Stocks struggle to make headway as bonds firm

Stocks are struggling to make headway and bond prices are firmer as a rising dollar and weaker oil prices provide an excuse for a breather after Wall Street hit a five-month high.

After losses for Chinese equities led a mixed Asia session, the pan-European Stoxx 600 is down 0.1 per cent, even with miners seeing buyers as iron ore prices hit a 10-month peak.

US index futures, which have bounced off session lows, suggest the S&P 500 will add less than 0.1 per cent to 2,103. The Wall Street stock barometer closed on Tuesday at its best level since the start of December, having enjoyed a 15 per cent bounce off the February trough that took it to within 1.5 per cent of last May’s record high.

The rally for US shares – which contributed to a global equity measure, the FTSE All-World index, also this week hitting a fresh 2016 peak – has coincided with a declining greenback, which is seen helping US company earnings, and a stronger oil price of late.

Both those supports are wobbling on Wednesday.

The dollar index, which last week touched a seven-month low of 93.63 amid a more dovish tone on possible interest rate rises from the Federal Reserve, is up 0.1 per cent on the day at 94.05.

A stronger greenback tends to weigh on dollar denominated commodities, and that is the case in the new session, with base metal prices broadly lower.

And it is delivering additional downward pressure on oil prices, which are floundering after Kuwaiti oil workers ended their strike, adding to fears of a global supply glut.

Brent crude, the international energy benchmark, is off 1.6 per cent to $43.32 a barrel, with news that US stockpiles rose last week also weighing on sentiment.

The fiscal damage done to energy-focused countries by recently falling oil prices has been highlighted by Saudi Arabia borrowing $10 billion from a consortium of banks, its first such debt raising since 1991.

It could be a difficult year for many oil producers, according to Fitch Ratings, which estimates the aggregate earnings of seven major oil companies in the Europe, Middle East and Africa region will fall 22 per cent in 2016.

“Most integrated firms will see a significant deterioration in credit metrics as weaker downstream performance adds to the impact of lower oil prices on cash flows,” Fitch said. “The fall in earnings will come after a 34 per cent drop in 2015 and is a severe, but not disastrous decline in the context of a 65 per cent drop in oil prices.”

Another factor not helping investors’ mood is a sharp fall for Chinese stocks.

The Shanghai Composite dropped 2.3 per cent, falling below the 3,000 level, as traders were believed to have a bout of nerves about the country's economic prospects, deciding to sell a market that had bounced 13 per cent in just eight weeks. Hong Kong's Hang Seng shed 0.9 per cent.

Japan's Nikkei 225 managed to add 0.2 per cent after Bank of Japan governor Haruhiko Kuroda suggested there was room for the central bank to buy more equity exchange traded funds as part of its stimulus efforts.

The Nikkei’s positive showing came despite the yen rallying in its traditional response to broader market angst, and after data showed the country’s trade surplus rose to ¥755 billion, its highest since October 2010.

A stronger yen contributed to the drop in export values and import prices, according to Capital Economics analysts.

They were upbeat on the prospects for global growth this year and next, which should “provide some support to export volumes” in Japan.

“For now though, the slump in export values is lowering firms’ revenues and profits and may undermine their willingness to expand capacity and lift wages,” they warned.

The yen has since given up gains to trade little changed at ¥109.20, as such a gloomy corporate prognosis encourages investors to think the Bank of Japan may deliver additional monetary easing at its policy meeting next week.

The 10-year Japanese government bond yield (which moves inversely to price) fell to a record low of -0.129 per cent, and yields are generally lower across the sovereign debt sector amid cautious trading in so-called riskier assets.

The yield on 10-year Treasuries is down one basis point to 1.77 per cent and equivalent maturity Bunds are off 1bp to 0.17 per cent ahead of the European Central Bank’s policy decision on Thursday.

Gold is down $1 to $1,249 an ounce.

Copyright The Financial Times Limited 2016