Dollar strengthens on U.S. rate outlook; S&P 500 futures decline

Bloomberg.- The dollar rose, reaching the strongest level against the euro since March, on speculation U.S. monetary policy will diverge from stimulus measures in Europe and Asia.

The dollar advanced against most of its major counterparts, reaching a six-year high versus the yuan after China’s central bank weakened its daily reference rate by the most since August. S&P 500 Index futures signaled U.S. equities will pare this week’s advance and European stocks fluctuated while Japanese shares fell after the nation was struck by an earthquake. Oil extended its fifth week of gains. The cost of insuring investment-grade corporate debt against default was set for the biggest weekly decline since July.

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The Bloomberg Dollar Spot Index headed for a third weekly gain after European Central Bank President Mario Draghi said Thursday that the authority’s bond-buying program will likely be tapered before it is halted, a hint that there will be an extension beyond the scheduled end-date of March 2017. Prospects for more stimulus contrast with Federal Reserve policy as officials weigh the case for its first interest-rate hike since 2015. Fed Governor Daniel Tarullo and San Francisco Fed President John Williams are scheduled to speak today.

“Anybody who had positioned for the risk that Draghi would signal a hard taper took their chips off that particular table,” said Ned Rumpeltin, the head of European currency strategy at Toronto Dominion Bank in London. “This also put emphasis back on the dollar. And the calendar over the next few weeks look dollar friendly.”

Currencies

The Bloomberg dollar gauge added 0.4 percent as of 8:55 a.m. in New York. South Korea’s won was the worst performer among major currencies, sliding 0.7 percent.

The euro dropped 0.4 percent to $1.0885, falling for the first time through the low recorded on June 24, when the outcome of Britain’s vote to leave the European Union was announced. Draghi’s non-committal stance leaves traders waiting until at least December for news about policy changes.

China’s yuan fell 0.3 percent to 6.7637 per dollar in Shanghai, weakening beyond the 6.75 level that it was forecast to reach by year-end. The onshore yuan has declined in all but one session this month as the People’s Bank of China allowed a drop past the 6.7 level that was previously seen as its line in the sand. In offshore trading, the currency was within 0.5 percent of the weakest level recorded since trading began in 2010.

Commodities

Crude oil added 0.1 percent to $50.69 a barrel in New York, following Thursday’s retreat from a 15-month high. Rosneft PJSC Chief Executive Officer Igor Sechin said Russia is capable of a substantial boost to production less than two weeks after President Vladimir Putin pledged support for international efforts to limit output. Nigeria also said Thursday that it cut the price of every type of crude it sells in an effort to boost its global oil market share.

Nickel fell 0.8 percent to $10,045 a ton in London having earlier touched the lowest price in two weeks. The metal came under pressure after China’s top stainless steel producer said it plans to cut output. Aluminum climbed for the first time in six days in London, trimming this week’s loss to 3.5 percent.

Gold was little changed $1,266.39 an ounce, near its 200-day average, a measure watched by traders and analysts who use chart patterns to make price predictions.

Stocks

S&P 500 Index futures were down 0.4 percent. General Electric Co. slipped 1.1 percent in early trading after cut its 2016 forecast for organic sales growth, while Microsoft Corp. surged as 6.2 percent in after-hours trading after first-quarter sales and earnings topped analysts’ estimates. Senior executives at AT&T Inc. and Time Warner Inc. have met in recent weeks to discuss various strategies including a possible merger, according to people familiar with the matter.

The Stoxx Europe 600 Index was little changed near a two-week high. Daimler AG fell 2.2 percent after the automaker reported a 10 percent increase in third-quarter earnings and SAP SE was up 2.9 percent following the announcement of sales that topped estimates. Ericsson AB slid 3.4 percent following its first loss in almost four years.

British American Tobacco Plc paced gains among retailers, rising 2.9 percent after offering to buy the stake it doesn’t already own in Reynolds American Inc. for $47 billion. Deutsche Bank AG’s shares recovered from the selloff sparked by the U.S. Department of Justice’s request for $14 billion to settle a probe tied to its mortgage-backed securities business.

Japan’s Topix index slid 0.4 percent and the yen strengthened after a magnitude-6.6 earthquake struck western Japan. The nation’s earnings season ramps up next week, with more than 350 members of the equity gauge set to report results.

Bonds

The yield on benchmark U.S. Treasuries due in a decade fell one basis point to 1.74 percent. It touched a four-month high of 1.81 percent this week as higher oil prices spurred speculation inflation will gather pace. That may boost the case for the Fed to raise rates.

China’s 10-year bond yield fell two basis points to a record 2.64 percent. Demand for sovereign debt firmed this week as data showed industrial output missed estimates last month and a weakening yuan spurred concern about capital outflows.

“It’s still a matter of debate whether economic fundamentals have turned better,” said Luo Yunfeng, a fixed-income analyst at Essence Securities Co. in Beijing. “It’s possible that, some time next year, the economy might show some sort of weakness again.”

Portuguese bonds gained, sending 10-year yields down three basis points to 3.15 percent, before the nation’s crucial investment-grade rating review from DBRS Ltd. Portugal’s rating is critical because it makes the government’s debt eligible for the ECB’s bond-purchase program.

The Markit iTraxx Europe Index of credit-default swaps on highly rated companies was little changed at 71 basis points, holding onto a three basis-point drop this week. Agauge of swaps on non-investment grade companies fell two basis points to 318 basis point.

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