Shares hit new high on view that Fed will raise rates slowly

WORLD shares hit their fourth high in less than a month yesterday and bond yields almost everywhere were lower as investors bet that policy tightening in the US would be glacial at best.

The overall mood was one of relief that US Federal Reserve chairperson Janet Yellen had not sounded more hawkish in her appearance before Congress the previous day, a green light for risk-taking.

Wall Street was expected to ring in another record peak for the Dow Jones Industrial Average when it resumes as the dollar pries itself off a nine-month low just in time for day two of Yellen’s semi-annual Washington grilling.

The star performer overnight had been the Canadian dollar, which rocketed to 11-month highs after the country’s central bank hiked interest rates for the first time in seven years and left the door wide open to further moves.

Sentiment received another boost when China reported upbeat data on exports and imports for June, the latest sign that global trade is finding some traction again.

It had helped push up Asian shares more than 1% and lift MSCI’s 47 country world index to its latest record high, and, although it took a while, Europe’s main bourses eventually muscled higher too.

Traders there began hoovering up banks stocks again after a 1.6% gain on Wednesday had given the regional STOXX 600 its best day since April’s French election win for Emmanuel Macron.

“It mostly seems to be down to Yellen,” Rabobank quantitative analyst Bas Van Geffen said.

“The fact that it seems like the Fed is going to take it slowly is being seen as a good sign by the equity markets and the currency markets.”

One of the Fed chief’s comments that markets latched on to was her view that the US central bank would not have to raise rates “all that much further” to reach current low estimates of the “neutral” funds rate.

Equities were also underpinned by a drop in bond yields as Yellen sounded cautious on inflation.

Debt market jitters prompted last month by an outbreak of harmony among top central banks about tightening policy appear to have evaporated again.

Treasuries rallied in reaction, with yields on two-year notes falling to three-week lows, as did bonds in both Europe and Asia. – Reuters