LONDON: Combined with fresh concern about China’s banking system, a stress test for British banks and a raft of Eurozone data, yesterday’s Opec meeting topped off a wild November for financial markets that has been dominated by Donald Trump’s victory in the US presidential election.
A possible rise in oil prices has also been feeding expectations for a rebound in global inflation. Those expectations have been gathering momentum since Trump promised $1 trillion of new spending on US infrastructure.
It has meant an electrifying run for the dollar, which was up at 1.0645 per euro and 113.04 yen as US trading began and as it headed for its strongest month against the Japanese currency in seven years.
Bumper US jobs data meant Wall Street was set to start higher while US Treasury yields — the benchmark for global borrowing costs — were also rising after a two-day pause. They hovered just under 2.36 per cent, having started November at just over 1.8 per cent. The climb is the biggest monthly move since December 2009.
“There have been more optimistic noises (about Opec deal) this morning and through into the afternoon session (here), and those hopes of a deal also encouraged US yields to rise,” said Jeremy Stretch, head of currency strategy for CIBC Global Markets in London.
European stocks were lifted by a jump in oil companies amid the Opec talk, although banks struggled as Royal Bank of Scotland failed a Bank of England stress test and Italian lenders fell before a referendum on the country’s political system on Sunday.
Worries about China’s financial sector had also spread in Asia overnight. Shanghai stocks fell about 1 per cent amid concern about government moves to stem capital flight and halt the recent sharp fall in the yuan.
“The stress could continue for a while,” said Gu Weiyong, chief investment officer at hedge fund Ucom Investment Co.
“Whether the situation gets better depends on the willingness of the central bank to inject more liquidity into the system.”
Emerging stocks rose marginally but were headed for their biggest monthly fall since January. Currencies hit by the latest onslaught from the dollar were also set to close November with hefty losses.
The Turkish lira and Mexican peso have lost around 8 to 9 per cent versus the dollar for their biggest monthly declines since 2008 and 2012 respectively.
And it is not only riskier assets that have suffered. Gold is on track for its biggest monthly decline since mid 2013, largely pressured by the bets of a series of US interest rate hikes over the next year.
The euro has fallen over 3 per cent. Eurozone inflation for November came in at 0.6 per cent year-on-year on Wednesday. That was its highest in two years, although still well below the European Central Bank’s preferred level of just under 2 per cent.
The ECB meets next week, and with expectations that the bank will extend its stimulus programme, already at more than 1.5 trillion euros, Eurozone government bond yields nudged lower on Wednesday.
A Reuters report that the ECB was ready to temporarily step up purchases of Italian government bonds if its borrowing costs spiked was also a driver.
“This reaction function does indicate that the ECB is aware of the important support that quantitative easing lends to the (Eurozone) periphery,” ING strategist Padhraic Garvey said.