US and European stock softer as dollar surges

US and European stocks are softer in Wednesday afternoon trading as the dollar hits a 13-year high and bond yields touch multimonth peaks with investors betting that president-elect Donald Trump’s pledge of infrastructure spending and tax cuts will accelerate inflation.

In Europe, Germany's Dax is down 1.1 per cent as shares in Bayer fall more than 5 per cent after the drugmaker raised €4 billion to pay for proposed acquisition of Monsanto.

The UK's FTSE 100 is off 0.8 per cent as energy groups note a 0.6 per cent fall in the price of Brent crude to $46.65 a barrel. Brent crude bounced 5.7 per cent in the previous session as hopes were once again revived that Opec could agree a production cut at its meeting in Vienna at the end of the month.

London-listed miners also are struggling for momentum after Chinese-traded iron ore futures fell more than 7 per cent.

Helping the mood

Initially helping the mood across global financial markets was the latest rally on Wall Street, where the S&P 500 on Tuesday closed within half a per cent of a record high and the Dow Jones Industrial Average of just 30 price-weighted stocks did enter virgin territory, closing at 18,923. But Wednesday sees the S&P 500 dipping 6.5 points to 2,174 as investors look warily at a continuation of the “Trumpflation trade”, where expectations that president-elect Trump’s policy of infrastructure spending will boost inflation are delivering surging borrowing costs and a robust dollar.

The 10-year US treasury yield, which moves opposite to the bond price, is continuing to nudge up, gaining 3 basis points to 2.26 per cent, holding near its highs of the year. Equivalent maturity German Bunds and Japanese paper are up 1bp to 0.32 per cent and adding 3bp to 0.03 per cent, respectively.

The dollar index (DXY) is currently flat on the day ay at 100.23, but it earlier hit a 13-year high of 100.53 as investors bet that "Trumpflation" may cause the Federal Reserve to raise interest at a faster pace than previously expected.

Sterling

Some traders noted that the DXY’s 14-day relative strength index – a closely watched momentum gauge – rose to 75.0 earlier in the session, moving above the 70 mark that is considered to signal an overbought level.

Sterling is holding its ground against the dollar at $1.2452 after data showed the UK unemployment rate hit a fresh 11-year low.

Gold tends not to like higher interest rates and a stronger buck and so the precious metal is slipping $1 to $$1,227 an ounce.

“It looks like yesterday was just a pause after all,” said forex analysts at Citi. “US dollar [USD]strength has resumed as we’re back to the post-Trump reflation story and watching yields. US 10-year yields are back on the march higher and most currencies are suffering against USD as a result.”

Emerging market currencies in particular are being pressured by the greenback’s latest revival, with the Turkish lira hitting a fresh low.

In the majors, the yen is 0.2 per cent softer at ¥109.35, its weakest since June as the prospect of Fed tightening stands in contrast with more monetary easing expected from the Bank of Japan.

Japan’s exporters like a softer yen, and so this helped the Nikkei 225 stock average gain 1.1 per cent in a generally upbeat Asia-Pacific performance.

South Korea's Kospi rose 0.6 per cent, but Hong Kong's Hang Seng eased 0.2 per cent and China's Shanghai Composite was down 0.1 per cent, the latter receiving little help from news that the renminbi is at its weakest against the US dollar since August 2008.

– Copyright The Financial Times Limited 2016