End of easy money? Euro surges, bond yields advance

Rajalakshmi S Updated - January 12, 2018 at 02:46 PM.

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The euro surged to its highest in over a year on Thursday, while bond yields and global shares also climbed, as a slew of hawkish comments from central banks signalled the era of easy money might be coming to an end for more than just the United States.

The dollar touched its lowest since October - before Donald Trump was elected US president - against its broad index , as investors shifted to the view that the US Federal Reserve might not be the only game in town when it comes to higher interest rates.

In Britain, Bank of England Governor Mark Carney surprised many by conceding a hike was likely to be needed as the economy came closer to running at full capacity.

That sent sterling surging, with the currency coming within a whisker of $1.30 on Thursday for the first time in five weeks.

The Bank of Canada went further, with two top policymakers suggesting they might tighten as early as July.

That followed comments earlier in the week from European Central Bank President Mario Draghi that stimulus might need to be toned down so it does not become more accommodative as the economy recovers.

“This is simply the central banks getting together and trying to arrest deflation,” said Nomura's head of G10 currency trading Peter Gorra.

“They are trying to be as smart as they can and agreeing that they have to act in unison. I don't think this is necessarily a dollar move and I don't think the dollar's rally is over. They are just trying to add some two-way risk to the market.”

ECB sources had tried to hose down the talk of tightening, telling Reuters on Wednesday that markets had over interpreted Draghi's comments. But those comments could not stop the euro's rally, with the single currency hitting a 14-month high of $1.1435.

Neither did they stop Germany's 10-year government bond yield hitting a five-week high on Thursday. Other bond yields also climbed higher.

“If we want to know what the ECB is planning, we will choose a carefully scripted Draghi speech over anonymous sources every time,” said Westpac currency strategist Sean Callow in Sydney.

The squall had already driven German short-term yields to their highest in a year, while yields on US 10-year Treasuries were up 12 basis points so far this week at 2.24 per cent.

“Stiffer headwinds"

European shares steadied as bank stocks extended a winning streak, after the US Federal Reserve cleared capital return plans from big banks. That offset losses among utilities and construction stocks, which tend to suffer from the prospect of higher interest rates.

Shares in Europe's banks rose for a fourth straight day, with news from the Fed adding steam to a rally already fuelled this week by expectations for monetary tightening by major central banks.

Those expectations also bolstered US banking stocks, helping the S&P 500 score its biggest one-day percentage gain in about two months on Wednesday.

Wall Street looked set to open slightly higher again, as MSCI's broad index of global shares hit a record high .

Earlier, Japan's Nikkei added 0.45 per cent, while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8 per cent to its highest since May 2015.

“Central banks will be very cautious in their approach," said Martin Whetton, a senior rates strategist at ANZ.

“But once they start tightening in concert, and their bloated balance sheets start unwinding, it is fair to say that bonds, equities, house prices and other asset markets will face stiffer headwinds than they have for a long time.”

The euro also surged to a 16-month top on the yen, as investors doubted the Bank of Japan would be in any position to begin winding back its stimulus for a long time to come.

The Canadian dollar vaulted to C$1.3006, having enjoyed its biggest daily gain in three months. Traders at Citi called the currency reaction “extraordinary" with turnover as much as twice the daily average on Wednesday. The dollar's fall boosted emerging stocks by half a per cent.

Crude oil rose for a sixth straight session on a decline in US output, but ongoing worries about global oversupply continued to drag.

Published on June 29, 2017 10:38