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GLOBAL MARKETS-Bonds and emerging market currencies' selloff resumes
July 11, 2017 / 12:08 PM / 3 months ago

GLOBAL MARKETS-Bonds and emerging market currencies' selloff resumes

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Selling in European bonds and rand, lira and rouble resumes

* Euro shares slip after higher start, Wall Street to start flat

* China shares hit 1-1/2 year high to lift Asia

* Dollar hits 4-month high vs yen on Fed/BoJ differences

By Marc Jones

LONDON, July 11 (Reuters) - The dollar hit a four-month high against the yen and world’s top bonds and emerging market currencies were back under pressure on Tuesday, on bets for higher interest rates in a small but growing group of major economies.

With the expectations fuelled by increasingly robust-looking global growth, MSCI’s 47-country All World share index was up for a third day running, though it was forced to cling on as Europe’s main bourses faltered despite a fresh flurry of M&A activity.

They were unsettled by some heavy falls among defensive consumer staples and property stocks, a dip in the commodity sector as oil stumbled and as futures markets pointed to flat start to U.S. trading for Wall Street.

Treasuries and benchmark European bond yields resumed their march upwards, having paused on Monday, as the focus shifted back to the pace of monetary tightening in the world’s largest economies.

Federal Reserve chief Janet Yellen starts two days of testimony on Wednesday as it prepares to unwind the massive hoard of bonds it bought to ease the financial crisis, while top ECB and Bank of England policymakers were due to speak in Europe on Tuesday.

Germany’s 10-year yield edged up 2 basis points to 0.56 percent having more than doubled over the last few weeks. The South African rand, Turkish lira and Russia rouble all dropped around 1 percent as some unusually concentrated selling resumed to emerging markets too.

Roger Webb, Head of European Credit at Aberdeen Asset Management said slightly stronger-than-expected global growth numbers recently had boosted expectations of higher interest rates.

“I think the increased hawkishness we have seen from the central banks has led to a fear that we could see a mini-taper tantrum,” he said.

“I don’t think there is too much alarm. I think the move to slightly higher yields in Europe and the U.S., UK and elsewhere is probably understandable.”

The dollar ground higher against most major currencies, including to a four-month high of 114.43 yen as traders played the past fortnight’s 25 basis-point rise in U.S. government bond yields against the Bank of Japan’s vow to keep its stimulus flowing.

The New Zealand dollar fell to its lowest in over two weeks meanwhile after an 6.8 magnitude earthquake hit the country’s south island.

The Canadian dollar was down slightly too as investors awaited a Bank of Canada interest rate decision on Wednesday which could be its first hike since the financial crisis.

Forecasters are still divided on whether it will pull the trigger, but money markets seem convinced it will and are also 80 percent priced for a follow-up rise by December.

FINE CHINA VS TOXIC TRIO

In commodities, crude oil slipped back after pushing higher overnight in Asia.

Increased drilling activity in the United States and uncertainty over Libyan and Nigerian production cuts clouded the future supply outlook, leaving U.S. crude down a third of a dollar at $44.13 a barrel and Brent at $46.57.

BNP Paribas slashed its forecasts for Brent by $9 to $51 a barrel for 2017 and by $15 to $48 for 2018. Barclays also cut its 2017 and 2018 Brent forecasts to $52 a barrel.

Gold edged lower to $1,212.13 an ounce as it headed back towards a four-month low and copper dipped too as the prospect of a strike at one of Chile’s big mines failed to offset data showing a rapid build-up of inventories.

Stainless steel ingredient nickel, however, gained after Chinese steel prices reached their highest in 3-1/2 years.

That came as bluechip Chinese stocks also hit an 18-month high as investors chased firms with stronger fundamentals and the central bank resumed liquidity injections having kept the taps closed for last 12 sessions.

Other emerging markets heavyweights were on the ropes though. South Africa’s rand hit a two-month low while Turkey’s lira and Russia’s rouble both lost almost 1 percent to trade just off recent respective 2-1/2 month and six-month lows.

They have become a new ‘toxic trio’ for traders having been hammered over the last few weeks despite other major EM currencies, such the Mexican peso, Brazilian real and Polish zloty, all faring relatively well.

“We have been emphasising the fundamental weakness of the South African macro story for some time, and believe that market pricing on ZAR (the rand) showed a degree of complacency that in part was explained by low G3 bond yields,” analysts at Morgan Stanley wrote in a note.

“It is thus not much of a surprise that it is the worst-performing EM currency now that liquidity conditions look less supportive.”

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Marc Jones; Editing by Raissa Kasolowsky

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