BLBG: Dollar Rises as Fed Lifts Discount Rate; Stocks, Oil Decline
By Justin Carrigan
Feb. 19 (Bloomberg) -- The dollar strengthened and stocks snapped a four-day rally after the Federal Reserve raised the discount rate, its clearest signal yet that the central bank is ready to reverse emergency stimulus. Copper and oil fell.
The dollar appreciated against all but one of its 16 most- traded counterparts at 10:27 a.m. in London. The pound plunged to a nine-month low against the dollar on concern the U.K. deficit will keep growing. Futures on the Standard & Poor’s 500 Index declined 0.8 percent and the MSCI Emerging Markets Index slid the most in two weeks. Copper dropped 1.1 percent, wheat lost 1 percent and crude oil futures slipped 1.2 percent.
The Fed yesterday raised the rate charged to banks for direct loans by a quarter-point, the first such increase since June 2006. Policy makers around the world are weighing how to withdraw measures to aid economies, which have caused deficits to swell, without derailing the recovery. Shares in Europe pared losses, helped by Nestle SA’s forecast that sales growth will accelerate.
The Fed’s decision is “a shot across the bow,” Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said in an e-mailed note. “In the grand scheme of things, the Fed is moving back to doing business as normal.”
Pound Drops
The Dollar Index, which tracks the currency against those of six major U.S. trading partners, climbed as much as 1.2 percent, its biggest gain since Jan. 20. The pound slid against all 16 of its most-traded counterparts after the U.K. yesterday unexpectedly posted a budget deficit in January for the first time since records began in 1993.
The cost of borrowing between banks, which plunged to a record low last year as policy makers provided unlimited cash to financial institutions, may start to rise following the Fed decision, which is effective today. The TED spread, the difference between what banks and the Treasury pay to borrow for three months, widened for the first time in three days, to 14.8 basis points.
The Stoxx 600 fell 0.6 percent. Thales SA, Europe’s biggest military-electronics maker, lost 10 percent in Paris after cutting its dividend for the first time in at least a decade. Declines were limited as Nestle, the world’s largest food company, rallied 2.6 percent in Zurich after saying revenue from food and beverages will rise more than 2009’s 3.9 percent.
Schlumberger Report
Technip SA, Europe’s second-largest oil-services provider, rose 1.7 percent. Schlumberger Ltd., the world’s largest, is in advanced talks to buy Smith International Inc., the Wall Street Journal reported, citing people familiar with the negotiations.
The MSCI Asia Pacific Index declined 2.1 percent, the biggest drop in two weeks. Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., slumped 3.6 percent in Hong Kong.
The decline in U.S. futures indicated the S&P 500 may erase yesterday’s 0.7 percent advance. The cost of living in the U.S. probably rose in January, pushed up by higher energy prices, economists said before a government report today. The consumer price index may rise 0.3 percent after a 0.2 percent increase in December, according to the median forecast of 78 economists in a Bloomberg News survey. The Labor Department report is due at 8:30 a.m. in Washington.
The MSCI Emerging Markets Index dropped 1.1 percent, the biggest decline since Feb. 5. The Micex index in Russia slid 0.8 percent and Kazakhstan’s KASE index lost 2.2 percent to its lowest level this year.
China Options
Options traders are paying the most to protect against a decline in Chinese stocks since March after the central bank ordered lenders to set aside larger reserves to help cool inflation in the fastest-growing major economy.
The S&P GSCI Index of 24 commodities declined as much as 1.1 percent, the first drop this week. Copper for delivery in three months fell $75 to $7,190 a metric ton on the London Metal Exchange. Crude oil for March delivery lost 91 cents to $78.15 a barrel on the New York Mercantile Exchange. Wheat futures declined 5 cents to $4.945 a bushel on the Chicago Board of Trade.
To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net
