Dollar Gains, Treasuries Slide; U.S. Stocks Fluctuate

New York (Nov 17)  The dollar rose and Treasuries fell on speculation the U.S. economy is robust enough to withstand higher interest rates and a recession in Japan. U.S. stocks fluctated as corporate deals offset a drop in energy shares.

The Bloomberg Dollar Spot Index rose 0.4 percent at 1:27 p.m. in New York. The yield on 10-year Treasuries added two basis points to 2.34 percent, while the Stoxx Europe 600 Index climbed 0.5 percent. Earlier, bonds rose and European shares followed Asian stocks lower amid concern over the strength of the global recovery. The Standard & Poor’s 500 (SPX) Index fluctuated near a record, while the Russell 2000 Index of small stocks slid 0.3 percent as energy shares tumbled. Brent crude fell 1 percent to $79 a barrel and U.S. natural gas surged.

While U.S. data today showed industrial production unexpectedly dropped, rising consumer confidence and the fall in gasoline prices are brightening the outlook for holiday sales, indicating factories will get a lift. European Central Bank President Mario Draghi said an expansion of stimulus could include government bonds. Japan’s economy, the world’s third largest, contracted 1.6 percent last quarter from a year before, stoking concern global growth will continue to slow.
“There’s a hope that monetary policy will stay accommodative across the board, which has emboldened risk-taking,” Chad Morganlander, a money manager at St. Louis-based Stifel Nicolaus & Co., which oversees about $160 billion, said by phone.

Manufacturing Data

About $3.5 trillion has been added to the value of global equities since Oct. 16 amid signs the U.S. was weathering a slowdown in Europe and Asia, while the Bank of Japan boosted stimulus measures.

Data today indicated output fell 0.1 percent after a 0.8 percent increase in September that was smaller than previously estimated. A separate report showed showed the Federal Reserve Bank of New York’s Empire Index increased less than forecast in November.

Benchmark U.S. 10-year yields rose two basis points, or 0.02 percentage point, to 2.34 percent, according to Bloomberg Bond Trader data. The yield touched 2.28 percent earlier, the least since Nov. 10.

“The Japanese news weighed on the market earlier, but risk sentiment has improved with the U.S. economic data being decent,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.

The euro fell 0.6 percent to $1.2450, while the yen appreciated 0.5 percent to 145.02 per euro, after earlier touching 146.53.
Rate Timing

Federal Reserve Governor Jerome Powell said he expects the U.S. central bank to raise interest rates next year, adding the exact timing would depend on the pace of economic recovery.

“This year is on track to be the best year in job creation since 1999,” Powell said in an interview today on CNBC. “It makes sense to raise rates in 2015, perhaps in mid-2015.”

The Fed has kept the target for the federal funds rate, which banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.

The S&P 500 capped a fourth week of gains to close Nov. 14 at an all-time high, as the gauge rebounded 9.5 percent from a six-month low in October.

Halliburton Co. fell 9.7 percent after agreeing to pay $34.6 billion for Baker Hughes Inc., which surged 10 percent. Actavis Plc added 1.7 percent after reaching a deal to buy Allergan Inc. for $55 billion. Allergan jumped 5.4 percent.

Draghi Remarks

Draghi presented European lawmakers with a list of policy resolutions for 2015 as he insisted his institution alone can’t fix the region’s economy.

“2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track,” Draghi said in Brussels today. “Monetary policy alone will not be able to achieve this.”

“The other unconventional measures might entail the purchase of a variety of assets, one of which is government bonds,” Draghi, speaking to lawmakers in Brussels, said.

The Stoxx 600 erased earlier losses of 0.8 percent to rise the most in a week.

Merck KGaA jumped 3.2 percent after saying it will receive $850 million and could get up to $2 billion in regulatory and commercial milestone payments to develop and commercialize a tumor treatment with Pfizer Inc.

Emerging Stocks

The MSCI Emerging Markets Index lost 0.6 percent. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong sank 1.9 percent, the most since Sept. 10. The Shanghai Composite Index slipped 0.2 percent.

International investors purchased 13 billion yuan ($2.1 billion) of Shanghai shares, triggering a halt in buy orders for the rest of the day. Mainland investors used about 1.7 billion yuan of their 10.5 billion yuan quota in Hong Kong.

China’s bad loans jumped by the most since 2005 in the third quarter, China Banking Regulatory Commission said in a statement on Nov. 15.

Japan’s second straight drop in gross domestic product, matching the textbook definition of a recession, followed a revised 7.3 percent contraction in the second quarter that coincided with an increase in the national sales tax from 5 percent to 8 percent.

Sales Tax

“The prime minister in all likelihood is going to say, look, we’re going to reduce the likelihood of Japan falling into recession again next year by taking away the VAT hike,” Jesper Koll, the head of Japan equity research in Tokyo at JPMorgan Chase & Co., said in a Bloomberg TV interview.

U.S. natural gas futures rose 6 percent to $4.26 per million British thermal units, the biggest gain in a week, amid colder weather. The fuel rose 2 percent in the U.K. after supply disruptions from the North Sea.

Brent crude futures extended the contract’s longest weekly decline since it began trading in 1988. West Texas Intermediate dropped 0.4 percent to $75.51 in New York.

Members of the Organization of Petroleum Exporting Countries are stepping up diplomacy before their Nov. 27 meeting to discuss production levels. Iran’s oil minister is preparing to visit the United Arab Emirates this week, according to Shana, the Tehran-based ministry’s news service.

Source: San Francisco