Optimism over solid world economic data
Oil prices are hovering at a 2½-year highs
ASIAN shares vaulted to 10year highs yesterday as solid economic data from the US and Germany reinforced investors’ optimism, while oil prices hovered at a two-and-ahalf year high, with unrest in Iran stoking supply disruption concerns.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, extending its gains so far this year to 2.4 percent.
Japan’s Nikkei jumped 3.3 percent on its first trading day of the year, hitting its highest level in a quarter of a century.
“The economic data published over the holiday period has been pretty good. So for those who were worried about New Year profit-taking, the market would look pretty strong,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities.
The economic data published on Wednesday on both sides of the Atlantic reinforced investors’ expectations that solid global growth will boost demand for goods, including oil, and lift corporate earnings.
Surge
US factory activity increased more than expected in December, boosted by a surge in new-orders growth, in a further sign of strong economic momentum at the end of 2017.
In Germany, Europe’s economic power house, the unemployment rate hit a record low of 5.5 percent last month, underpinning a broad-based economic upswing.
European shares were expected to gain, with spread-betters looking to a higher opening of 0.6 percent in Germany’s Dax , 0.5 percent in France’s Cac 40 and 0.2 percent in Britain’s FTSE.
The world’s stock markets, which had their best year since 2009 last year, hit a record high yesterday, extending gains so far this week to 1.4 percent.
On Wednesday, the three main stock indexes on Wall Street hit record closes, helped by a 1.5 percent rise in energy stocks.
Japan’s Nikkei jumped 3.3 percent on its first trading day of the year, hitting its highest level in 25 years.
Oil prices hovered at twoand-a-half year highs as the anti-government protests in Iran that began last week rattled Tehran’s clerical leadership and left 21 people dead so far, raising concerns about supply.
US West Texas Intermediate crude futures rose to as high as $62.17 per barrel, up 0.9 percent for the day and their highest level since mid-2015.
International benchmark Brent futures also scaled a twoand-a-half year high of $68.19 a barrel.
“Oil appears to be trading at a premium compared to economic fundamentals because of concerns over developments in Iran,” said Motofumi Okoshi, senior economist at Nomura Securities. At the moment, forward contracts are trading cheaper than expected spot prices, a condition known as backwardation, suggesting investors expect any supply shortages to be temporary.
“If conditions in Iran deteriorate further, I expect forward contracts will begin to be bought as well,” Okoshi added.
Concerns about geopolitical instability are also supporting safe-haven gold, which fetched $1 310 an ounce, after hitting a three-and-a-half month high of $1 321.5 on Wednesday.
Above record
Still, investors are expecting financial markets to be stable overall, with the CBOE Volatility index, which measures implied price volatility of US stocks in the next one month, closing at 9.15 points, just above the record closing of 9.14 points touched on November 3, and below its 2017 average of 11.09 points.
The volatility index has been kept at one of the lowest levels since the global financial crisis in 2008, primarily because investors bet the US Federal Reserve (Fed) and the world’s other major central banks will tighten monetary policy only gradually, with few signs of inflation pressures building.
To be sure, inflation expectations indicated by the gap between 10-year US inflation-linked bonds and conventional ones limbed above 2 percent to the highest level since March.
Still, the minutes of the Fed’s last policy meeting on December 12-13 released on Wednesday did little to change the perception of measured monetary tightening.