World equities marched to fresh multi-year highs this week, helped by a broadly encouraging outlook for global interest rates.
European stocks hit a succession of 3½-year highs over the week, with the FTSE Eurofirst 300 finally settling on Friday at 1,248.20, up 1.4 per cent over the five-day period and its best close since April 2002.
Wall Street did even better in spite of the holiday-
shortened trading week. The S&P 500 and the Nasdaq Composite both hit fresh 4½-year peaks, recording gains of 1.5 per cent each, while the Dow Jones Industrial Average was also up 1.5 per cent at its best level since March.
Asian equities also had a strong week. Tokyo’s Nikkei 225 Average climbed 1.1 per cent to its highest level for nearly five years, while South Korean shares finished at record highs.
Wall Street got a boost from the minutes of the Federal Reserve’s last policy meeting, which the markets interpreted as suggesting that US rates were near to the top of their current cycle. The Fed has raised rates 12 times since last summer to the current level of 4 per cent.
“It is clear from reading the minutes . . . that the [Federal Open Market Committee] members are discussing their eventual exit
strategy from the current tightening campaign and this could mark a turning point for the financial
markets,” said David Rosenberg, north American economist at Merrill Lynch.
But Richard Reid at Citigroup was slightly more cautious, saying he continued to believe that US policy would be driven by forthcoming economic indicators.
“These we believe will encourage the Fed to raise interest rates 25 basis points in both December and January,” he said, although he expects 4.5 per cent to be the peak for the Fed funds rate.
Meanwhile, the prospects for eurozone borrowing costs attracted plenty of debate as unexpectedly weak business confidence data from Germany’s Ifo institute added weight to the view that the European Central Bank would not embark on a Fed-style series of rate increases.
“The key point to stress is that this disappointing figure should not alter the immediate outlook for eurozone interest rates,” said Tom Levinson, economist at ING. “We still consider a 25 basis point rate hike from the ECB next Thursday highly probable, which would be the first increase in ECB interest rates for over 5 years.
“However, the detail of the Ifo does provide encouragement for our view that ECB interest rates are unlikely to get to 3 per cent by the end of next year, as the market is pricing in.”
Eurozone government bond yields fell sharply on growing expectations that that the ECB would not raise rates aggressively.
The shift in overall yield expectations between the US and the eurozone meant that the dollar took a pause from its recent rally against the euro for most of the week. By late trading on Friday, however, the single currency was down about 0.4 per cent from its level against the greenback a week ago. The dollar continued to gain ground against the yen, hitting a fresh 27-month high.
In commodities, gold hit a new 18-year high on Friday, although the market lacked the impetus for a final push to the psychological $500 an ounce mark.
“The $500 [level] continues to look achievable soon but we think this has become more of a self-fulfilling prophecy with a lot of the reasons to be bullish on gold appearing to be post-rationalisation to us,” said Yingxi Yu at Barclays Capital.
Zinc hit an 8½-year high during the week and aluminium rose to a 10½-year peak.
Copper prices saw volatile trading amid lingering uncertainty about a huge reported short position in the metal in China. Copper ended the week within striking distance of last week’s record high of $4,243 a tonne.
Oil prices continued to retreat over the week after data showing a bigger than expected rise in US distillate inventories last week helped calm fears of fuel shortages as winter approaches.
The benchmark US crude future has now fallen some 17 per cent from the record high of $70.85 a barrel struck at the end of August.
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