[NEW YORK] Minutes of the Federal Reserve's last meeting supported the US dollar, while also boosting equities as the record indicated policy makers may increase interest rates soon but maintain a gradual approach to further tightening. The pound rallied.
The Bloomberg Dollar Spot Index climbed to a seven-month high after the minutes showed several officials said a rate hike was needed "relatively soon". The greenback advanced to its strongest level since the start of September versus the yen. The S&P 500 Index rose from a one-month low, while 10-year Treasuries capped a second day of declines. Sterling gained for the first time in five days after UK Prime Minister Theresa May accepted that Parliament should be allowed a say on her Brexit plan. Oil fell a second day.
Investors have boosted wagers on a Fed hike, with odds the US central bank will lift borrowing costs this year at 66 per cent, up about four percentage points from a week ago. Better-than-estimated data on manufacturing to services coupled with concern inflation will accelerate is driving the bets, which held gains as the Fed minutes confirmed officials are moving toward tightening.
The meeting record showed that policy makers viewed last month's decision to hold fire was a close call. Higher US rates would further amplify the country's divergence with policy approaches in Japan and Europe.
"December was already priced in, so this is just confirming," said Melda Mergen, senior vice president and director of US equities in Boston at Columbia Threadneedle Investments.
"I think they will definitely go in that direction unless something big happens." The Fed left the benchmark lending rate unchanged in a range of 0.25 per cent to 0.5 per cent for the sixth straight meeting last month, even as a majority of the 17 participants still forecast at least one hike this year.
Kansas City Fed president Esther George, Cleveland's Loretta Mester and Eric Rosengren of Boston dissented at the meeting in favor of higher rates. Officials next meet Nov 1-2, just before the US presidential election on Nov 8.
"It was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation," minutes from the Sept 20-21 gathering in Washington showed.
Bloomberg's US dollar index, which tracks the currency against 10 major peers, rose 0.2 per cent as of 5pm New York time, climbing for a third straight session and reaching its highest level since March. The greenback added 0.7 per cent to 104.21 yen, touching its strongest level since Sept 2, and gained 0.4 per cent to US$1.1007 per euro.
"The US has a rate-tightening bias and the rest of the world generally has a rate-easing bias," said Philippe Bonnefoy, founder of Switzerland-based hedge fund Eleuthera Capital AG, based in Pfaffikon.
"The US dollar is responding to that. The US dollar is very comfortably bid and that bid will continue into year-end." Even so, the currency's 14-day relative-strength index is nearing 69, a level unseen since January when anxiety over China's economic slowdown whipsawed markets. Some traders see an RSI level of 70 or above as a signal that gains may have become overdone.
The pound strengthened against most major peers, paring an advance of as much as 1.7 per cent to 0.7 per cent after Ms May clarified her position in a weekly question session in Parliament. The prime minister sidestepped calls to guarantee lawmakers a vote on the Brexit plans, saying officials would "have every opportunity to debate this issue."
Elsewhere, the rand rebounded after the chief of South Africa's National Prosecuting Authority said he is willing to reconsider the decision to charge Finance Minister Pravin Gordhan with fraud. Meanwhile, the Thai baht tumbled amid concern over the health of the king and on the prospect of a US rate hike this year.
The S&P 500 ended Wednesday up 0.1 per cent after tumbling the most in a month Tuesday amid disappointing corporate earnings. Apple Inc contributed the most to the gauge's advance, while Cisco Systems Inc slumped with other network-equipment makers after Ericsson AB said its business was deteriorating faster than expected.
After surging as much as 7.2 per cent this year through a record in August, the S&P 500 has failed to push higher as analysts predict a sixth quarter of falling earnings and speculation intensifies that the Fed will raise borrowing costs this year.
"The combination of bad out-the-gate earnings reports, rising sense of Fed raising rates, and bond yields going up is a tough combination for stocks," said Jim Paulsen, chief investment strategist at Wells Capital Management.
"The market is going to need a show of momentum economically and on earnings to handle higher yields."
Concern over a slowdown in earnings also weighed on European stocks. Ericsson tumbled 20 per cent after reporting a slump in third-quarter sales and profitability, while Glencore Plc led commodity producers higher.
In Asia, futures on Japan's Nikkei 225 Stock Average benefited from the yen's retreat, with contracts rising at least 0.3 per cent in Osaka, Singapore and Chicago. Futures on stock gauges in Australia and Hong Kong retreated, while those in China and South Korea edged higher. Some futures trading ended before the Fed minutes were released.
Benchmark 10-year Treasury yields rose by one basis point, or 0.01 per centage point, to 1.77 per cent, after jumping five basis points last session, according to Bloomberg Bond Trader data.
US government debt has lost 0.9 per cent so far this month, according to Bloomberg Barclays US Treasury Index data, with benchmark yields rising every trading day except Oct 7. That's already putting bonds on pace for their biggest decline since February 2015, and comes as government securities have fallen around the world this month.
Investors can expect a "somewhat significant" increase in nominal bond yields, Mike Swell, co-head of global portfolio management for fixed income at Goldman Sachs Asset Management in New York, said in an interview on Bloomberg TV Tuesday.
A US$20 billion US 10-year debt auction Wednesday drew the highest yield at a sale of the securities since March. That lured investors, with a gauge of demand known as the bid-to-cover ratio rising to the most since June. A US$24 billion three-year note sale earlier in the day drew the highest auction yield since January.
Oil dropped on speculation the Opec agreement to trim crude output won't succeed in reducing supply. Crude got a boost after the Organization of Petroleum Exporting Countries agreed late last month to have a new output range of 32.5 million to 33 million barrels a day. Opec Secretary-General Mohammed Barkindo said Wednesday that talks with Russia about production curbs have been "very constructive".
The country has been sending mixed signals about its commitment to an output cut or freeze.
"We pushed solidly above US$50 on the Opec agreement and are now refocusing on whether they will actually follow through with actual cuts," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut. "Any gains will be tempered until there's evidence they are honoring their production cuts."
West Texas Intermediate crude for November delivery fell 1.2 per cent to US$50.18 a barrel on the New York Mercantile Exchange. Brent for December settlement dropped 1.1 per cent, to US$51.81 a barrel on the London-based ICE Futures Europe exchange.
Gold for immediate delivery rose 0.2 per cent to US$1,255.25 an ounce in only its third rising day in 12 sessions. Most industrial metals also advanced.
Cotton surged as much as 3.9 per cent after the US made a larger-than-expected cut to its domestic inventories estimate, while corn slid the most in four weeks as the government indicated local production is topping analysts' estimates.