Equities battle rising global bond yields
Asian factories off to a strong 2018 start and Europe posting solid growth, survey shows
European stocks rose yesterday after three days of losses, although US and German bond yields near multi-year highs checked gains in world stock markets and kept them from testing recent record highs.
Stock markets in Europe rose 0.25 per cent, supported by a flurry of mostly positive earnings results, while Japan’s blue-chip stock index bounced 1.7 per cent off four-week lows and MSCI’s all-country equity index was marginally higher.
US equity futures however pointed to a flat open for Wall Street ahead of earnings announcements from tech giants Apple, Alphabet and Amazon. com.
January’s last trading session on Wall Street ended in the red, but US indexes still ended with monthly gains of over 5 per cent. World stocks enjoyed a record 15-month winning streak.
This week’s meeting of the US Federal Reserve was more hawkish than expected, but confirmed what markets had already expected — an interest rate rise is likely in March, said Markus Huber, a trader at brokerage City of London Markets.
“In light of today’s flood of earnings in Europe and the United States, the Fed meeting will most likely have only a limited and temporary impact on markets,” Huber predicted.
Growth momentum
Global equity markets are torn between buoyant economic growth and double-digit company earnings, on the one hand, and the possibility that US and Eurozone central banks will tighten policy faster than expected. The growth momentum was confirmed by manufacturing activity surveys yesterday that showed Asian factories getting off to a strong 2018 start and Europe posting solid growth.
Boeing and Facebook were the latest to reinforce the solid US earnings growth picture. European markets cheered improved performance at Unilever and Royal Dutch Shell Huber said results from the likes of Amazon and Apple would be crucial.
“It will be essential that those companies not only deliver in regard to earnings expectations but also show that the momentum going forward remains strong,” he added.
Equity bullishness is being tempered, however, by rising global bond yields. The Fed held interest rates unchanged on Wednesday but raised its inflation outlook, no longer saying it expected price growth to stay below 2 per cent. It also flagged “further gradual” rate increases.
That wording convinced many that rates could rise four times this year, rather than three.US 10-year Treasury yields surged to near four-year highs above 2.75 per cent after the Fed statement, while German Bund yields yesterday rose to fresh two-year highs at around 0.74 per cent.
Two-year US yields are near decade-highs and could rise further should jobs data due on Friday confirm sustained labour market strength.
“Long-ended US yields are still rising and that’s spilling over on the European market and (German) Bunds especially,” said Commerzbank rates strategist Rainer Guntermann.
Pressure on Eurozone
Pressure is building on Eurozone authorities, too, to curb stimulus, with employment at record highs and yesterday’s manufacturing surveys confirming the bloc’s growth boom.
On currency markets, the dollar’s post-Fed bounce fizzled, pushing it down 0.1 per cent against a basket of currencies. The Euro gained 0.2 per cent to $1.2440, just off recent threeyear highs of $1.2538.
The British pound rose 0.25 per cent, after a 5 per cent gain in January, its biggest monthly rise since May 2009, owing to broad dollar weakness and expectations of a Brexit deal more favourable to the UK.