Stocks pare gains, bonds drop after Fed minutes


The bond market expects almost 65 bps of interest rate cuts by the end of the year
Chief Investment Office22 Aug 2019
    Photo credit: AFP Photo


    US

    US stocks pared gains and Treasuries fell as Federal Reserve minutes fell short of signalling the central bank was ready to cut rates sharply.

    The S&P 500 Index moved away from Wednesday’s (21 August) highs and two-year Treasury yields surged after the minutes indicated the Fed is prepared to ease if economic conditions worsen, while hinting the committee did not view the July cut as part of an extended cycle of reductions. The two-year yield was briefly above the 10-year rate, a key signal watched by investors and seen as a harbinger of a recession. The bond market expects almost 65 bps of interest rate cuts by the end of the year.

    “With hopes for Fed stimulus as the biggest driver of stocks’ buoyancy in the face of trade tensions and weakening global growth, today’s relatively dovish Fed minutes were about in line with investors’ high expectations,” said a managing director of a research company.

    Stocks already started the day higher after solid results from retailers Target Corporation and Lowe’s Companies Inc defied recession fears. Traders also assessed the latest developments in the US-China trade spat, with US President Donald Trump predicting the US will “probably” make a deal. Trump also said Wednesday that the economy is strong and kept up his relentless attack on the central bank, claiming that “the only problem we have is Jay Powell and the Fed”. Bloomberg News.

    The Dow Jones Industrial Average increased 0.93% to 26,202.73, the Nasdaq Composite Index gained 0.90% to 8,020.21, and the S&P 500 Index climbed 0.82% to 2,924.43.

     

    EUROPE

    The International Monetary Fund (IMF) executive board recommended removing the age limit for the fund’s managing director, paving the way for the European Union (EU)-backed candidate to replace Christine Lagarde.

    Kristalina Georgieva, the World Bank‘s chief executive, was earlier this month selected by European governments as their nominee to head the fund. Current IMF rules prohibit the appointment of a new managing director aged 65 or older and says they cannot serve in the role past their 70th birthday, the fund said in a statement Wednesday (21 August). Georgieva turned 66 last week (ended 16 August).

    Lagarde is set to step down 12 September, and the IMF wants to choose her successor by 4 October.

    Removing the age restriction for the IMF managing director will bring the rules in line with those for the IMF executive board and the World Bank Group president, according to the statement. None of those positions are subject to an age limit.

    The IMF board of governors must give final approval on removing the age restrictions.

    Meanwhile, UK Prime Minister Boris Johnson is seeking to rally support for former Finance Minister George Osborne to become the next head of the IMF. The UK objected to the way other EU governments nominated Georgieva, saying they did not have enough time to field a candidate. A Briton has never run the fund.

    An unwritten transatlantic agreement typically allows Europe to select the managing director of the IMF and the US to choose the president of the World Bank. – Bloomberg News.

    The Stoxx Europe 600 Index traded 1.21% higher to 375.80 on Wednesday (21 August).

     

    JAPAN

    Radiation from the crippled Fukushima nuclear plant is becoming the latest source of tension between Japan and South Korea, potentially undercutting Tokyo’s effort to promote the 2020 Olympics.

    In recent days, South Korean officials have summoned a Japanese diplomat to express concern about a planned release of treated radioactive water into the ocean by Tokyo Electric Power Company (Tepco), the plant’s owner. They are also pushing for independent radiation checks at Olympic venues and proposing a separate cafeteria for their athletes, citing concerns about contaminated food.

    The radiation dispute is threatening to prolong tensions between the two US allies, who have spent much of the summer trading economic sanctions and diplomatic threats in a tit-for-tat dispute. The feud has exposed lingering mistrust and disagreements over Japan’s colonial rule on the Korean Peninsula.

    South Korea’s radiation concerns contrast with signs of softening attitudes last week (ended 16 August) on the anniversary of Japan’s World War II surrender. Japan has also taken steps to show that its recent export controls will not prevent legitimate sales to its neighbour.

    Now, Tepco is preparing a release from onsite storage tanks, which are expected to fill up by 2022 with water treated to remove most radioactive elements. An adviser for the company has recommended a controlled release into the Western Pacific – a common practice at other reactors around the world – while the environmental group Greenpeace has urged keeping the water in storage. – Bloomberg News.

    The Nikkei 225 Index added 0.49% to 20,719.86 early-Thursday (22 August) morning. It slipped 0.28% to 20,618.57 the previous session.

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