Markets struggle to extend highs as dollar stabilises

Stock markets are struggling to extend multi-week highs as the dollar stabilises, though Chinese equities rallied after the regulator loosened restrictions on speculation.

In a choppy session the pan-European Stoxx 600 is down 0.2 per cent after a mostly soft performance in Asia, where activity was thinned by Japan’s closure for a holiday. On Wall Street, the S&P 500 is flat at 2,049.

The Wall Street barometer closed last week at its highest level in 2016, having rallied 13.3 per cent off a two-year intraday low hit on February 11th.

A rebound for commodity stocks amid a bounce in oil prices helped sentiment over that period, as did waning fears about a US economic slowdown and more evidence that central bank policy remains mostly dovish.

The CBOE Vix index, a measure of expected volatility known as Wall Street’s “fear gauge”, finished Friday’s session at 14.0 – its lowest close in seven months, and an illustration of how confident investors have become.

The start of the new week sees a more tentative tone, however, after market technicians’ noted that the S&P 500’s 14-day relative strength index, a momentum measure, finished last week near the 70 level that marks supposedly “overbought” territory.

And the caution on Monday comes despite the oil market rally grinding on.

Brent crude, the international energy benchmark, is up 0.1 per cent to $41.24 a barrel, shrugging off dashed hopes for more substantial production cuts following news that the US oil rig count rose for the first time since December.

In currencies, most moves are fairly minor, with the dollar index up less than 0.2 per cent to 95.24 as the buck is flat versus the euro but adds 0.1 per cent against the yen.

“On the whole spot G10 FX has traded within recent tight ranges and this has resulted in an apparent lack of desire to get too heavily involved,” said analysts at Citi in a note to clients near the European open.

But sterling is notably softer, losing 0.5 per cent to $1.4398 as internal divisions in the ruling Conservative party are seen bolstering those who favour “Brexit”.

Government bond markets are taking no succour from the dwindling risk appetite. Ten-year Treasury yields, which move inversely to the price, are up 3 basis points at 1.90 per cent, and equivalent maturity Bunds are gaining 1bp to 0.23 per cent.

Gold is down $11 to $1,243 an ounce.

In contrast to the generally reticent tone across most markets, Chinese equities started the week on a positive note. The Shanghai Composite rose 2.2 per cent as investors welcomed news that the China Securities Finance Corp, which lends money to brokerages to fund margin financing, was to resume lending and trim the cost.

The move is seen as encouraging more speculative investment to underpin the stock market and allowed equities to shrug off warnings about the high level of corporate borrowing and the risks it poses to the economy.

Zhou Xiaochuan, People’s Bank of China governor, warned at the weekend that the country’s corporate debt levels were too high.

Reflecting on the governor's comments, Zhou Hao, an economist at Commerzbank, said: "It appears that China has started a new round of deleveraging in targeted sectors, which indeed makes perfect sense from a fundamental point of view.

“It looks like Chinese authorities see that it is not wise to keep these zombie companies in the economy, which not only bring in significant distortion in the financial sector but also create moral hazard if governments repeat to bail out these companies.”

Copyright The Financial Times Limited 2016