Dollar scales 11-month peak, oil slides ahead of OPEC

LONDON - 21 June 2018: Simmering trade and political tensions and a pumped-up dollar weighed on world shares on Thursday, while oil prices were under pressure before an OPEC meeting expected to increase the world’s supply of crude.

Europe’s main stock markets were back near two-month lows and Wall Street futures had also turned lower [.N], as the jitters that have dominated markets for months began to reassert themselves. [.EU]

Europe’s car shares .SXAP fell to a nine-month lows after Mercedes-Benz maker Daimler (DAIGn.DE) warned the global trade tensions were slowing its sales. Italian stocks and bonds also tumbled on reports a eurosceptic had been given a key finance role [.EU][GVD/EUR].

Asia had been mixed, too, with Japan's Nikkei .N225 adding 0.6 percent and Australia's main index enjoying another strong day before the end of its financial year next week.

China remained the weak link, though, finished more than 1 percent lower .CSI300 .SZSC .SSEC [.SS], and ensured MSCI's broadest index of Asia-Pacific shares .MIAPJ0000PUS fell, dropping as much as 0.5 percent higher at one point.

Strains were compounded by the dollar’s surge to an 11-month high [FRX/]. That raises inflation outside the U.S. and puts pressure on any country or company that has gorged itself on dollar-denominated debt. [EMRG/FRX]

“The reaction of the dollar has been very interesting this week,” said State Street Global Markets head of macro strategy Michael Metcalfe.

“In previous periods this year, fears of a trade war have been dollar-negative, but that has been different this week ... we have had this potential escalation in the trade war, and it has rallied.”

The mere absence of new threats from U.S President Donald Trump on tariffs was nevertheless enough to keep hopes alive that all the bluster was a ploy which would stop short of an outright trade war.

Markets had also been encouraged by the People's Bank of China's move to set firm fixings for its yuan, along with the addition of extra liquidity, though the spot yuan rate CNY=CFXS did hit a fresh five-month low.

There was also much speculation the central bank would cut bank reserve requirements, thus boosting lending power in the economy.

On Wall Street on Wednesday, tech stocks helped the Nasdaq to an all-time high, though the moves were modest. The Dow Jones .DJI fell 0.17 percent, the S&P 500 .SPX gained 0.17 percent and the Nasdaq .IXIC 0.72 percent.

Twenty-First Century Fox Inc (FOXA.O) had climbed 7.5 percent after Walt Disney Co (DIS.N) sweetened its offer for some of the company’s assets to $71.3 billion, looking to topple Comcast Corp’s (CMCSA.O) bid.

WAITING ON THE BOE

The dollar's latest spurt softened safe havens such as the yen, with the dollar adding 0.31 percent to 110.71 yen JPY=.

It also firmed 0.45 percent against a basket of currencies to 95.484 .DXY, hitting an 11-month top and sending the euro EUR= down to a three-week low of $1.1500.

Sterling GBP=D4 was at seven-month low of $1.3108, having made only a fleeting recovery after Britain's Prime Minister Theresa May won another crucial Brexit vote in parliament.

The Bank of England holds a policy meeting later in the session, but not a single analyst polled by Reuters expects a rate hike and some are getting cold feet about a rise in August given recent soft economic data.

While the European Central Bank has signaled an end to bond-buying, it also pledged to keep rates low past next summer, and the Bank of Japan shows no sign of unwinding its stimulus.

Switzerland’s central bank kept its rates deep in negative territory on Thursday and warned that risks to the economy were rising amid all the trade war noise.

“It feels like the yellow warning lights are flashing for the global economic system,” noted analysts at Citi.

“However, with the ECB and BoJ still pumping in liquidity and keeping rates lower for longer, the chances of a systemic event are low.”

Ahead of Friday’s meeting of oil producers in Vienna, Saudi Arabia is trying to convince fellow OPEC members of the need to pump more oil, according to sources familiar with the talks. Iran on Thursday signaled it could be won over to a small rise in output, potentially paving the way for a deal.

“We need to release supply to the market,” Saudi Arabian Energy Minister Khalid al-Falih told reporters in Vienna.

Benchmark Brent crude LCOc1 fell $1.56 a barrel to a low of $73.18 before recovering slightly to $73.34, down $1.40, by 0850 GMT. U.S. light crude CLc1 was $1.00 lower at $64.71.

“It would seem that an aggregate increase in production for OPEC+ of between 500,000 barrels per day (bpd) and 1 million bpd is the range that is being considered,” said Harry Tchilinguirian, head of oil strategy at French bank BNP Paribas.