Dollar and government debt rally as investors shun risky bets

The dollar strengthened and government bonds firmed ahead of Friday’s US jobs data that will be closely watched by rate-setters at the Federal Reserve.

The US Dollar index, which measures the currency against its peers, was up 0.4 per cent in a move that takes its gain for the month to 2.6 per cent.

Investors also bought government debt, which — like the dollar — tends to rally when uncertainty causes investors to hold back from buying riskier assets.

The yield on the benchmark 10-year US Treasury, which moves inversely to its price, fell 0.04 percentage points to 1.44 per cent. Germany’s equivalent Bund yield dropped 0.03 percentage points to minus 0.20 per cent.

Economists surveyed by Bloomberg expect Friday’s non-farm payroll report to show US employers added close to 700,000 jobs in June, up from 559,000 the previous month.

Column chart of S&P 500 index, % monthly change showing Wall Street stocks rise for five consecutive months

But fund managers have become reluctant to take decisions ahead of the jobs report since economists’ predictions for the April payrolls turned out to be wildly inaccurate and the one for May also came in significantly below forecasts.

“The jobs data has become very hard to predict,” said Ken Taubes, US chief investment officer for Amundi. “We’ve had professional economists getting it wrong in the hundreds of thousands.”

ADP’s national employment report on Wednesday showed US private sector employers added 692,000 jobs in June, down from 886,000 a month earlier but ahead of economists’ expectations for a 600,000 increase.

Michael Pearce, senior US economist at Capital Economics, warned the ADP survey had “completely missed the labour-shortage driven slowdown in payroll gains evident in the official figures” in recent months.

“So we would treat the survey with an even bigger dose of scepticism than normal,” he said.

On Wall Street, the blue-chip S&P 500 was flat at lunchtime and the tech-heavy Nasdaq Composite slid 0.2 per cent. Across the Atlantic, the region-wide Stoxx Europe 600 slid 0.8 per cent.

However, both the S&P 500 and Stoxx 600 were on track for five consecutive months of gains despite the lacklustre moves.

Analysts have upgraded their 2021 earnings per share forecasts for companies by 15 per cent since January, said Citi, as businesses benefit from economies reopening and vaccine rollouts. Earnings expectations have increased the most for companies whose fortunes are linked to economic cycles, such as industrial groups and materials producers, Citi found.

But the prices of companies’ equity and debt instruments have already been lifted so high by this optimism that “everywhere you look there is nothing left in terms of value”, said Tatjana Greil Castro, co-head of public markets at Muzinich & Co.

“So now everything is about the Fed and how much liquidity they will continue to pump into markets.”

Global oil marker Brent crude added 0.6 per cent to $75.84 a barrel, trading around its highest point since April 2019 as buyers shrugged off concerns about the spread of the Delta variant of Covid-19 to focus on a drop in US oil stockpiles.

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