DJ Asian Morning Briefing: U.S. Stocks End Lower

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17 Oct 2018 21:35 (GMT)

SNAPSHOT 

U.S. stocks were lower on concerns over higher itnerest rates. U.S. government bond yields were higher after release of the Fed minutes. The dollar was stronger as Fed minutes showed the central bank is ready to contiune gradual rate hikes. Crude oil ended below $70 for the first time in more than three weeks. And gold settled lower.

OPENING CALL 

China publishes economic growth figures for the third quarter. Economists’ median forecast for China’s third quarter gross domestic product growth is 6.6%, only a tick down from the second quarter’s 6.7%, but they warn that increasing trade tensions with the U.S. may create more headwinds to the Chinese economy next year.

EQUITIES 

U.S. stocks edged lower in another volatile session as investors parsed the latest economic and earnings signals amid continuing jitters about higher interest rates.

The S&P 500 closed down less than 0.1%, after falling as much as 1% earlier in the day and briefly turning positive several times in afternoon trading. The Dow Jones Industrial Average fell 92 points, or 0.4%, to 25707. The tech-heavy Nasdaq Composite slipped less than 0.1%.

Major indexes had their best day in six months on Tuesday, paring some of their declines from the past week following robust profit figures. Still, worries about higher interest rates and whether the U.S. economy might be peaking have swung stocks lately. Volatility has surged, and the S&P 500 and Dow industrials are about 4% off their recent records.

Lingering concerns about tariffs weakening the global economy and lukewarm data outside the U.S. also continue to hang over financial markets.

Earlier in the day, it was a second consecutive session of gains for Asia-Pacific stocks, with advances generally bigger than Tuesday’s.

Japan, South Korea and the Philippines each rose by more than 1% while Singapore’s benchmark was solidly above that threshold.

Investor worries grew last week, stoked by money moving out of momentum plays as traders grew skittish, but have since faded. Taiwan’s market was the only one to have closed lower, though Chinese indexes hit fresh multiyear lows before staging a late rally to close higher.

In quite the up-and-down day for Chinese stocks as most others in the region opened strongly and remained so, mainland shares bounced from session lows to finish solidly higher. The Shanghai Composite closed up 0.6% at 2561.61 after earlier hitting another four-year intraday low. Shenzhen indexes did the same before the Shenzhen Composite ended 0.8% higher and the startup-heavy ChiNext climbed 1.2%. Among big caps, industrials rose more than 1% but health-care and consumer-discretionary shares fell as economic worries persisted.

Korea’s Kospi ended up 1% at 2167.51 while the Philippine Stock Exchange index ended up 1.6% at 7099.68.

The Nikkei Stock Average ended up 1.3% at 22841.12.

FOREX 

The U.S. dollar held on to gains as minutes of the Federal Reserve’s September meeting underlined expectations for the central bank to continue on its path of gradual rate increases.

The majority of the Fed’s Open Market Committee believe that rates will have to rise until the economy slows down on the back of rising borrowing costs, according to the minutes. Investors have been speculating about when the rising rate cycle would come to an end, with many expecting hikes in 2019 but fewer beyond then.

The September meeting saw the Fed drop the word "accommodative" from the description of its monetary policy, but the minutes showed few participants expected that policy would have to instead become restrictive.

"The median rate projection was 3.4%. Accordingly it is clear that the majority of officials think the fed-funds rate will need to rise [above] its long-run neutral level to prevent inflation climbing further above the 2% target," wrote Paul Ashworth, chief U.S. economist in a note.

The dollar, measured by the popular ICE U.S. Dollar Index, was among the best performers of the session and extended its gains to be up 0.6% at 95.570, counteracting Tuesday’s sluggishness.

BONDS 

U.S. Treasury yields wobbled but wound up ending higher, after Federal Reserve minutes showed officials believe that economic strength justifies continued interest-rate increases.

The yield on the benchmark 10-year U.S. Treasury note settled at 3.178%, compared with 3.158% Tuesday.

Yields, which rise as bond prices fall, slipped overnight and held onto declines after data showed U.S. housing starts fell more than expected in September, adding to what has been a streak of disappointing data for the housing sector.

Weak economic data can spur demand for Treasurys and other so-called haven assets, sending yields lower.

Yet as U.S. stocks pared their losses around midday, bond yields bounced off their lows, remaining higher for the day after the Fed released minutes from its Sept. 25-26 meeting.

Officials had voted unanimously at that meeting to raise short-term interest rates by a quarter percentage point. The Fed’s minutes showed that, while most officials believe the central bank will have to raise rates once more in 2018 and around three times in 2019, they are less in agreement about how far interest rates will have to rise to reach a so-called neutral level: the point at which rates neither drive up nor stall economic growth.

COMMODITIES 

Oil futures dropped, with the U.S. benchmark ending below $70 a barrel for the first time in more than three weeks, as U.S. government data revealed a sizable climb in domestic crude supplies for a fourth week in a row.

November West Texas Intermediate crude on the New York Mercantile Exchange fell $2.17, or 3%, to settle at $69.75 a barrel. That was the lowest finish for a front-month contract since Sept. 17, according to FactSet data. December Brent crude, the global benchmark, declined $1.36, or 1.7%, to $80.05 a barrel on ICE Futures Europe after an intraday low of $79.17. The settlement was the lowest since Sept. 21.

The Energy Information Administration reported that domestic crude supplies rose by 6.5 million barrels for the week ended Oct. 12. That followed three consecutive weeks of gains. Analysts surveyed by S&P Global Platts had forecast a rise of 1.88 million barrels, while the American Petroleum Institute on Tuesday reported a decline of 2.1 million barrels in crude inventories.

The EIA numbers "were an eye opener with a large build in crude oil and in Cushing, Okla.," the delivery hub for Nymex crude futures, said Tariq Zahir, managing member at Tyche Capital Advisors.

Meanwhile, gold futures settled lower and extended their decline into electronic trading as a benchmark U.S. dollar index climbed to fresh session highs, shortly after the release of minutes from the Federal Reserve’s September monetary policy meeting.

A key benchmark for the dollar, the ICE U.S. Dollar Index, touched an intraday high of 95.543, up 0.5%, as minutes from Federal Open Market Committee’s September meeting revealed that a majority of senior Fed officials believe that interest rates will have to continue to rise until policy becomes restrictive. The minutes came out after the gold-price settlement.

"The minutes pointed to further rake hikes on the horizon" and still shows concerns about inflation, both consumer and producer, into 2019," said Jeff Wright, executive vice president of mineral exploration company GoldMining Inc.

In electronic trading, December gold was at $1,226.10 an ounce. The contract had lost $3.60, or 0.3%, to settle at $1,227.40 an ounce.

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