Global Market Overview

Last updated: June 9, 2014 9:10 pm

Global policy hopes push stocks higher

Monday 21:00 BST. Global stocks inched to fresh record highs as the prospect of continued policy accommodation from the world’s main central banks, plus some encouraging economic signals from China and Japan, provided support.

The FTSE All-World equity index was up 0.1 per cent and heading for a second successive record close, as the S&P 500 in New York edged 0.1 per cent higher to 1,951, its seventh record finish in eight sessions. The CBOE Vix volatility index was up 5.5 per cent from Friday’s seven-year low.

Across the Atlantic, the Xetra Dax in Frankfurt rose 0.2 per cent to finish above 10,000 for the first time, while the FTSE Eurofirst 300 added 0.4 per cent to a six-year high. In Tokyo the Nikkei 225 rose 0.3 per cent to its best close in three months.

“It is difficult to turn bearish on equity markets when central banks look to maintain zero/negative interest rate policy for as long as possible, indicate that rate hikes will be gradual, and signal that the tightening cycle will not see rates return to their normal pre-crisis levels,” said Divyang Shah, global strategist at IFR Markets.

“We reiterate our forecast that the S&P could see 2,026 and the Dax 10,421 by the end of the year, based on Fibonacci projections. But these are now looking less of a stretch to achieve.”

But others in the market sounded a note of caution. “Equity valuations are looking mightily stretched in Europe and the US,” said Andrew Lapthorne, quantitative analyst at Société Générale.

“Median price to cash flow ratios are just 8-9 per cent below the historical highs seen at prior peaks. Rarely have average stock valuations stayed this high for long, particularly in Europe, where median price cashflow ratios have only exceeded current levels in 2000 and 2007.

“These look like ‘end of’, not ‘beginning of’, bull market valuations.”

However, for now at least, the equity bull market remained intact, underpinned by signs that the US labour market was continuing to recover – and after the European Central Bank’s bold moves last week to stimulate growth and ward off deflation.

Peripheral eurozone government bonds remained the chief winners from the ECB’s move, with the 10-year Spanish yield dropping 6 basis points to a record low of 2.59 per cent, taking it below that of the US for the first time since 2010.

The 10-year Treasury yield was up 1bp at 2.61 per cent – but still close to a recent 11-month low of 2.4 per cent – while that on the German 10-year Bund rose 3bp to 1.38 per cent.

The euro slipped 0.4 per cent against the dollar to $1.3588, matching a recent four-month closing low. The US currency enjoyed a broad bout of strength in the wake of last week’s solid non-farm payrolls report, gaining 0.4 per cent against the Swiss franc and edging up versus the yen to Y102.51. The dollar index was up 0.3 per cent to 80.65.

Investor risk appetite was further helped by some positive signs on the growth front from Japan and China.

First-quarter Japanese GDP growth was unexpectedly revised up from 1.5 per cent to 1.6 per cent – 6.7 per cent on an annualised basis.

“The main reason for the stronger headline figure was an adjustment to business investment, which rose 7.6 per cent quarter on quarter rather than the 4.9 per cent in the preliminary estimate,” said Marcel Thieliant at Capital Economics.

“What’s more, machinery orders climbed to a fresh high in March, which indicates that firms remain confident about the outlook for demand.”

Meanwhile, Chinese trade data released over the weekend showed that the annual rate of export growth accelerated to 7 per cent in May, suggesting that external demand conditions were becoming more supportive.

Imports, however, fell 1.6 per cent – highlighting weak domestic demand – sending the trade surplus from $20.4bn a year earlier to $36bn.

“The big jump in trade surplus and robust export growth in May support our 7.5 per cent [year-on-year] growth forecast for second quarter 2014,” said economists at BofA Merrill Lynch Global Research.

After Asian markets had closed, the People’s Bank of China announced a reduction in the reserve requirement ratio for some smaller banks in an effort to bolster lending to small businesses and the rural economy.

Among industrial commodities, copper hit a one-month low on fresh worries about Chinese demand before rallying to finish just 0.2 per cent softer at $6,670 a tonne.

Gold was up $1 at $1,253 an ounce.

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