Dollar Hits Two-Year High as Investors Assess End of a Tumultuous Quarter

By Paul J. Davies 

-- S&P 500 and Dow Jones Industrial Average futures up 0.3%

-- Hong Kong stocks set for worst quarter since 2015

-- Brent crude drops 1.2%

The U.S. dollar edged to its strongest level in over two years Monday at the end of a volatile third quarter in which markets faced attacks on Saudi Arabia's oil industry, unrest in Hong Kong and a spike in a critical U.S. overnight lending rate.

The dollar has rallied for much of the past three months and was trading at its strongest level in more than two years against both the euro and a basket of currencies in the ICE dollar index. It was up 0.3% against the euro Monday, meaning it has gained 4.3% against the European currency this quarter. One euro bought $1.091.

Among major stock markets, Shanghai was the biggest mover Monday, slipping 0.9% despite manufacturing numbers that were better than expected. Official data showed manufacturing activity rebounded in September mainly on improving domestic demand. Chinese stock markets will be closed for the rest of the week to mark the 70th anniversary of the founding of the People's Republic of China.

U.S. futures were up 0.3% and the S&P 500 is set to end the quarter almost flat having touched a record high at the end of July. The Japanese Nikkei 225 was down 0.6%, but closes out the quarter as one of the better performers, up 2.3%. The Stoxx Europe 600 was up 0.1% Monday and the FTSE 100 in London was 0.3% lower.

While the Chinese data was a positive surprise, the trend still points toward a slowdown in the world's second-largest economy. Weaker manufacturing and export data globally has been the story of the quarter, although employment and consumer spending has remained resilient. Still, the Federal Reserve and European Central Bank have begun new rounds of looser monetary policy, supporting stock markets.

Government bond yields in the U.S. and Europe tumbled in August before rising sharply again in early September, while some currencies have also seen big moves. The yuan, meanwhile, has dropped nearly 4% against the dollar this quarter, its weakest run since the second quarter of 2018.

The Chinese manufacturing data was "encouraging, given the tighter industrial production restrictions ahead of the 70th Anniversary Celebration for environmental concerns," Citigroup economist Xiangrong Yu wrote in a note.

Stocks in Hong Kong rose 0.5% after another weekend of pro-democracy protests. The Hang Seng has been one of the worst performing of the world's major indices in the past three months, down nearly 9%, since the protests took a more violent turn in late July.

A big positive was a strong debut in Hong Kong for the newly listed shares of Budweiser Brewing Co. APAC, the Asia business of European beer giant Anheuser Busch InBev. The stock climbed 4.4% above its initial public offering price. Budweiser had raised $5 billion in Asia's largest IPO this year and the funds will go towards reducing AB InBev's debt.

Brent crude oil was down 1.2% Monday at $60.34 even though there are several factors threatening to restrict supplies. Saudi Arabia's Crown Prince Mohammed bin Salman said in an interview with "60 Minutes" broadcast Sunday that energy prices could hit unimaginable highs if a conflict with Iran escalated.

The Wall Street Journal also reported that the U.S. shale boom was slowing, with production growth of just 1% in the first six months of 2019.

The Federal Reserve Bank of New York is due to conduct another overnight lending operation for banks Monday to help keep market interest rates in check over the tricky quarter end when funding markets tend to be restricted.

The Fed began to support repo markets, where banks and investors swap U.S. Treasurys and other safe bonds for cash, nearly two weeks ago after lending rates rose sharply. It currently has nearly $162 billion out on loan to banks in a mix of overnight and 14-day repo operations. About $23 billion will be repaid this morning and the New York Fed is offering up to another $100 billion in overnight money.

Elsewhere German 10-year bond yields were 0.08 percentage points higher at minus 0.566%, while French 10-year yields were 0.1 points higher at minus 0.271%. In the U.S. 10-year Treasury yields were 0.02 percentage points higher at 1.697%.

Gold was also lower, down 0.85% at $1493.60.

Write to Paul J. Davies at [e-mail]

(END) Dow Jones Newswires

September 30, 2019 08:19 ET (12:19 GMT)

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