Bonds Climb With Gold as European Stocks Slide on Fed Fallout

 

Bonds surged with the yen as the Federal Reserve’s caution regarding the global economic outlook rippled through markets.
European stocks headed for the biggest drop in two weeks, while gold extended its first weekly gain in four after Fed Chair Janet Yellen kept interest rates on hold, partly on concern over slowing growth in China. German 10-year bund yields tumbled the most since July as the decision spurred speculation that the euro region’s central bank could boost stimulus. Emerging markets rallied on prospects for rates staying lower for longer.

While Yellen said most policy makers still expect a rate increase this year, traders of fed fund futures pushed bets to next year. For the third straight quarter, Fed officials lowered projections for the funds rate in coming years, saying in a statement that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
“The China comments were more important than the decision itself, and Europe is more dependent on the Chinese economy than the U.S. is,” said John Plassard, senior equity sales trader at Mirabaud Securities in Geneva. “Yellen also said that inflation is very low and will last for several months. That would conclude that there can’t be a Fed hike in October and it also tells us that the probability of a Fed hike in December is really low.”
Futures traders are pricing in a 17 percent probability the central bank increases the target range in October, a 44 percent chance by the December meeting and a 52 percent likelihood by January.

Bonds

Bonds gained from Australia to Germany, while Treasuries held an advance from Thursday. The yield on 10-year German bunds, the euro region’s benchmark sovereign securities, dropped 10 basis points to 0.68 percent at 6:07 a.m. in New York, set for its biggest decline since July 7, on prospects for further easing by the European Central Bank.
Rates on similar-maturity Italian bonds fell seven basis points to 1.83 percent, while those on Spain’s declined seven basis points to 2.02 percent.
“The implication for Europe is that the ECB may need to ease policy further,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London.
The yield on U.S. 10-year Treasuries fell one basis point to 2.18 percent on Friday, after sliding 10 basis points the previous day. The rate on Australian notes due in a decade slid nine basis points to 2.78 percent, and neighboring New Zealand’s benchmark yield fell five basis points.
(For more news on bonds, see TOP BON.)

Currencies

The yen rose 0.8 percent to 119.11 per dollar. The era of a weaker yen is coming to an end and Japan’s currency may strengthen toward 115 per dollar, according to Eisuke Sakakibara, a former vice finance minister.

The dollar dropped against 14 of its 16 major peers on Friday, heading for weekly declines against the euro and the yen.
The dollar was at $1.1450 per euro on Friday, after tumbling 1.3 percent to $1.1435 the previous day. It has declined 1 percent against Europe’s common currency this week. The Bloomberg Dollar Spot Index dropped to its lowest level since Aug. 24.
The Australian, New Zealand and Canadian dollars were among the best performers as investors were drawn to currencies with higher yields.
The Aussie was also boosted after Reserve Bank of Australia Governor Glenn Stevens said he was “pretty content” with the level of interest rates and the economy appears to be coping with a drop in mining investment.
(For more news on currencies, see TOP FX.)

Stocks

Automakers and banks led declines in Europe, with the Stoxx Europe 600 Index dropping 1.1 percent and trimming a second weekly advance to 0.4 percent. The volume of shares changing hands was 26 percent greater than the 30-day average.
E-mini futures on the Standard & Poor’s 500 Index expiring in December added 0.1 percent after the gauge fluctuated between gains of 1.3 percent and losses of 0.4 percent yesterday. The measure has risen 1.5 percent this week, heading for its first back-to-back weekly increases since June.
U.S. stocks erased gains yesterday after Yellen indicated that global developments overshadowed signs of strength in America.
The expiration of some futures and options on stocks and indexes, known as quadruple witching, may add to market volatility today.
(For more news on stocks, see TOP STK.)

Emerging Markets

The MSCI Emerging Markets Index added 0.7 percent, taking this week’s advance to 3.8 percent, the most since April. India’s Sensex climbed 1.4 percent and South Korea’s Kospi gained 1 percent.
The Hang Seng China Enterprises Index increased 0.4 percent, extending this week’s gain to 3 percent, amid data showing property prices rising in more Chinese cities during August. The Shanghai Composite Index closed 0.4 percent higher, trimming a weekly drop to 3.2 percent.
India’s rupee jumped 1 percent and South Africa’s rand climbed 1.4 percent, lifting a gauge of 20 currencies up 0.4 percent.
(For more news on emerging markets, see TOP EM.)

Commodities

Gold advanced 0.4 percent to $1,136.36 an ounce, extending its three-day advance to 2.9 percent.
Oil headed for a weekly increase after an unexpected decline in U.S. crude stockpiles. West Texas Intermediate crude was little changed at $46.93 a barrel, leaving it 5.1 percent higher on the week. Brent crude advanced 1.1 percent to $49.62.