European Morning Briefing: Hawkish Yellen Boosts Dollar, Euro Extends Losses
Stocks seen nudging higher; EUR/USD 1.1788-91; bund yield 0.410%; Brent crude $58.58; gold $1295.21
-Yellen Defends Fed Rate Rise Plan Despite 'Mystery' of Low Inflation
-Atlanta Fed's Bostic Says He Is Comfortable With Idea of December Rate Rise
-U.S. Officials Aim to Ease North Korea Tensions Amid Heated Rhetoric
-Trump: U.S. Is 'Totally Prepared' For Military Option With North Korea
-Tillerson Heads to China Amid U.S.-North Korea Hostilities
-Alstom, Siemens Announce Merger to Create European Train Business
-Fortum Makes Official Takeover Offer for Uniper
-EU Opens Investigation Into Essilor-Luxottica Merger
-Syngenta Seeks to Settle GMO Corn Cases
-China Industrial-Profit Growth Accelerates
Watch For: Eurozone M3; France, Italy consumer confidence; WTO World Trade Report; speeches by Fed's Bullard, Rosengren
Federal Reserve Chairwoman Janet Yellen on Tuesday defended the central bank's projection for a gradual path of rate increases over the next few years despite the past few months of unexpectedly low inflation.
She said, however, the Fed could slow the pace of rate increases if low inflation persists and officials conclude it reflects long-term changes in the economy rather than transitory factors.
Although Ms. Yellen said she expects inflation to gradually move up to the target, she acknowledged the uncertainty surrounding that prediction.
"How should policy be formulated in the face of such significant uncertainties? In my view, it strengthens the case for a gradual pace of adjustments," Ms. Yellen said. "It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent."
Ms. Yellen's speech boosted market expectations of a rate increase at the Fed's December meeting. Investors pegged a 77.9% chance of a rate move Tuesday, up from 72.8% a day ago, according to CME Group data.
European equities are likely to edge into positive territory Wednesday, with DAX futures up 14 points and FTSE 100 futures 4 points higher.
Asian stock indexes were little changed on Wednesday as investors shrugged off comments from Janet Yellen about the prospect of higher interest rates.
Japanese stocks were lower ahead of interim dividend payments by many Japanese companies. The first half of the fiscal year ends on Saturday, and shareholders as of Tuesday's close were entitled to those dividends.
The ex-dividend sales had a roughly 130-point impact on the Nikkei Wednesday, which was recently down 0.3%.
"With the focus back on monetary policy and particularly fiscal policies in the U.S., markets in the Asian region may sit tight," said Jingyi Pan, a market strategist at IG Group.
Most other Asian stock indexes early Wednesday were within 0.2% of Tuesday's finishes.
Resurgent shares of technology companies helped Nasdaq eke out a 0.2% gain Tuesday.
Even with tech's rise, however, eight of the 11 major S&P 500 sectors closed lower, leaving the broad index little changed, while the Dow Jones Industrial Average slipped less than a percentage point.
"Investors are looking to pick up things that have fallen down a little bit," said Chris Wolfe, chief investment officer at First Republic Bank's wealth-management arm. With bond yields still relatively low, "you get into a place where equities are the only game in town," he added.
Siemens on Tuesday agreed to merge its rail operations with Alstom, aiming to create a European giant with the scale to fight growing competitive threats from state-backed Chinese rivals.
Under the deal, Siemens will have majority control of the new company, receiving slightly more than 50% of its shares, officials from Alstom and Siemens said. Alstom shareholders will receive two special dividends totaling EUR1.8 billion: EUR4 per share for surrendering control of the company and EUR4 per share as an "extraordinary dividend," the companies said.
The deal faces the risk of political backlash in France, where Alstom's factories have been a symbol of national industry for more than a century. Yet the merger has strong backing from French President Emmanuel Macron, who has argued that Europe needs to cooperate across borders to compete better against economic powers in China, the U.S. and elsewhere.
Finland's Fortum said on Tuesday it would launch an offer for energy company Uniper after striking a deal to buy parent company E.ON's stake.
The offer of EUR22 per share would value Uniper at a total EUR8.05 billion, as reported last week, when Fortum revealed it was in advanced talks with E.ON. Fortum agreed to buy E.ON's 46.65% stake in Uniper, bringing E.ON proceeds of EUR3.76 billion.
Fortum has said it aimed for a "full business combination agreement, including commitments to protect the interests of Uniper's key stakeholders."
The European Union's antitrust authority said Tuesday it started an investigation into the proposed merger between Ray-Ban maker Luxottica and optical-lens maker Essilor, which would create a global eyewear colossus.
The deal -- announced in January and poised to forge a firm with a combined market value of around EUR46.3 billion ($54.5 billion) -- threatens to exclude other lens suppliers from markets, according to the EU's executive arm, the European Commission.
"The merged entity may use Luxottica's powerful brands to convince opticians to buy Essilor lenses and exclude other lens suppliers from the markets," the EU said.
Syngenta said it would settle thousands of lawsuits from U.S. farmers who alleged the Swiss agricultural giant's launch of genetically engineered corn seeds cost them money.
Syngenta said Tuesday that its proposed settlement with the farmers would "avoid the uncertainty of ongoing litigation." A Syngenta spokesman said it was too early to comment on the size of any settlement fund. Syngenta isn't admitting to the plaintiffs' charges. The agreement still requires court approval.
The dollar extended gains in Asia with the euro still under pressure following Sunday's German election.
The WSJ Dollar Index was less than 0.1% higher at 86.16, after rising 0.3% Tuesday. The euro fell further to $1.1791.
A weaker-than-expected performance by Chancellor Angela Merkel's conservative alliance and a strong showing for the nationalist Alternative for Germany party suggests Europe's largest economy could face political turbulence. The outcome surprised traders as it followed results in France and the Netherlands earlier this year that were more favorable to a unified Europe.
"The outcome was less clear and less desirable than markets had hoped," said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York. "There's the question about whether this will cause any political jitters in Europe."
Italy's antiestablishment 5 Star Movement is also polling competitively with the ruling Democratic Party, raising investors' concerns that hard-liners could call for a referendum on withdrawing from the euro.
The dollar was further supported on expectations the Trump administration and senior Republican lawmakers in Congress will unveil a stimulative tax reform plan over the next 24 hours, said Commonwealth Bank of Australia. President Trump said Tuesday the planned tax reform measures will cut taxes "tremendously" for the middle class, lower the corporate tax rate and bring back trillions of dollars invested overseas.
Markets will have a better indication of whether tax reform will be possible to implement by year end when the details of the tax plan are released, CBA said.
At 0350 GMT, USD/JPY was 112.36-37, EUR/USD was 1.1788-91 and GBP/USD was 1.3435-37.
U.S. government bonds edged lower Tuesday as investors registered a muted reaction to Janet Yellen's latest speech on inflation and monetary policy.
The yield on the benchmark 10-year Treasury note settled at 2.229%, compared with 2.220% Monday.
Several analysts said the speech offered few surprises, coming shortly after Ms. Yellen delivered a similar message at the conclusion of the Fed's policy meeting last Wednesday.
While there are strong arguments for why yields should be higher than where they are now, the "market needs a bigger catalyst" to break out of its current range, said Bruno Braizinha, senior interest rates strategist at Société Générale.
Oil futures rebounded in Asian trading as American Petroleum Institute data released Tuesday showed U.S. crude inventories fell slightly last week.
Many investors and analysts will be watching for Wednesday's Energy Information Administration survey for the latest reading and expect a modest increase in inventories and refinery use. The market has been buoyant of late, helped by hurricanes hitting the U.S. and solid global demand and Tuesday's retreat in prices was sparked by some investors taking recently-gained profits.
At 0155 GMT, November Nymex oil was up 0.4% at $52.11/barrel while Brent ticked 0.2% higher to $58.58.
London spot gold edged higher in Asia after slipping below a psychological mark of $1,300/troy ounce Tuesday on hawkish remarks by Janet Yellen.
With the prospect of another rate increase this year adding to dollar strength as well as a dialing back of rhetoric between North Korea and the U.S., gold is likely to see any gains capped. Investors are also keeping an eye on President Trump's promised tax reform plans.
At 0222 GMT, spot gold was trading 0.1% higher at $1,295.21/troy ounce.
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