Rising US dollar, oil prices set pace in global financial markets

The strong rise in the US dollar on the back of continued economic growth in the past quarter reverses an earlier trend that growth was picking up in Europe and other major economies

As a result, the US currency was hammered last year and in the first quarter. But as global growth has slowed and the US Federal Reserve has adopted a more aggressive stance on interest rates, the dollar’s advance has gone on longer than many anticipated.

The WSJ Dollar Index’s basket of 16 other currencies rose 5.1% in the second quarter for its first quarterly gain since 2016.

In the week ahead, the Fed will on July 5 – a day after US markets are closed for Independence Day – release minutes of its June meeting at which officials raised their benchmark interest rate for the second time this year and indicated two more increases by year’s end.

The minutes should provide more details of their internal discussions about the economic outlook and the path for rates.

US inflation gathers steam
Investors got another sign that inflation is firming. The Fed’s preferred inflation gauge, the price index for personal consumption expenditures, rose 0.2% in May and was up 2.3% from a year earlier. Excluding volatile food and energy costs, prices rose 0.2% in May from April, and 2% from a year earlier.

Both year-on-year inflation measures posted their largest increase in more than six years, since March 2012.

The yield on the benchmark 10-year US Treasury note rose for the fourth straight quarter, briefly topping 3% on concerns about mounting trade tensions and slower global growth.

The yield peaked at a nearly seven-year high of 3.109% on May 17 but has since fallen, settling at 2.847% on Friday.

On July 6, the June jobs report from the Labor Department will signal whether the steady pace in growth will push the unemployment rate down further in the coming months.

In May, the unemployment rate edged down to 3.8%, matching April 2000’s level as the lowest reading since the 1960s.

US trade data due
Also on Friday, the Commerce Department publishes May international trade data. The US exported a record amount of oil and fuel in April, helping to narrow the nation’s trade gap while giving the economy a lift. Economists predict the trade deficit hit $US43.8 billion in May.

In trade news at the weekend, President Donald Trump said the motor vehicle sector would give him the most leverage in trying to win concessions from trading partners such as Mexico, Europe and Japan.

“You know, the cars are the big one,” he said on Fox News. “We can talk steel, we talk everything. The big thing is cars.”

The American car market is much bigger than the steel market, and the economies of Mexico, Germany and Japan in particular are much more dependent on exporting vehicles to the US.

The US imported about $29b in steel in 2017, compared with about $US192b in cars. The car industry makes up nearly a quarter of that country’s $US500b-plus trade deficit.

“The European Union is possibly as bad as China, just smaller, OK,” Mr Trump said. “It’s terrible what they did to us … take a look at the car situation. They send a Mercedes in; we can’t send our cars in.”

Europe imposes a 10% tariff on car imports compared with 2.5% by the US. However, the US imposes a 25% tariff on imports of light trucks.

General Motors has followed Daimler in posting profit warnings about the potential impact on global sales.

“We’re starting to see some corporate impact to some of the rhetoric coming out of Washington,” Voya Investment Management head of asset allocation Barbara Reinhard says.

“Potentially targeting the auto sector has a far greater economic impact than anything that has been done so far.”

Meanwhile, Canada implemented its tit-for-tat trade tariffs at the weekend and China followed through on a pledge announced in May to cut tariffs on car imports to 15% from 25%.

Shares gain on trade war pause
On Wall Street, investors took advantage of a momentary pause in trade tensions to boost major indexes’ gains for the second quarter.

The Dow Jones Industrial Average rose as much as 293 points early in Friday’s session before paring its gain in the final hour of trading.

The Dow added 0.2%, to 24,271. The S&P 500 rose less than 0.1% while the Nasdaq Composite gained 0.1%.

The gains pushed each further into positive territory for the second quarter. The Dow and S&P 500 rose 0.7% and 2.9%, respectively, to bounce back from losses suffered in the first three months of the year.

The tech-heavy Nasdaq has added 6.3%, its strongest three-month period of trading since the first quarter of 2017.

“It’s a nice snap back after a rough losing streak,” US Bank Wealth Management investment director Jeff Kravetz says, adding that mostly upbeat stress tests, alongside gains in oil prices, made bank and energy stocks attractive buys.

However, “trade weighs on our view for the rest of the year,” he says.

Stocks elsewhere mostly rose after EU leaders agreed to help coastline countries by redistributing some of the migrants rescued in the Mediterranean. The deal assuaged some concerns over German Chancellor Angela Merkel’s fragile government and Italy’s new coalition.

The Stoxx Europe 600 rose 0.8% to gain 2.4% over the past three months.

Stocks in Asia closed the week with gains, led by markets in Hong Kong, Shanghai and Shenzhen. Hong Kong’s Hang Seng climbed 1.6%, while the Shanghai Composite rose 2.2% from its lowest close since March 2016.

Both indexes posted steep quarterly losses amid building worries about the outlook for trade and the Chinese economy.

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