· The safe-haven dollar and yen fell on Wednesday as risk sentiment improved after global political worries eased with what markets perceived as positive news in Hong Kong, Italy and Britain.
The dollar index slid for a second straight session, while the yen, which draws safe-haven bids in times of geopolitical stress, dropped for the first time in four days against the greenback.
Risk appetite rose on reports Hong Kong leader Carrie Lam would announce the formal withdrawal of an extradition bill that triggered months of unrest.
In Italy, the 5-Star Movement approved a coalition deal with the Democratic Party, paving the way for a new government, while lawmakers opposed to a no-deal Brexit gained the upper hand in Britain, triggering a global equities rally.
The dollar was last down 0.55% against a basket of major currencies, at 98.46. The yen fell against the dollar, which rose 0.43% to 106.38 yen.
The euro also rose 0.4% versus the dollar to $1.1011 after comments from Christine Lagarde, who will likely be the European Central Bank’s next president, introduced some doubt over the scale of an ECB stimulus package expected next week. Lagarde said highly accommodative monetary policy for a prolonged period was necessary but she added that the bank needed to be mindful of the negative side-effects of such tools.
Expectations for an interest cut, the relaunch of asset purchases and other ECB measures to stimulate the economy have weighed on the euro. On Tuesday, it hit a 28-month low around $1.0924.
The dollar’s weakness helped China’s offshore yuan pull away further from record lows plumbed earlier this week.
The Chinese currency was last up 0.4% against the dollar, which fell to 7.1511 yuan. The British pound recovered Tuesday’s losses, when it hit a three-year low, after the latest parliamentary attempt to stop a no-deal Brexit took a step forward.
Sterling bounced 1.06% to $1.2111, and against the euro it rallied 0.4% to 90.45 pence.
· Short-term U.S. government debt yields fell Wednesday after Hong Kong leader Carrie Lam said a controversial extradition bill that sparked mass protests within the city has been withdrawn.
The yield on the benchmark 10-year Treasury note held steady at 1.456%, while the yield on the 30-year Treasury bond hovered at 1.958%. The 2-year Treasury rate, however, fell 3 basis points to 1.428%, its lowest level since 2017.
· Chinese state media reported Thursday that officials from the U.S. and China held a phone call Thursday morning and agreed to meet in early October for another round of trade negotiations.
· The U.S. economy expanded at a modest pace from June through August, despite looming concerns about the U.S.-China trade war, according to the Federal Reserve's Beige Book.
Almost all of the Fed’s 12 districts reported modest growth over the past few months, the Fed said in its region-by-region roundup of anecdotal information known as the Beige Book. The report, prepared by the Federal Reserve Bank of St. Louis, was based on information collected through Aug. 23.
"Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook," the report said.
Overall, wages grew at a modest pace, on par with the previous reporting period. Employment varied across industries, but manufacturing -- often used as a telltale sign of an impending recession -- remained relatively flat across the different districts.
· Chicago Federal Reserve Bank President Charles Evans on Wednesday said that not only is trade policy uncertainty slowing U.S. business investment decisions, limits on trade and immigration could mean slower potential economic growth overall.
· The U.S. Federal Reserve should cut interest rates by half a percentage point at its meeting in two weeks to get ahead of both financial market expectations for a rate cut and a global trade war that has become a broader “reckoning” over how the world economy is organized, St. Louis Federal Reserve President James Bullard said in an interview on Tuesday.
Global investors have sent bond yields plummeting in recent weeks to record lows, leaving the Fed’s overnight policy rate seemingly out of line, Bullard said.
Economic data on Tuesday meanwhile showed the U.S. manufacturing sector had contracted for the first time in three years amid slowing global economic growth and as China and the U.S. ratchet up tariffs on each other.
Bullard said he felt the situation amounted to a “global shock” that warranted an “aggressive” step by the Fed at its meeting in two weeks. In July, the Fed reduced borrowing costs by a quarter point, its first rate cut since 2008.
“We are too high,” Bullard said of Fed interest rates, noting that the central bank’s current target policy rate of between 2% and 2.25% was higher than the current yield of all U.S. Treasury securities. Typically the Fed’s rate should form a baseline for the determination of other rates, but even the 30- year bond has dipped below 2%.
· New York Federal Reserve President John Williams said in a speech Wednesday that sluggish inflation is one of the central bank’s most pressing issues and promised to use monetary policy to sustain economic growth in the U.S.
“Low inflation is indeed the problem of this era. The current outlook of moderate growth, low unemployment, but stubbornly low inflation is a reflection of the broader economic picture,” Williams said. “I am carefully monitoring this nuanced picture and remain vigilant to act as appropriate to support continuing growth, a strong labor market, and a sustained return to 2 percent inflation.”
· British Prime Minister Boris Johnson failed in his bid to call a snap general election on Wednesday, after lawmakers wrested control of Parliament this week and voted through a bill that aims to stop a no-deal Brexit.
The election had been proposed for October 15, but the prime minister needed a two-thirds majority in the House of Commons to pass his motion. The opposition parties of Labour, the Scottish National Party and the Liberal Democrats all said they would not back Johnson’s plan even before the vote began. The result saw 298 votes for the motion and 56 against — 136 short of what was needed.
The U.K. leader could still try other options to force an election. The government could try to bypass legislation requiring a two-thirds majority to approve a snap election. It has even been mooted that Johnson could call a vote of no confidence in his own government and then call on his MPs (Members of Parliament) to abstain from the vote although this is seen as extremely unlikely.
· Hong Kong leader Carrie Lam said on Wednesday that she has withdrawn a contentious extradition bill that has sparked months of mass protests.
A full withdrawal of the bill is one of five demands that protesters have been fighting for. The proposed bill would have allowed people in Hong Kong to be extradited to mainland China for trial. Despite Lam’s suspension of the bill in June, protesters continued to rally. On Sunday, the city saw its most violent day since mass protests first broke out earlier this year.
Hong Kong protesters released their five demands in July. The demands include the following:
1. Fully withdraw from a proposed bill that would allow Hong Kong people to be extradited to mainland China.
2. Retract any characterization of the movement as a “riot.”
3. Drop all charges against anti-extradition protesters.
4. Set up an independent committee to investigate the use of force by Hong Kong police.
5. Universal suffrage in elections for the city’s chief executive and legislature by 2020.
· Oil prices rose more than 4% on Wednesday, boosted by a wider market pickup on positive news from China, after three days of losses due to fears about a weakening global economy.
Brent futures were up 4.14%, at $60.66 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 4.3%, to $56.26.
That put WTI on track for its biggest daily percentage increase since July 10.
· A private survey showed that activity in China’s services sector expanded at the fastest pace in three months in August as new orders rose, prompting the biggest increase in hiring in more than a year.
Data on Wednesday showed growth in China’s services sector had expanded at its fastest rate in three months in August, despite broader economic headwinds.
The Caixin/Markit Services Purchasing Managers’ Index (PMI) came in at 52.1 in August — its highest reading since May. The 50-mark in PMI readings separates growth and contraction.
Reference: CNBC, Reuters, Fox Business, Euro News
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