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BLBG: European Stocks Retreat as Dollar Rally Fades Before Yellen
 
Commodity producers lead declines as iron ore falls on China
Drop in German business confidence reignites Brexit concern
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European stocks fell for the first time this week amid concern over the outlook for economic growth while a dollar rally ran out of steam before signals on the likely path of U.S. interest rates.
Equity markets retreated in Europe as an unexpected drop in German business sentiment signaled companies remained cautious after Britain’s decision to quit the European Union. Iron ore fell on the prospect of shrinking steel production in China and crude oil traded near a one-week low. The Bloomberg Dollar Spot Index snapped a four-day winning streak as investors await comments by Federal Reserve Chair Janet Yellen at a symposium in Jackson Hole, Wyoming, on Friday.
A rally that’s driven global equities to their highest level in a year has petered out as the prospect of higher U.S. rates risks thwarting efforts by other central banks to stimulate growth by cutting borrowing costs. While German business confidence dropped to the lowest level in six months in August, a U.S. report on Thursday showed durable goods orders rose more than forecast.
"There is renewed caution ahead of Yellen’s appearance at Jackson Hole tomorrow,” said Michael Ingram, a market strategist at BGC Partners in London. “It won’t take a great deal for sentiment to turn from glass half full to glass half empty.”
Stocks
The Stoxx Europe 600 Index slid 0.9 percent at 8:31 a.m. in New York. Glencore Plc and Anglo American Plc led a gauge of miners to the worst performance on the equity gauge as iron ore retreated. Total SA dragged energy producers lower as oil held near its lowest close in a week.
Playtech Plc rose 4.2 percent after the gambling-software provider reported an increase in first-half revenue and announced a special dividend. Jimmy Choo Plc jumped 6.2 percent after the maker of luxury shoes posted higher first-half revenue and earnings and said it remains optimistic on this year’s prospects. CRH Plc rose 3 percent after the Irish construction company posted higher-than-expected first-half sales and profit.
S&P 500 Index futures slipped 0.2 percent, after a late selloff in drugmakers helped drag U.S. equities down 0.5 percent on Wednesday. HP Inc. dropped 6.7 percent in early New York trading after the seller of personal computers and printers forecast fiscal fourth-quarter profit that may fall short of analysts’ estimates.
Currencies
The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, declined less than 0.1 percent, after climbing 0.8 percent over the last four trading sessions.
“The market’s just trying to get through the whole event risk” of Yellen’s speech, said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia. “But after that, what’s driving the market is back to the search for yield and it’s good for emerging markets in general."
Goldman Sachs Group Inc. sees the pound, the yen and the New Zealand’s kiwi as most vulnerable to a potential surprise from Yellen’s speech. Jackson Hole has only been a big market mover once in the past 10 years, when former Fed Chairman Ben S. Bernanke signaled the second round of quantitative easing in 2010, according to Bank of America Corp.
Emerging markets rebounded, with South Africa’s rand advancing 0.7 percent. South Korea’s won strengthened 0.6 percent and Turkey’s lira rose 0.5 percent. Currencies tumbled on Wednesday as political and security concerns resurfaced in South Korea, South Africa and Turkey. A JPMorgan Chase & Co. gauge that measures the volatility of developing-nation currencies was the highest since July 6.
The flare-ups eroded returns on carry trades, borrowing where interest rates are relatively low and investing the proceeds where they are higher. Turmoil in South Africa’s leadership sent the rand tumbling, cutting the return on this quarter’s best carry trade in half from 10 percent.
For more on risks to the carry trade, click here.
Commodities
Iron ore dropped 2.3 percent in Singapore after Li Xinchuang, a vice chairman at the China Iron & Steel Association, said falling steel production in China should weigh on prices for the raw material. The price is still up by about 40 percent for the year.
West Texas Intermediate crude retreated 0.5 percent to $46.56 a barrel. It dropped 2.8 percent in the last session as data showed U.S. inventories unexpectedly rose last week.
Gold was little changed at $1,324.42 an ounce, after sliding 2.1 percent over the last four days.
Bonds
U.S. Treasuries due in two years were little changed with their yield at a two-month high of 0.77 percent. The securities are the cheapest they’ve been relative to 30-year notes since the start of 2008 following a run of hawkish comments from Fed officials including Vice Chairman Stanley Fischer and the heads of the New York and San Francisco branches.
The rate on 10-year Treasuries was at 1.56 percent. Fed fund futures indicate a 54 percent chance of a U.S. interest-rate hike this year, up from 36 percent at the start of August. The yen was little changed at 100.47 per dollar while the euro gained 0.2 percent to $1.1284.
Fed Bank of Kansas City President Esther George said the U.S. labor market nearing full employment and inflation rising toward the central bank’s target should prompt higher interest rates. George dissented in July at the Fed meeting when they held rates unchanged.
“The Fed is likely to hike this year, with December more likely than September,” said Jarrod Kerr, a senior rates strategist at Commonwealth Bank of Australia in Sydney. “There is some room for short-end U.S. yields to push a little higher over 2017.”
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