Oil down again, dollar steady as pivotal week for markets gets underway

March 13, 2017 09:18 AM

Oil prices, down for a fifth straight day on Monday, were an outlier in a relatively calm start to an event-packed week for global markets as investors braced for a potential interest rate hike in the United States, a Dutch election and the first G20 finance ministers' meeting of the Trump era

Strong U.S. employment data and talk that European Central Bank policymakers had begun thinking about how to raise interest rates as inflation returns saw market participants, particularly in bond and currency markets, start to price in higher borrowing costs.

The financial market's top banks are unanimous on the view the Federal Reserve will increase interest rates at its policy meeting next week following a stronger-than-forecast February U.S. payrolls report, a Reuters poll showed on Friday.

U.S. stock futures were little changed.

The market's attention is now firmly on the scale of tightening further out.

A fifth straight session of losses for oil prices, now down more than 8 % in the past week on worries over a supply glut, remained in focus.

In Europe, the euro eased slightly while euro zone government bond yields, jolted last week by reports that some ECB policymakers had discussed the possibility of lifting interest rates, pulled back from multi-week highs.

"Improved growth and inflation prospects are allowing developed market central banks to sketch their exits from extreme accommodation at varying speeds," David Folkerts-Landau, group chief economist at Deutsche Bank wrote in a note to clients.

The dollar was flat against a basket of major currencies though its recent weakness spurred a rally on sterling where net speculative bets against the currency hit 16-week highs last week. 

The pound added to the day's gains after Scottish National Party leader Nicola Sturgeon said she would seek permission to hold a fresh Scottish independence referendum which would be held at earliest in late 2018.

British Prime Minister Theresa May is poised to launch the two-year process of taking the country out of the EU, something which was opposed by most Scots in last year's Brexit vote.

"The push and pull between solid growth momentum and political risks look set to continue in the near-term," Deutsche's Folkerts-Landau said.

The world's most powerful finance ministers and central bankers convene in the German spa town of Baden-Baden on March 17-18, their first meeting since Donald Trump's U.S. election victory in November where his protectionist stance on international trade is likely to be a key issue.

Political risks
Gains in mining stocks and continued corporate deal-making activity helped European shares offset weakness in oil-related shares, with the benchmark STOXX 600 up 0.2 % in early trades.

The FTSE 100 was up slightly where along with mining blue chips a 1 % gain for shares of HSBC supported the index.

HSBC shares rose after Europe's biggest bank tapped an outsider, Mark Tucker, for its top job.

The brisk start to the year for corporate deal-making continued as chips giant Intel said it would acquire driverless technology firm Mobileye for $15.3 billion

In bond markets, euro zone government bond yields pulled back from multi-week highs, as nervous investors turned their focus to this week's Dutch parliamentary elections—the next key gauge of populism in Europe.

Although the risk of a eurosceptic party coming to power in the Netherlands is small, a strong election performance could renew concerns about the popularity of the far-right in French presidential elections in April and May, said Erin Browne, head of macro investments at UBS O'Connor, a hedge fund manager within UBS Asset Management.

"If you see a eurosceptic party gains a significantly larger share of the vote than current polls suggest that could spill over into concern about the French elections and the National Front doing better in the second round of voting than is currently being predicted," she said.

"That's the risk for markets with a view to the Dutch elections."

In commodities, oil prices remained on the backfoot as more rigs are deployed to look for oil in the United States and as crude inventories in the United States, the world's biggest oil consumer, have surged to a record

Gold climbed slightly as uncertainty created by elections in Europe fueled investor interest, but the prospect of imminent rate rises later this week kept prices near the five-week lows touched last week.

About the Author