Wall Street opens lower as rally loses momentum

Markets are subdued, with Wall Street opening lower, as the recent global “risk on” rally struggles for momentum.

In equities, the pan-European Stoxx 600 is down 0.3 per cent as weakness in miners leaves London’s FTSE 100 down 0.2 per cent. In Asia, Japan’s Nikkei 225 shed 0.3 per cent and China’s Shanghai Composite rose less than 0.4 per cent.

In New York, the S&P 500 is slipping 0.4 per cent to 2,042, not helped by poorly received results from Nike.

Global shares have rallied for five consecutive weeks, with the FTSE All-World Index up more than 11 per cent in that period.

Stocks and bonds have received a boost over the past fortnight as a handful of major global central banks struck a dovish tone, prompting expectations for monetary policy to remain accommodative for some time.

But Wall Street’s S&P 500 index, which by the end of last week had jumped 13 per cent off its February lows, closed the last two sessions with moves of just 0.1 per cent, suggesting the rally is either consolidating or running out of puff.

A holiday-shortened week because of the Easter break is likely contributing to the cautious tone. Share trading volumes have been notably meagre in New York and Tokyo over the last few sessions.

Markets have been sluggish since the Federal Reserve issued a dovish policy statement at its meeting last week. That initially weighed on the dollar, prompting other currencies to rally, which in turn put pressure on stocks of exporters, particularly those in Japan.

However, the dollar index (DXY), a measure of the US currency versus a basket of global peers, has since reversed course, propped up this week by more hawkish commentary from Fed officials. Unfortunately, that shift also seems to be hampering risk appetite by sowing confusion about Fed policy.

The DXY is 0.5 per cent higher on Wednesday at 96.11 as the euro slips 0.3 per cent to $1.1178.

Sterling is down 0.6 per cent to $1.4117 and the cost of pound/dollar three-month option volatility - which would now cover the June 23 referendum on EU membership - has jumped to its highest in nearly six years.

The DXY is on track for a fourth straight day of gains - though here too the average advance is only about 0.3 per cent per session.

Analysts at DBS suggested there was a “contradiction in the market’s recent bullishness” on asset prices.

“That is, risk assets are pushing higher on the basis that rates will stay low for longer, the dollar stays weak and the US economy strengthens. But they cannot all be true simultaneously for any extended period of time.”

DBS highlighted creeping US inflation, noting that if the economy strengthened further, the Fed would again come under pressure to raise rates, which will push the dollar higher and cause more volatility in global financial markets.

Investors initially moved toward haven assets such as gold and government bonds on Tuesday following a series of bomb attacks in Brussels. Gold gained 0.4 per cent on Tuesday but is 2.3 per cent softer on Wednesday at $1,219 an ounce in response to the firmer buck.

German and UK government 10-year bonds rallied on Tuesday but their US counterparts staged a late sell-off and that move is causing weakness in Bunds and gilts in the current session.

The US Treasury yield, which moves inversely to the price, is easing 3 basis points to 1.91 per cent while the equivalent maturity German and UK paper are flat at 0.22 per cent and 1bp higher at 1.46 per cent, respectively.

In oil markets, Brent crude, the international benchmark, is off 2.6 per cent to $40.72 a barrel -– a decline that is also weighing on broader market sentiment on Wednesday.

Crude rallied modestly on Tuesday amid reports that Saudi Arabia was prepared to join an oil production freeze next month regardless of whether Iran would participate or not, in a move that would go some of the way to justifying a nearly 50 per cent price rebound since mid-January.

Copyright The Financial Times Limited 2016