Cautious Fed sends stocks to record highs, dollar dips

LONDON: Global stocks scaled record highs on Friday, capping their best week in over two months as the dollar stayed close to nine-month lows, with bets on a gradual US Federal Reserve rate hike path and hopes for a strong earnings season boosting risk appetite.
After a scare at the end of last month, when stock markets skidded on the view that the era of easy money might be coming to an end across the globe, investors have been soothed by a run of more dovish comments from central bankers.
Dallas Fed President Robert Kaplan on Thursday advocated a go-slow approach to further tightening after two hikes so far this year, saying he first wants to see more evidence that inflation is heading back up to the Fed’s 2 per cent goal.
Fed Chair Janet Yellen also said on Thursday that the central bank’s further rate hikes could be gradual, given persistently low inflation despite an improving economy.
European shares were poised for their best week since late April as investors piled back into equities, though moves on indexes on Friday were muted as investors hunkered down ahead of earnings reports from major US banks including JPMorgan and Citigroup later in the day. The pan-European STOXX 600 index inched up 0.1 per cent, adding to earlier gains on stock markets in Asia that took MSCI’s world stock index to an all-time high.
Asian traders headed into the weekend cautiously upbeat on Friday following a broadly positive week across global equity markets after Federal Reserve Chief Janet Yellen indicated a softer approach to raising US interest rates.
Tokyo ended 0.1 per cent higher, Sydney added 0.5 per cent and Singapore was 0.8 per cent up while Seoul put on 0.2 per cent.
Hong Kong, which is at its highest level since mid-2015 following a four-day rally, closed 0.2 per cent higher, while Shanghai ended up 0.1 per cent.
Second-quarter earnings are also in focus with US banking giants JPMorgan Chase and Wells Fargo due out later in the day, while Netflix and Johnson & Johnson are among those up next week.
“The US profit reporting season looks likely to be a key market driver over the next couple of weeks,” said CMC Markets Chief Market Analyst Ric Spooner in a commentary.
“Another good… season will be very supportive for stock markets and continue the current bias against being too trigger happy in response to potential risk events. However, full valuations mean there’s not a lot of margin for error. Stocks that underperform are likely to be dealt with harshly.”
The signals from the Fed drove the dollar to a nine-month low against its broad index on Thursday and it stayed close to that trough, inching down 0.1 per cent on the day.
The yen, meanwhile, was on the back foot against high-yielding currencies such as the Australian dollar as the VIX index, a gauge of asset volatility, drifted lower and provided a boost to carry trades.
“The latest comments from Yellen and others suggest that interest rates will rise very gently, and that is supportive for high-yielding currencies for now,” said Viraj Patel, an FX strategist at ING Bank in London.
The recent caution from central bankers has also taken the sting out of a sell-off in the bond market, which had been gathering steam over the past few weeks in the euro zone on rising expectations that the European Central Bank is set to wind down its asset purchase programme.
The bloc’s benchmark German 10-year yield fell some 3 basis points when European trading started on Friday to 0.50 per cent, moving away from an 18-month high hit earlier this week of 0.583 per cent.
Wall Street had also edged higher on Thursday though it was set for a slightly weaker open ahead of key earnings reports. “The US profit reporting season looks likely to be a key market driver over the next couple of weeks,” Ric Spooner, Chief Market Analyst at CMC Markets in Sydney, wrote in a note.
“Full valuations suggest that the market is yet again going into this reporting season anticipating results to outperform consensus analyst expectations.”
The euro was up 0.1 per cent at $1.1410 and was set to end the week flat. The ECB is likely to signal in September that its bond-buying scheme will be wound down gradually next year, but President Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal said on Thursday.
In commodities, oil markets edged lower amid high fuel inventories and improving industry efficiency, but remained on track for a solid weekly gain.
Brent crude futures, the international benchmark for oil prices, were down 19 cents, or 0.4 per cent, at $48.23 per barrel.
Gold was steady at $1,217.32 an ounce, heading for a half-per cent gain for the week. — Reuters