The dollar and U.S. bond yields fell on Monday while Asian shares hit a four-week low, as investors cashed in on some of their recent bets that the anticipated fiscal boost from the incoming Trump administration will support riskier assets.
Wall Street hit record highs and the dollar rose to a 14-year peak last week, but as the last full trading week of the year got underway investors chose to take some of those chips off the table.
The profit-taking spread to Europe, where bank stocks were among the biggest fallers following two weeks of strong gains on the back of rising bond yields. Their decline pushed the broader European indices into the red.
“As we enter the Christmas, year-end holiday season, volumes could decline and lead to choppy price action. Traders should watch out for higher volatility due to restricted holiday trading volumes,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell for the third straight day, shedding 0.3 percent to a four-week low. It has lost 3.7 percent since Trump was elected.
In addition, investors turned cautious after China’s top leaders said over the weekend they would stem asset bubbles in 2017 and place greater importance on the prevention of financial risk.
Japan’s Nikkei .N225, which has benefited from the yen’s sharp fall against the dollar, snapped its nine-day winning streak, dipping 0.1 percent from Friday’s one-year high.
Financial markets briefly turned “risk-off” in late U.S. trade on Friday following news that a Chinese Navy warship had seized a U.S. underwater drone in international waters in the South China Sea.
The diplomatic incident appears to have been resolved for now after the two countries said on Saturday that China will return the drone.
MR FOREX, MR BOND
In bonds the 10-year U.S. Treasuries yield US10YT=RR stood at 2.58 percent in Europe on Monday, down a basis point on the day but still close to its two-year high of 2.641 percent touched on Thursday.
It has risen almost 100 basis points from the low in the hours immediately after the Nov. 8 U.S. election. That surge, and the Federal Reserve’s interest rate hike last week, have pushed the dollar sharply higher lately.
The dollar’s index against a trade-weighted basket of six major currencies jumped to a 14-year high of 103.56 last week .DXY although it gave up some gains on Monday.
The index last stood at 102.68.
“The dollar is acting as a brake on the extent of Fed tightening and the extent of the bond sell-off,” Societe Generale currency analysts wrote on Monday.
“Mr Forex is hyper-sensitive to these bouts of self-doubt by Mr Bond, and the dollar has backed off a little on this Monday morning,” they said.
The Bank of Japan started its two-day policy meeting on Monday and is widely expected to hold policy, including its twin targets of minus 0.10 percent interest on a part of excess reserves and the zero percent 10-year government bond yield.
Fed Chair Janet Yellen will be speaking on “the State of the Job Market” at 1330 EST/1830 GMT, an opportunity for market players to gauge her assessment of the U.S. economy.
Oil prices rose in anticipation of tighter crude supply going into 2017 following the decision by OPEC and other producers to cut output.
Brent LCOc1 futures rose 0.5 percent to $55.51 a barrel, while U.S. West Texas Intermediate crude CLc1 added 0.6 percent to $52.22 per barrel.