Business Blog Posts

A super-loose U.S. monetary policy that promises to keep U.S. interest rates near zero for a long time has driven investors to look for yield, in part on worries that easy policy would fuel future inflation.

Friday's U.S. jobs report, which showed private firms hiring at the fastest pace since April, further supported investor demand for risk, a bounce in the U.S. dollar on short-covering notwithstanding.

Indeed, some Japanese investors cheered the bounce in the U.S. dollar as it tempered gains in the strong yen, offering some reprieve to Japanese exporters.

The dollar bought 81.23 yen in early Asian trade, more than a yen lower than the 15-year high of 80.21 yen hit last week.

"We are watching whether there are more strong economic indicators from the United States. More strong signs would push up the dollar and encourage inflows into Japanese export-related shares," said Hideyuki Ishiguro, a supervisor in the investment strategy section at Okasan Securities.

The slight retreat in the yen helped Japan's Nikkei average .N225 rise 0.8 percent to a three-month high, the best performer in Asia in early trade.

The MSCI Asia ex-Japan index .MIAPJ0000PUS was off 0.15 percent, just under a 2-1/2-year high hit on Friday.

For the year however, the MSCI index easily outperforms the Nikkei. It has jumped 16 percent since January, compared to a 8 percent drop in Japanese shares.

The bounce in the U.S. dollar did little to crimp demand for commodities. Gold <GOL/>, a traditional hedge against inflation, powered to a record above $1.398 an ounce.

Oil prices <O/R> held above $87 a barrel near a two-year high and silver hit a new 30-year peak

The stronger U.S. dollar had a bigger impact in currency markets. It pulled the euro under $1.40, triggering a rush of stop-loss selling and dragged other higher-yielding currencies such as the Australian dollar down as well.

(Reporting by Koh Gui Qing; Editing by Sanjeev Miglani)

This week's G20 summit will require every bit of President Barack Obama's diplomacy skills after the Federal Reserve embarked on a new $600 billion bond-buying spree, sparking criticism from four continents that the U.S. central bank was ignoring the global repercussions.

Officials from Germany, Brazil, China and South Africa were among those expressing concern that the Fed's money printing could weaken the dollar, drive up commodity prices and send uncontrollable waves of investor cash into emerging markets.

If the G20 fails to defuse these global tensions, it may heighten investor concerns that policymakers are drifting further apart, leaving the world economy vulnerable to another bout of upheaval.

Domestic politics and policies make Obama's job tougher.

He arrives in Seoul for the November 11-12 summit weakened by a crushing congressional election defeat for his Democratic Party. His primary task will be to convince his peers the Fed's actions do not run counter to a U.S.-led push for global cooperation to even out economic imbalances.

(For a graphic on G20 economies, see link.reuters.com/tah43q)

South African Finance Minister Pravin Gordhan said the Fed's move "undermines the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis."

German Finance Minister Wolfgang Schaeuble was less diplomatic. He called U.S. policy "clueless."

It was less than five months ago that G20 leaders gathered in Toronto, talking in warm and fuzzy terms about "collective well-being" and "shared objectives."

"G20 members have a responsibility to the community of nations to assure the overall health of the global economy," the leaders said in their closing statement in June.

"If we act in a coordinated manner, all regions are better off, now and in the future."

G20 PLUS QE2 = CATCH 22

Since that Toronto meeting, the dollar has dropped 11 percent against a basket of currencies, driving up currencies in Japan, Brazil, the euro zone and elsewhere. The biggest exception is China, where the tightly managed yuan has gained a relatively modest 2 percent versus the dollar since late June.

Obama's response to G20 criticism is expected to be that the world needs a healthy U.S. economy, and the U.S. economy needs healthier exports.

With earnings season winding down and a light economic calendar this week, the market will be left to its own devices to sort out its direction.

A rise of more than 16 percent in the S&P 500 .SPX since the start of September had many investors expecting a pullback after the trio of big events. But it appears to have emboldened them instead.

The CBOE Volatility Index, a measure of market anxiety, has slipped below 19 and the late-week action suggests a market getting ready for more gains -- not a sell-off.

"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," said Bill Luby, a private investor in San Francisco, who writes the VIX and More blog.

This will result in "reducing some of the downside risk for owning stocks, and also putting downward pressure on the VIX."

With the Fed supporting markets through quantitative easing, rates could remain low for quite some time. That, in turn, should help stimulate borrowing and make riskier assets more attractive. It could take data of a momentous nature -- something that suggests the economy is not responding to the Fed's plan to buy $600 billion in Treasuries -- to cause anything more than a minor slip-up in the market.

"What the Fed is doing is a consistent increase in money supply. Consistency will be much more important to the psyche of investors than big spikes," said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.

That feeling permeated the market even before Friday's jobs data, which showed the fastest payroll growth in the private sector since April. It is difficult to see the market fighting Fed-led stimulus, strong corporate results and labor force improvements.

DIAL 'M' FOR MOMENTUM

The Fed's intentions make the search for yield even more intense, which could bolster financial stocks in coming days.

Financials climbed solidly higher on Friday, with the KBW Bank index .BKX up 2.2 percent, on talk the Fed may allow stronger banks to increase dividends. They could continue to climb as they have underperformed the rally since September.

Call volume in the Financial Select Sector ETF SPDR fund (XLF.P) surged, as option traders exchanged about 618,000 contracts in the XLF on Friday, led by the trading of 480,000 call options. The overall options volume was three times greater than its average daily turnover, according to options analytics firm Trade Alert.

A correction might still occur, though. A number of indicators suggest the market is in position to consolidate.

The 14-day relative strength index is at 88.5. A reading above 70 usually indicates an overbought condition. However, some analysts say the indicator for an overbought market expands in a bull market. So this level may not necessarily be a bearish indicator.

China and the United States turned down the heat in an acrimonious dispute over currencies and trade imbalances at a meeting of finance ministers from the 21-member Asia-Pacific Economic Cooperation (APEC) forum.

Meeting in Japan's ancient capital of Kyoto on Saturday, the finance chiefs declared members will move toward more market-determined exchange rate systems reflecting underlying economic fundamentals, and refrain from competitive devaluation of currencies.

U.S. Treasury Secretary Timothy Geithner told reporters on Saturday that while there was now broad consensus to develop some form of policy framework to avoid excessive current account imbalances, specific targets should not be expected from a Group of 20 summit in Seoul on Nov 11 and 12, just ahead of an APEC summit.

"It's not something you can reduce easily to a single number," Geithner said. He had earlier suggested countries should aim to cut surpluses or deficits to a targeted share of gross domestic product over time.

Geithner was also forced to fend off criticism that the United States was deliberately weakening the dollar after the U.S. Federal Reserve announced last week it was in effect running the printing presses to buy another $600 billion in government bonds in an effort to reinvigorate the flagging U.S. economy.

The series of APEC meetings in Yokohama, just south of Tokyo, will conclude next weekend in a summit that brings together U.S. President Barack Obama, Chinese President Hu Jintao Japanese Prime Minister Naoto Kan and other leaders of fast-growing nations around the Pacific rim.

APEC members have signed more than 100 bilateral and other mini-free trade agreements with each other, and stitching them together somehow into an area that accounts for 44 percent of global trade is an ambitious task.

HOT MONEY INFLOWS

"I think FTAAP is a very good idea," Asian Development Bank President Haruhiko Kuroda said in an interview on Sunday, referring to the Free Trade Area of the Asia-Pacific.

"Rather than doing bilaterally or with a small number of countries, free trade deals work better when more countries get involved because that will not only benefit member countries but also reduce the negative impact on non-member nations, and that could be a plus for the global economy."

Kuroda said regional coordination was needed to deal with the differing rates at which currencies are appreciating in Asia's hot emerging markets.

"Southeast Asian currencies are appreciating, but the Chinese one is not. There is a gap among emerging market currencies," Kuroda said. "This is causing a big problem, so we need to talk more about currency cooperation in the region.

"If regional coordination and cooperation progress, it will help ease global imbalances," Kuroda said.

Capital inflows into developing countries have been massive. Flows into emerging market funds reached $46.4 billion in the year to the fourth week of October compared with $9.4 billion for all of 2009, according to Global fund tracker EPFR.