The Jim Bakker Show

China Jan FX reserves fall below $3 trillion for first time in nearly 6 years

dollar sign next to other currencies representing economy

By Kevin Yao

BEIJING (Reuters) – China’s foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in January for the first time in nearly six years, though tighter regulatory controls appeared to making some progress in slowing capital outflows.

China has taken a raft of steps in recent months to make it harder to move money out of the country and to reassert a grip on its faltering currency, even as U.S. President Donald Trump steps up accusations that Beijing is keeping the yuan too cheap.

Reserves fell $12.3 billion in January to $2.998 trillion, more than the $10.5 billion that economists polled by Reuters had expected.

While the $3 trillion mark is not seen as a firm “line in the sand” for Beijing, concerns are swirling over the speed at which the country is depleting its ammunition, sowing doubts over how much longer authorities can afford to defend both the currency and its reserves.

Some analysts fear a heavy and sustained drain on reserves could prompt Beijing to devalue the yuan as it did in 2015, which could throw global financial markets into turmoil and stoke political tensions with the new U.S. administration.

While Beijing quickly downplayed the fall below the $3 trillion level, the breach could bolster China’s argument that it not deliberately devaluing its currency, ahead of the U.S. Treasury’s semi-annual report in April on currency manipulators.

To be sure, the January decline was much smaller than the $41 billion reported in December, and was the smallest in seven months, indicating China’s renewed crackdown on outflows appears to be working, at least for now.

Economists expect more forceful policing of existing regulatory controls after the latest slide, though China’s financial system is notoriously porous, with speculators quickly able to find new channels to get funds out of the country.

“With FX reserves below $3 trillion, we can expect capital controls as well as tightening yuan liquidity to continue, as the authorities try to avoid a further drawdown,” said Chester Liaw, an economist at Forecast Pte Ltd in Singapore, referring the central bank’s surprise hike in short-term interest rates on Friday.

While the world’s second-largest economy still has the largest stash of forex reserves by far, it has burned through over half a trillion dollars since August 2015, when it stunned global investors by devaluing the yuan.

The yuan <CNY=CFXS> fell 6.6 percent against a surging dollar in 2016, its biggest annual drop since 1994.

The crackdown is threatening to squeeze legitimate business outflows from China as well, with some European companies reporting recently that dividend payments have been put on hold and Chinese firms having a tougher time winning approval for overseas acquisitions.

“In their efforts to reduce outflows, the authorities have so far avoided contentious, high profile measures such as formally re-imposing restrictions on outflows or re-introducing

rules on the sale of U.S. dollar receipts by exporters, for fear of damaging the reputation of China’s reform process,” said Louis Kuijs, head of Asia Economics at Oxford Economics.

“Our analysis suggests, however, that they are likely to end up taking such steps eventually.”

COULD HAVE BEEN WORSE?

The drop in January’s reserves would have been worse if not for a sudden reversal in the surging U.S. dollar in January, some analysts said. The softer dollar boosted the value of non-dollar currencies that Beijing holds.

“Based on our calculation, the FX valuation effect alone would lead to a sizeable increase of reserves by US$28 billion,” economists at Citi said in a note.

However, despite tighter capital curbs and a bounce in the yuan, Citi estimated net capital outflows still intensified to nearly $71 billion in January from $51 billion in December.

Adding to the pressure, many Chinese may have exchanged yuan for dollars and other currencies to travel overseas during the long Lunar New Year holidays.

“Today’s FX reserve number suggests that the authorities are willing to trade a relatively stable yuan-dollar exchange rate for falling FX reserves because of financial stability concerns,” the economists at Citi added.

The yuan has gained nearly 1 percent against the dollar so far this year.

But currency strategists polled by Reuters expect it will resume its descent soon, falling to near-decade lows, especially if the U.S. continues to raise interest rates, which would trigger fresh capital outflows from emerging economies such as China and test Beijing’s enhanced capital controls.

The drop in reserves in January was mainly due to interventions by the central bank as it sold foreign currencies and bought yuan, China’s foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), said in a statement.

But SAFE said that changes in China’s reserves were normal and the market should not pay too much attention to the $3 trillion level.

HOW LOW CAN THEY GO?

While estimates vary widely, some analysts believe China needs to retain a minimum of $2.6 trillion to $2.8 trillion under the International Monetary Fund’s (IMF’s) adequacy measures.

If the dollar’s rally gets back on track, fears of a yuan devaluation would likely spark more intense capital flight.

“The fact that China holds less than $3 trillion in reserves right now means that China has to rethink its intervention strategy,” said Zhou Hao, a senior emerging markets economist at Commerzbank in Singapore.

It does not make much sense to keep sharply draining reserves if market expectations of further yuan weakness are unlikely to change, he added.

(Reporting by Beijing Monitoring Desk and Kevin Yao; Editing by Kim Coghill)

U.S. trade deficit falls as exports hit more than 1-1/2 year high

Freighters and cargo containers ready for trade

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. trade deficit fell more than expected in December as exports rose to their highest level in more than 1-1/2 years, outpacing an increase in imports.

The Commerce Department said on Tuesday the trade gap dropped 3.2 percent to $44.3 billion, ending two straight months of increases. The trade deficit rose 0.4 percent to a four-year high of $502.3 billion in 2016. That represented 2.7 percent of gross domestic product, down from 2.8 percent in 2015.

The Trump administration is targeting trade in its quest to boost economic growth. President Donald Trump has vowed to make sweeping changes to U.S. trade policy, starting with pulling out of the 12-nation Trans-Pacific Partnership trade pact.

Trump also wants to renegotiate the North American Free Trade Agreement (NAFTA), which was signed in 1994 by the United States, Canada and Mexico. Economists, however, warn that the America-first or protectionist policies being pursued by the administration are a threat the country’s economic health.

Economists polled by Reuters had forecast the trade gap slipping to $45.0 billion in December.

When adjusted for inflation, the deficit decreased to $62.3 billion from $63.9 billion in November. The improvement in the deficit at the end of the year could set up trade to be a modest drag on growth in the first quarter.

U.S. financial markets were little moved by the report as the government published an estimate of the goods deficit last month. Trade slashed 1.7 percentage points from gross domestic product in the fourth quarter, leaving output rising at a 1.9 percent annualized rate. The economy grew at a 3.5 percent pace in the third quarter.

EXPORTS INCREASE BROADLY

In December, exports of goods and services increased 2.7 percent to $190.7 billion, the highest since April 2015, as shipments of advanced technology goods such as aerospace, biotechnology and electronics, hit a record high.

There were increases in exports of industrial supplies and materials, capital goods, consumer goods and motor vehicles.

Still, exports remain constrained by relentless dollar strength. The dollar gained 4.4 percent against the currencies of the United States’ main trading partners last year.

Exports to the European Union jumped 10.1 percent, with goods shipped to Germany surging 12.4 percent.

A Trump trade adviser has accused Germany of unfairly benefiting from a weak euro. Exports to China, another sore point for Trump, fell 4.1 percent.

Imports of goods and services rose 1.5 percent to $235.0

billion in December, the highest level since March 2015. Part of the increase in the import bill reflects higher oil prices, as well as strengthening domestic demand.

The price of imported crude oil averaged $41.45 in December, the highest since September 2015. Food imports hit a record high, as did those of motor vehicles.

Imports of goods from China fell 7.6 percent in December. Germany saw a 1.4 percent increase in merchandise shipped to the United States in December.

With both exports and imports falling, the politically sensitive U.S.-China trade deficit dropped 9.0 percent to $27.8 billion in December. The trade deficit with China decreased $20.1 billion to $347.0 billion in 2016.

The trade gap with Germany declined 6.2 percent to $5.3 billion in December. The trade deficit with Germany narrowed $10.0 billion to $64.9 billion last year.

The United States also saw big declines in its trade deficits with Canada and Mexico in December.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

Savaged dollar steadies ahead of Fed, stocks rise

By Marc Jones

LONDON (Reuters) – The dollar steadied on Wednesday and world stocks made their first gain in five days, having been whipped into worry by Trump administration claims that Germany, Japan and China had devalued their currencies.

The dollar <.DXY> suffered its worst January in three decades after President Donald Trump complained that every “other country lives on devaluation,” while the U.S sat by “like a bunch of dummies”.

It recovered a modest <.DXY> 0.15 percent in Asian and European trading. Bruised dollar bulls reassured themselves that the Federal Reserve should signal later that it still plans to raise U.S. interest rates a number of times this year.

Wall Street futures also pointed to a 0.3-0.6 percent bounce <ESc1> after Apple <AAPL.O> reported a strong revival in iPhone sales and healthy results from a slew of Europe’s bluechips had lifted its big bourses 1 percent.

That all combined to help MSCI’s 46-country All World index snap a four-day losing streak <.MIWD00000PUS> though the recent protectionist noises from Trump’s team kept markets jittery.

Trump’s top trade adviser had also said on Tuesday that Germany was using a “grossly undervalued” euro to exploit its trading partners. The accusations drew rebuttals from German and Japanese officials, but looked likely to run for some time.

“The issue is at what point do investors get concerned that the potential negative shock effects from trade, immigration and geopolitics overwhelm the positives (of potential U.S. stimulus),” said Bluebay asset management head of Credit Strategy David Riley.

There was little reaction to a raft of European data. Sterling <GBP=D3> nudged up after figures showed its fall since June’s Brexit vote had stoked the sharpest rise in factory costs on record a day ahead of a Bank of England inflation report.

Euro zone factories meanwhile started 2017 by ramping up activity at the fastest rate for nearly six years.

Despite that France’s government borrowing costs continued to outpace Germany’s or even Belgium’s as pressure simmered ahead of elections in April and May.

Marine Le Pen’s strongly polling National Front party said on Tuesday it would put leaving the euro at the heart of its economic platform.

“The France (bond yield) spread to Belgium is the gauge we use for political risk, and that has widened further after an adviser to Le Pen fleshed out their Frexit plans,” said ING strategist Martin van Vliet, using a term similar to the Brexit

FED ON HOLD

Overnight in Asia, Japanese investors seemed relieved the yen’s rise <JPY=> against the dollar on Tuesday had not been larger. They nudged the Nikkei <.N225> up 0.6 percent and MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> up 0.1 percent in a largely quiet session.

Chinese markets were still on holiday but surveys from the Asian giant showed manufacturing and services activity continued to expand in January.

Exports from tech bellwether South Korea also grew at the fastest pace in almost five years, another sign the global economy had been on the mend before all the talk of U.S. protectionism darkened the air.

Investors’ hopes for a fiscal boost to the world’s largest economy under Trump have been tempered by controversial and protectionist policies that have seen him suspend travel to the United States from seven Muslim-majority countries.

The policy uncertainty only added to expectations the U.S. Federal Reserve will keep interest rates steady when it concludes a two-day meeting later Wednesday.

The recent retreat in the dollar also boosted a range of commodities, with copper near two-month highs as a strike also loomed the world’s biggest copper mine in Chile <CMCU3>.

Oil edged further above $55 a barrel too supported by signs that Russia and OPEC producers are delivering on promised supply reductions. Brent crude oil <LCOc1> for April added 55 cents to $56.14, while U.S. crude <CLc1> rose 47 cents to $53.29.

(Additional reporting by Wayne Cole in Sydney; Editing by Toby Chopra)

Momentum and risk: world economy enters 2017 with winds fore and aft

By Jonathan Cable and Nichola Saminather

LONDON/SINGAPORE (Reuters) – Factories across the world fired up – or at least kept up activity – in January with some registering multi-year output highs, just as a barrage of political risks threatens the global economy with potential harm.

Rising protectionism from the United States, concerns over how Britain’s negotiations on leaving the European Union will pan out, and national elections in Europe’s largest economies all lie ahead.

But entering 2017, economic growth gathered momentum, according to surveys released on Wednesday, following on from last year thanks to a bounce in consumption.

Euro zone factories registered the fastest activity rate for nearly six years, China’s activity expanded for the sixth month and Japanese manufacturing growth was the fastest in almost three years.

Even in Britain, where a slump in sterling since the June referendum stoked the sharpest rise in factory costs on record last month, growth remained robust.

There were also signs of growth in Brazil, where industrial output rose in December at its fastest monthly pace in 2-1/2 years after one of the worst years on record.

“So far momentum is pretty strong heading into 2017,” said Jacqui Douglas at TD Securities. “But political risks are definitely one of the biggest this year and given the surprises we had through 2016 it’s really hard to tell what’s in store.”

Among unexpected events last year was Britain’s vote to leave the EU and the election as U.S president of Donald Trump, both seen as the result of anti-establishment anger among voters who feel left out of the wealth of nations.

Signs of concern this may spread could be found on bond markets. The premium investors demand to hold France’s government debt rather than that of similar economies shot up on so-called Frexit fears – the possibility that the far-right National Front might win the presidential election and try to take the country out of the euro zone.

IHS Markit’s final manufacturing Purchasing Managers’ Index for the currency bloc rose to 55.2 in January from December’s 54.9, its highest since April 2011. A Markit/CIPS UK factory PMI edged down to 55.9 from December’s 2-1/2 year peak of 56.1, matching the consensus forecast in a Reuters poll.

Anything above 50 indicates growth.

A similar survey for the United States due later on Wednesday is expected to show factories in the world’s largest economy also increased activity.

TOKYO TEMPERING TRUMP

A stronger dollar helped major economies such as Japan, where export orders surged, Markit/Nikkei PMI numbers showed, a welcome sign for the economy along with recent data suggesting a more durable recovery may be underway.

However, those encouraging signals sit uncomfortably with the growing threat from Trump’s trade policies. Japan is moving to temper the risks with plans to show Trump its firms are ready to create U.S. jobs, according to a document whose contents were revealed to Reuters.

In export-reliant Asia, and other regions where global supply chains are closely interlinked, Trump’s election is a particular risk to both world trade and broad economic growth if the new president follows though on his “America First” policies.

“The uncertainty surrounding future market access to the U.S. is bound to weigh on investment activity as companies await regulatory certainty,” said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong.

“I suspect there’s going to be a lot of capital expenditure expansion projects that will be put on hold as long as the uncertainty surrounding the trade environment persists.”

In China, the world’s second-biggest economy, growth was led by an investment and construction boom that has helped spur global growth. Its official PMI stood at 51.3 in January, slowing marginally from 51.4 in December.

Analysts question whether Chinese growth will be sustainable once the impact of earlier stimulus begins to wear off and if the property market cools. They warn a slowdown in the Asian economic powerhouse could ripple across the region and beyond.

“Within China, we expect that real estate will slow down, because the government is quite keen to contain housing prices,” said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

Other regional economies like Indonesia showed positive momentum in manufacturing activity, while Indian factory activity returned to modest growth in January, bouncing from a contraction in December triggered by the government’s scrapping of high value banknotes.

Even in laggard South Korea where manufacturing contracted for the sixth straight month, exports rose at the fastest pace in nearly five years.

“We remain quite cautious how much of an acceleration in growth we can see in this pretty challenging climate,” Oxford Economics’ Kuijs said.

“Things like PMI are timely indicators of the hard data but sometimes they do run ahead, and the improvement in actual data doesn’t materialize.”

(Editing by Jeremy Gaunt)

Rethink on Trump hits dollar and world stocks

electronic board in Japan showing stock prices

By John Geddie

LONDON (Reuters) – The U.S. dollar headed for its worst start to a year in over a decade on Tuesday, while world stocks cemented their biggest losses in six weeks after widespread protests against President Donald Trump’s stringent curbs on travel to the United States.

Thousands took to the streets of major U.S. cities to oppose the travel ban, which also halts refugee arrivals, while marches in Britain added to pressure on Prime Minister Theresa May to cancel a planned state visit by Trump.

A stream of U.S. policymakers and business executives have also slammed Trump’s stance.

The dollar lost more ground against a basket of six major currencies <.DXY> on Tuesday, on track for a slump of over 2 percent this month – its worst start to the year since 2006.

Against the safe haven yen, the dollar slipped to 113.28 yen <JPY=>, set for a fall of over 3 percent this month.

MSCI’s gauge of the world’s top 46 stock markets <.MIWD00000PUS> failed to recover any ground on Tuesday, after a 0.6 percent slide on Monday which was its largest loss in a month and a half.

Futures showed Wall Street opening around 0.2 percent lower <ESc1>, with the S&P 500 index set to add to its biggest daily fall in a month, seen on Monday.

“His actions over the last few days are another reminder that there were two sides to his campaign and Trump is just as adamant to follow through on those measures that will likely weigh on market sentiment in the coming months,” said Craig Erlam, senior market analyst at OANDA.

Benchmark German government bond yields edged higher as the euro zone posted better-than-expected inflation and growth data, a trend that plays into the hands of a minority of policymakers calling for an end to the European Central Bank’s ultra-easy stance.

European bourses <.STOXX> clawed back some ground after big losses on Monday, buoyed by strong results from the likes of British online supermarket Ocado <OCDO.L>.

MSCI’s broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.6 percent while Japan’s Nikkei <.N225> dropped 1.7 percent, its biggest fall in almost three months.

Supported by signs of accelerating momentum in the global economy, most stock markets remained up on the month as a whole. MSCI’s ex-Japan Asian shares index was up 5.8 percent this month while its index of world markets was up 2.7 percent.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

DOLLAR RALLY OVER?

In other currencies, the euro <EUR=> edged up to $1.0756 against the U.S. dollar after Trump’s trade adviser told the Financial Times that Germany was benefiting from a “grossly undervalued” exchange rate. It has bounced back from a 14-year low of $1.0340 set on Jan. 3.

“We sense the strong U.S. dollar policy is over, a thing of the past,” said Mizuho’s head of hedge fund FX sales, Neil Jones. “Recent U.S. concern over a strong U.S. dollar versus China is now feeding into the euro zone with the comment on an undervalued euro.”

The British pound <GBP=D4> fell by almost a full cent after weaker than expected data on consumer credit added to a handful of tentative signs that the UK economy may finally be slowing on the back of last year’s Brexit vote.

Elevated uncertainty about Trump’s policies, including a lack of detail so far on his plans for tax cuts and fiscal spending, is tempering optimism on the U.S. economy. Over half of the global investors polled by Reuters this month said they thought Trump’s stimulus plans would fail to meet existing market expectations.

Data on Monday showed U.S. consumer spending accelerated in December while inflation showed some signs of picking up last month.

The core PCE price index, the Federal Reserve’s preferred inflation measure, rose 1.7 percent on a year-on-year basis after a similar gain in November.

The Federal Reserve, which starts its two-day policy meeting on Tuesday, is widely expected to keep interest rates unchanged as it awaits greater clarity on Trump’s economic policies.

(Additional reporting by Jemima Kelly in London and Hideyuki Sano in Tokyo; Editing by Mark Trevelyan)

Stocks bask in Dow’s afterglow, dollar perks up

By Marc Jones

LONDON (Reuters) – World stock markets climbed strongly on Thursday, with investors basking in the afterglow of a break past 20,000 points for Wall Street’s record high Dow Jones index.

MSCI’s 46-country All World index <.MIWD00000PUS> was within touching distance of its lifetime high as European stocks [.EU] rose to their highest since Dec. 2015, completing a global loop after Asia’s main bourses also saw a bumper session. [.T]

The “Trump trade”, based on hopes of U.S. stimulus reflating growth, would appear to be back on – egged on by some impressive corporate earnings, higher commodity prices and signs that growth is finally finding some traction worldwide.

The Dow’s record run looked set to continue later [.N] and the curious outlier of recent weeks, the dollar <.DXY>, pushed off seven-week low it had hit after Trump confirmed he was ready to start building his controversial border wall with Mexico. [FRX/]

There were no such wrinkles in bond markets. Ten-year U.S. Treasury yields <US10YT=RR> were back above 2.53 percent to their highest of 2017 so far and the equivalent German <DE10YT=TWEB> and French yields jumped to their highest levels in over a year.

“The reflation trades are being driven by two main things,” said Neil Williams, chief economist at fund manager Hermes.

“Countries more willing to open the fiscal box and we are awaiting Mr Trump’s long-awaited tax cuts in mid-year. And second is the prospect of ultra-loose monetary policy.”

In commodities, crude oil prices also bounced as global sentiment lifted and the dollar weakened, which helps non-U.S. buyers of dollar-denominated raw materials. [O/R]

U.S. crude <CLc1> was up 0.8 percent at $53.18 a barrel after losing the same amount the previous day. Brent added 0.8 percent to $55.53 a barrel <LCOc1>, while cooper hit a two-month high as a strike loomed at the world’s biggest mine in Chile.

DON’T STOP ME DOW

Wall Street traders were already sifting through results from the likes of Ford <F.N>, Caterpillar <CAT.N> and Dow Chemical <DOW.N>. Service sector PMI numbers are also due later to provide the macro temperature of the world’s largest economy.

The Dow Index had been flirting with 20,000 points for weeks so it brought widespread cheer – and cap brandishing – when it broke through. It only topped 19,000 in November and this was the second-shortest time on record to jump 1,000 points.

SEB investment management’s global head of asset allocation Hans Peterson said he was now taking stock following the moves.

“We are neutral on the U.S. (stocks)” he said. “We think it is sort of stretched although not extremely stretched and not as far as it has been, but (U.S. Treasury) yields are going up and the dollar might be closer towards its turing point.”

Europe’s cross-country European STOXX 600 index <.STOXX> was trading 0.3 percent higher by 1300 GMT at its highest since December 2015. Germany’s DAX <.GDAXI> hit its highest since May 2015 and London’s FTSE <.FTSE> was near an all-time record.

Milan <.FTMIB> also showed little sign of nerves after Italy’s constitutional court on Wednesday opened the way for new elections this year, potentially in the summer and one which will be another populist battle.

Asian shares <.MIAPJ0000PUS> had a good day too. Japan’s Nikkei <.N225> brushed aside a stronger yen to rise 1.7 percent, Hong Kong’s Hang Seng <.HSI> climbed 1.3 percent and Shanghai <.SSEC> edged up ahead of a week-long Lunar New Year holiday.

“Today’s excitement mainly comes from strong U.S. stocks overnight, but people are also positive about Japanese companies’ earnings, especially machinery manufacturers,” said Takuya Takahashi, a strategist at Daiwa Securities in Tokyo.

Back in the currency markets, sterling hit a six-week high after solid GDP data before fizzling. The dollar index <.DXY>, which tracks the greenback against six other top currencies, clawed back from its overnight lows to stand flat on the day.

“The problem that the greenback is having right now is two- fold – first Trump has been talking down the currency and second, his policies make foreign investors nervous,” wrote Kathy Lien, managing director of FX strategy for BK Asset Management.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Gareth Jones)

Dollar steadies after stumble, Brexit ruling saps sterling

woman walks past electronic board with stock market numbers on it

By Marc Jones

LONDON (Reuters) – The dollar and world stocks tip-toed higher on Tuesday, as signs of a revival of worldwide economic activity helped ease some of the caution triggered in recent days by U.S. President Donald Trump’s focus on protectionism over fiscal stimulus.

Talk of trade wars rumbled in the background but was offset as Japanese manufacturing showed the fastest expansion in almost three years and a 5-1/2 year peak in French business activity provided the latest proof of a nascent euro zone recovery.

European stocks made modest gains as the data helped bolster a 2-1/2 year high in commodity stocks and as merger talk swirling around two of Italy’s big insurers fueled a 1 percent jump in shares in Milan.

There was also the expected confirmation that Britain’s parliament will have to approve the start of the Brexit process, though sterling dropped on news that assent will not be needed from pro-EU Scotland or Northern Ireland.

It was largely fine-tuning however, with both the pound and the euro, as well as the Japanese yen already pushed back by the dollar as its index clawed its way back above the 100 point threshold breach on Monday.

“Most of the PMIs around the world have been quite strong so there is no bad news here, but the protectionism above stimulus story (from Trump) has given the dollar bulls reason for pause,” said Saxo bank’s head of FX strategy John Hardy.

“The dollar rally needs to find some support pretty soon otherwise we are facing a potentially serious correction.”

U.S. futures also pointed to another flat start for Wall Street’s S&P 500, Dow Jones Industrial and Nasdaq ahead of U.S. manufacturing data and what should be more activity in Washington from Trump’s new administration.

Sentiment had taken a knock on Monday when U.S. Treasury Secretary nominee Steven Mnuchin told senators that he would work to combat currency manipulation but would not give a clear answer on whether he thought China was manipulating its yuan.

In written answers to a Senate Finance Committee, Mnuchin also reportedly said an excessively strong dollar could be negative in the short term.

The dollar duly skidded as far as 112.52 yen in its biggest fall since July though it was back up at 113.40 yen by 1300 GMT. It had also hopped up to $1.0745 to the euro and almost a full cent to $1.2440 per pound.

SCEPTICISM GROWS

While Trump promised huge cuts in taxes and regulations on Monday, he also formally withdrew from the Trans-Pacific Partnership (TPP) trade deal and talked of border tariffs.

“It’s interesting that markets did not respond positively to a reaffirmation of lower taxes and looser regulation, reinforcing the impression that all the good news is discounted for now,” wrote analysts at ANZ in a note.

“As week one in office gets underway, there is a growing sense of scepticism, not helped by the tone of Friday’s inaugural address and subsequent spat with the media.”

Doubts about exactly how much fiscal stimulus might be forthcoming had helped Treasuries rally. Yields on 10-year notes steadied at 2.42 percent in European trading, having enjoyed the steepest single-day drop since Jan. 5 on Monday.

Two-year yields were around 1.16 percent, narrowing the dollar’s premium over the euro to 183 basis points from a recent top of 207 basis points.

Europe’s moves included the second dip in a row for Italian yields as its highest court began deliberations on the legality of the country’s latest electoral law with the decision likely to influence the timing of elections there.

An unambiguous ruling offering a simple solution to Italy’s electoral tangle could open the way for an early ballot by June. A more nuanced, convoluted reading would almost certainly leave parliament in place until the legislature ends in early 2018.

Spain and France clocked up impressive demand of almost 50 billion euros between them in new 10- and 22-year bond sales.

The upbeat global data boosted industrial metals including copper and iron ore, while gold was near two-month high at $1,212 an ounce.

Oil prices edged up too as signs that OPEC and non-OPEC producers were on track to meet output reduction goals largely overshadowed a strong recovery in U.S. drilling.

U.S. crude futures added 45 cents to $53.19, while Brent crude climbed 42 cents to $55.65 a barrel. [O/R]

(Additional reporting by Wayne Cole in Sydney; Editing by Andrew Heavens)

European stocks fall, investors seek safety after Trump address

People walk through lobby of London Stock Exchange

By Abhinav Ramnarayan

LONDON (Reuters) – European stocks and bond yields edged lower on Monday and the dollar briefly hit a six-week low after U.S. President Donald Trump began his term in office with a protectionist speech that drove a nervous market into safe-haven assets.

Wall Street was set to open slightly lower, tracking stock markets in Europe and parts of Asia, having hit multi-year highs earlier this month on expectations Trump would boost growth and inflation with extraordinary fiscal spending measures.

However, his inaugural address on Friday, signaling an isolationist stance on trade and other issues, led investors to retreat to the safety of higher-rated government bonds.

Trump also made it clear that he plans to hold talks with the leaders of Canada and Mexico to begin renegotiating the North American Free Trade Agreement.

U.S. stock futures were down 0.2 percent, pointing to a lower open after European stocks touched their lowest levels this year in early trades. By midday, the broad STOXX index had come off the day’s lows but was still down 0.3 percent.

Earlier, Japan’s Nikkei dropped 1.1 percent while shares in Australia fell 0.8 percent after Trump’s administration also declared its intention to withdraw from the Trans-Pacific Partnership (TPP), a 12-nation trade pact that Japan and Australia have both signed.

Other Asian shares were more resilient, however, in part due to dollar weakness, and MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent.

“The focus this morning is on the protectionist rhetoric and the lack of detail on economic stimulus, so it’s a nervous start (to the presidency),” said Investec economist Victoria Clarke.

“The other concern is how the Fed interprets Trump’s stance, the worry being the less he does on fiscal stimulus the more nervous they may get on pushing the rate hikes through.”

The U.S. Federal Reserve, which has indicated it expects to raise its benchmark interest rate three times this year, is due to hold its next meeting on Jan. 31 and Feb. 1.

Rabobank analyst Michael Avery said a more protectionist United States could lead to a U.S. dollar liquidity squeeze, with Mexico and Asia likely the most badly hit.

“We would see outright confusion over what currency to invoice, trade, and borrow in: a 19th century world of competing reserve currencies in different geographic zones, but without the underpinning of gold,” Avery said in a note.

The problem would be exacerbated if China tightens capital controls further, he said.

The U.S. dollar was down 0.4 percent against a basket of six major currencies.

The nervous start on Monday saw safe-haven assets in demand.

The yield on Germany’s 10-year government bond, the benchmark for the region, led most euro zone bonds lower and was down 2 basis points to 0.34 percent.

This followed 10-year U.S. Treasuries yields, which fell to 2.43 percent, after having risen briefly on Friday to 2.513 percent, their highest since Jan. 3.

Spot gold prices, meanwhile, rose on Monday to their highest in two months.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Hideyuki Sano in Tokyo; Editing by Mark Heinrich)

Sterling skids to three-month low as ‘hard Brexit’ fears bite

By Jemima Kelly

LONDON (Reuters) – Sterling skidded to its lowest levels – bar a “flash crash” in October – in 32 years on Monday, hit by fears that Prime Minister Theresa May will say on Tuesday that Britain is set for a “hard” Brexit out of the EU and its single market.

Sterling fell as much as 1.5 percent against the dollar and 2.5 percent against the yen. That shifted the spotlight away from the greenback, which has come under pressure in recent days as investors ponder U.S. President-elect Donald Trump’s likely economic policies after he takes office on Friday.

The pound plunged to $1.1983 <GBP=D4> in early trade in Asia, depths not seen since a bout of thin liquidity triggered a “flash crash” on Oct. 7 that wiped as much as 10 percent off the pound in a matter of minutes. Apart from that, it was the lowest level since May 1985.

By 1230 GMT (7:30 a.m. ET) sterling had managed to climb back above $1.20, but was still trading down more than 1 percent on the day at $1.204.

Dealers said the market was reacting to various media reports over the weekend that said May would signal plans for a “hard” Brexit in her speech on Tuesday, saying she’s willing to quit the European Union’s single market in order to regain control of Britain’s borders.

“Every time there’s ‘hard Brexit’ headlines, that triggers a fresh bout of selling sterling,” said MUFG currency analyst Lee Hardman, in London. “It’s almost impossible to see Europe allowing the UK to remain a full member of the single market if it wants to regain control of the border and the laws and wants to strike its own agreements.”

Hardman added that the weekend reports were “not really new news”, as May’s government has consistently pointed toward giving priority to immigration controls over single market access, and that was why sterling had not fallen further in London trading hours.

U.S. markets were closed on Monday for Martin Luther King day, which means liquidity will be lower.

“The fact that the sell-offs usually happen during periods in which there’s less liquidity increases the risk we could have a sharper sell-off (today), but as we saw in the flash crash that doesn’t mean that’s fundamentally justified,” said Hardman.

Citi’s head of European G10 currency strategy in London, Richard Cochinos, said Britain’s hefty current account and budget deficits meant it was heavily dependent on foreign capital. The more uncertainty investors feel over Britain’s place in Europe, he said, the more investment dries up – the key reason for sterling’s weakness.

May has said she will trigger Article 50 – starting the formal EU withdrawal talks – by the end of March. But so far, she has revealed few details about what kind of deal she will seek, frustrating some investors, businesses and lawmakers.

“SAFE-HAVEN” YEN

The euro climbed as much as 1.5 percent against the pound to a two-month high of 88.53 pence <EURGBP=>, before retreating to 87.85 pence, still up 0.7 percent on the day.

Against the yen, which is perceived as a safe haven, sterling fell as much as 2.3 percent to a two-month low of 136.48 yen <GBPJPY=>, before recovering to trade down around 1.4 percent on the day by 1230 GMT.

The Japanese currency gained broadly as a risk-off mood permeated markets, hitting a six-week high of 113.61 yen to the U.S. dollar <JPY=>.

“The risk-averse sentiment stemming from ‘hard Brexit’ (worries) is pushing down the dollar/yen,” Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

“But so far, I think the correction from the dollar/yen’s high in December, and concerns about stronger protectionism under the new U.S. presidency, have been the dominant theme.”

The dollar index climbed 0.4 percent to 101.59 <.DXY>.

Trump revealed few policy clues at his first press conference last week since his November election victory. The dollar rose after the election on expectations that his administration would embark on stimulus to boost growth and inflation, prompting the U.S. Federal Reserve to adopt a faster pace of interest rate hikes.

But Trump’s protectionist stance has also added to some investors’ risk aversion, as he has threatened to impose retaliatory tariffs on China, build a wall along the Mexican border and tear up the North American Free Trade Agreement (NAFTA).

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Wayne Cole in Sydney and Tokyo markets team; Editing by Catherine Evans)

Trade tensions, dollar danger cloud economic optimism in Davos

By Noah Barkin

DAVOS, Switzerland (Reuters) – A trade war between the United States and China and a strengthening dollar are among the biggest threats to a brightening global economic outlook, according to leading economists at the World Economic Forum in Davos.

As political leaders, businessmen and bankers converge on the resort in the Swiss Alps this week, they can draw hope from a more benign economic picture and a rally in global stock markets on expectations of major stimulus under a new U.S. administration led by Donald Trump.

The backdrop is brighter than it was a year ago, when concerns about a rapid economic slowdown in China led to what Credit Suisse CEO Tidjane Thiam described at the time as “the worst start to any year on record in financial markets ever”.

“I am more optimistic than last year. If no major political or geopolitical uncertainties materialize and derail the world economy, it might even surprise to the upside in 2017,” Axel Weber, the chairman of Swiss bank UBS <UBSG.S> and a former president of the German Bundesbank, told Reuters.

Still, there are big storm clouds on the horizon.

“It is too early to give the all clear,” Weber continued. “This cyclical upswing hides but does not solve the world’s underlying structural problems, which are excessive debt, over-reliance on monetary policy, and adverse demographic developments.”

Among the biggest concerns for 2017 cited by the half dozen economists interviewed by Reuters was the threat of a U.S.-China trade war, and broader economic tensions, triggered by what they fear could be a more confrontational Trump administration.

Trump is threatening to brand China a currency manipulator and impose heavy tariffs on imports of Chinese goods. Last month he named leading China critic Peter Navarro, author of the book “Death by China”, as a top trade adviser.

“This is the key uncertainty because you don’t know how much the rhetoric is a ploy to get better deals,” said Raghuram Rajan, an economist at the University of Chicago who stepped down as governor of India’s central bank last September.

“I’m worried about the people he is surrounding himself with. If they have a more protectionist world view and believe the reason the U.S. is not doing well is because others are cheating that creates a certain kind of rhetoric that could end up very badly for the world.”

CURRENCY RISKS

Last month, the U.S. Federal Reserve hiked interest rates for just the second time in a decade, a sign that the lengthy period of ultra-loose monetary policy that followed the global financial crisis may be coming to an end.

The World Bank said last week that it expects global growth to accelerate to 2.7 percent this year, up from a post-crisis low of 2.3 percent in 2016, on the back of a pickup in U.S. growth and a recovery in emerging markets fueled by a rise in commodity prices.

A year ago in Davos, both Rajan and Weber warned about the limits of loose monetary policy. But now that the Fed is in tightening mode, a new set of risks has emerged.

One is a further strengthening of the dollar, which is already hovering near 14-year highs against the euro.

A further appreciation could widen the U.S. trade deficit, increasing pressure on Trump to resort to protectionist policies. It could also expose weaknesses in the balance sheets of borrowers outside the United States who have borrowed in dollars but hold domestic currency assets.

In Europe, by contrast, a stronger dollar could add fuel to a solid if unspectacular economic recovery, allowing the European Central Bank to plot an end to its own easy money policies including the bond-buying, or quantitative easing (QE), program it recently extended through to the end of 2017.

While welcome, this would also come with risks, particularly for the peripheral euro zone countries that have come to depend on QE to keep a lid on their borrowing costs.

“Just when you think the euro zone is stable it might turn out not to be,” said Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund (IMF).

“If U.S. interest rates continue to rise and the dollar appreciates against the euro it’s going to start getting very hard for (ECB President) Mario Draghi to tell the story that he’s doing QE to prop up inflation. If he ever slows down on QE, the vulnerabilities of the periphery countries are huge.”

EUROPEAN BANKS

Rajan and Richard Baldwin of the Graduate Institute in Geneva said they viewed European banks as another big risk for the global outlook. Italy agreed last month to inject about 6.6 billion euros into Monte dei Paschi di Siena <BMPS.MI>, but the weakness of other Italian banks and German institutions, including Deutsche Bank <DBKGn.DE>, remain a concern.

However the biggest threat may be political. Were French far-right leader Marine Le Pen, who favors a Brexit-style referendum on France’s EU membership, to deliver a Trump-like surprise in the two-round French election in April and May, doubts about the future of the EU and euro zone will increase.

The chances of that seem slim for now. A poll last week suggested conservative candidate Francois Fillon would beat Le Pen in a runoff by a 63 to 37 percent margin. But after two seismic political shocks in 2016 – Trump and Brexit – no one is counting her out.

“Political surprises may fundamentally alter the currently favorable economic and financial outlook for 2017,” said Weber.

(Reporting by Noah Barkin; Editing by Pravin Char)

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