New Global Growth Concerns Ignite the Dollar

The US dollar has fully recouped and more so the losses inflicted in the immediate aftermath of the FOMC’s decision to recycle the MBS and Agency bond holding proceeds backing into Treasuries. Its somewhat more gloomy outlook has been followed by a disappointing machinery order data from Japan and softer data from China has heightened growth concerns again and this has led to the buying of the low yield currencies today—the dollar, Swiss franc and Japanese yen.

The dollar dipped below the JPY85 level for the first time since late last year, but no follow through selling materialized. Stops are thought to lay below JPY84.80. The UK reported soft data as well (Nationwide consumer confidence lowest since April 09 and claimant count decline was a bit less than expected). This coupled with a dovish BOE quarterly inflation report overwhelmed the more favorable flows that market talk had linked to M&A flows and possible dividend conversion. Emerging market currencies are also under pressure today.

US shares recouped about half their losses in the aftermath of the FOMC decision, but Asian and European shares have slumped. The MSCI Asia-Pacific Index shed 1.6%, its biggest loss in two months and brings the loss thus far this week to 2.7%. The soft economic data and stronger yen contributed to the 2.7% decline in the Nikkei, easily the region’s worst performer. All but 5 companies in the Nikkei 225 fell today. China’s equities were the main exception to the regional downdraft and the Shanghai Composite rose almost 0.5%. In the region as a while, financial and technology sectors were the hardest hit. European bourses are faring now better. They mostly opened about a little more than 1% lower and have languished around there through the first several hours. In Europe, basic materials, technology and financials are the largest drags. The early call is for opening losses of similar magnitude in the US.

The renewed growth concerns, the sell-off in equities and the Fed-inspired rally in US Treasuries has triggered a global bond market rally. The 10-year JGB yield is just below 1% and the 30-year yield is at new 7-year lows near 1.625%. Benchmark 10-year yields are mostly off 5-7 basis points in Europe, with the gilts outperforming and the 10-year yield is off 8 bp. The rally in US Treasuries is also continuing. The Federal Reserve will provide more details of its purchases after the market closes today, but it has already indicated it will focus on the 2-10 year part of the curve, so the longer end is expected to under-perform. Elsewhere, note that late yesterday S&P revised higher its outlook for Czech Republic to positive from stable (currently rated “A”) and may be why, though down about 0.5% against the euro today, is faring considerably better than the Polish zloty and Hungarian forint. Norway’s central bank meets but is widely expected to stand pat for the fourth month.