Financial Times - S&P 500 eyes records as techs and financials gain
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June 13, 2017. Dave Shellock.
Pound retakes $1.27 and Canadian dollar extends advance.
Overview
The S&P 500 edged back to within sight of recent record highs as technology stocks rallied after two days of steep losses and financials gained ahead of a widely expected interest rate rise from the Federal Reserve.
The dollar eased back, however, and Treasuries were little moved, amid uncertainty about the longer-term outlook for US monetary policy.
Sterling climbed back above the $1.27 mark after news that UK inflation had reached its highest level in almost four years. The Canadian dollar hit a two-month high as speculation mounted that the country’s central bank could be on the verge of raising rates.
Hot topic
it was the prospects for US monetary policy that dominated the markets as a two-day meeting of the Federal Reserve got under way.
Even with the market attaching a 99 per cent probability of the US central bank pulling the trigger again tomorrow — according to CME Group’s FedWatch tool — the dollar remained close to a recent seven-month low hit against a basket of currencies.
“The Fed funds futures market prices a 25 basis point rate hike with a strong degree of confidence, but it’s a lot less sure about what happens after that,” said analysts at Société Générale.
“Another 18bp hike is priced in for the end of the year, then 26bp for 2018 as a whole and 18bp in 2019. The pricing of end-2019 rates has come down by 25bp since the start of the year, even as pricing for 2017 has risen.
“The Fed’s insouciance about market pricing for the peak of the rate cycle, along with the fall in wage growth and inflation since the start of the year, is behind both the dollar’s relative softness, and markets’ overall buoyancy.”
The dollar was up fractionally against the yen at ¥109.96, while the euro was a shed firmer at $1.1204. The yield on the policy-sensitive two-year Treasury was unchanged at 1.36 per cent.
Forex
The dollar was down a further 0.7 per cent against its Canadian namesake at a four-month low of C$1.3235, for a two-day decline of 1.8 per cent.
The gains followed comments late on Monday from Carolyn Wilkins, senior deputy governor at the Bank of Canada.
“Billed as an economic update, the remarks read an awful lot like the central bank starting to make the case for a modest tightening in monetary policy later this year — much sooner than many people had thought,” said Shaun Osborne, chief FX strategist art Scotiabank.
“Markets assessed the risk of a rate hike from the BoC some time this year at about 25 per cent Friday, but that is now a little above 40 per cent.”
Sterling, too, was on the ascendancy — up 0.7 per cent against the dollar at $1.2746, with the euro down 0.7 per cent at £0.8788 — after UK data showed CPI inflationrising to an annual rate of 2.9 per cent last month from 2.7 per cent in April, higher than expected.
“Inflation is now more clearly outstripping the pace of earnings, which was recorded at an annual rate of 2.4 per cent in March,” noted Philip Shaw at Investec.
“We believe it unlikely that wages are set to accelerate materially over the course of the next year, especially given a likely period of tepid economic growth. Without evidence of mounting pay pressures, we still consider it unlikely that the [Bank of England’s] Monetary Policy Committee will raise rates before 2019.”
The 10-year UK gilt yield rose 7bp to 1.03 per cent as the markets priced in the higher inflation figures. By contrast, Italy’s 10-year government bond yield slipped a further 3bp to 1.98 per cent following a market-friendly outcome to municipal elections at the weekend.
Equities
Sterling’s advance meant the FTSE 100 equity index lagged behind most of its continental European peers, although the less internationally exposed FTSE 250 rose 0.9 per cent.
A 1.1 per cent rise for the technology sector helped the pan-European Stoxx 600 bounce 0.6 per cent.
In New York, the tech-heavy Nasdaq Composite was up 0.6 per cent in mid-afternoon trade, following a 2.3 per cent slide over the previous two sessions.
The benchmark S&P 500 index, meanwhile, was up 0.4 per cent and just above the record close of 2,439.07 struck at the start of June, but still short of its all-time intraday peak of 2,446.20. The Dow Jones Industrial Average was on track to record its best-ever finish.
Commodities
Energy stocks also gained ground as oil prices pulled further away from recent one-month lows. Brent, the international crude benchmark, was up 0.6 per cent at $48.57 a barrel.
Trading in the oil markets was volatile after a report showed that Opec oil output rose in May, despite an agreement between the cartel and major producers to curb production.
The dollar’s softer tone helped push gold up $3 to $1,268 an ounce.
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