in deals, according to Refinitiv data.

Analysts expect the weak environment for deals could trigger cost-cutting measures by either freezing hiring or reducing jobs.

“We believe, if investment banking revenue trends do not improve in H2, cost initiatives will move into focus to improve profitability,” RBC Capital Markets analysts wrote in a separate report.

(Reporting by Saeed Azhar in New York; Additional reporting by David Henry in New York and Noor Zainab Hussain in Bengalaru; Editing by Michelle Price and Matthew Lewis)

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