European equities and Wall Street futures were being traded cautiously ahead of US inflation data later in the week that may determine the future direction of central banks’ monetary policies.
The Stoxx Europe 600 rose 0.2 per cent, on course for another all-time high. Futures markets suggested the S&P 500, Wall Street’s dominant equity gauge, would drop 0.1 per cent when New York markets open.
Contracts that wager on the top 100 stocks on the Nasdaq Composite index, whose highly valued tech companies are viewed as sensitive to tightening monetary conditions, fell 0.4 per cent.
Economists expect consumer price inflation data on Thursday to show the year-on-year inflation rate jumped to 4.7 per cent in May, following an unexpectedly strong consumer prices report in April.
The Federal Reserve, which meets next week, views strong inflation as a temporary effect of the economy reopening after pandemic shutdowns. Investors are alert, however, for persistent price rises that could force monetary policymakers to raise interest rates more quickly than planned. Since last March, the Fed has purchased $120bn of assets each month and pinned interest rates at record lows to ensure markets function smoothly.
“This will be a transition year for monetary policy,” said Gergely Majoros, a member of the investment committee at European fund manager Carmignac. After becoming used to central banks’ strong support, he added, “the transition is going to be a difficult one for investors to manage”.
Janet Yellen, US Treasury secretary, told Bloomberg on Sunday that it would be “a plus” if President Joe Biden’s multitrillion-dollar stimulus programmes resulted in slightly higher interest rates.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” Yellen said.
Financial markets were “hyperactive on cheap money,” added Patrick Spencer, vice-chair of equities at stockbroker Baird, referring to spikes in so-called meme stocks favoured by retail traders and frenzied price moves in cryptocurrencies. “We need to come off the sugar.”
Stock market investors were also increasingly concerned, Carmignac’s Majoros added, about companies failing to meet analysts’ increasingly bullish earnings expectations.
After a bonanza first-quarter earnings season on both sides of the Atlantic as businesses hit by lockdowns profited from resurgent demand as economies reopened, forecasters have widely upgraded their expectations for second-quarter results.
“Analyst optimism is getting to extreme levels,” Liberum strategists Joachim Klement and David Mak commented in a research note.
“The share of companies experiencing upgrades is now roughly at all-time highs,” on both the Stoxx and the S&P 500, they said. “We expect the next earnings season to become a reality check for many analysts and investors.”
The yield on the 10-year US Treasury bond, which moves inversely to its price, rose by 0.02 percentage points to 1.578 per cent. The yield has climbed from about 0.9 per cent since the start of the year as investors anticipate higher inflation, which erodes the value of bonds’ fixed interest payments.
Brent crude dropped 0.5 per cent to $71.55 a barrel after reaching its highest level since May 2019 in Asian trading earlier on Monday.
In currencies, the Mexican peso added 0.9 per cent to 19.78 a dollar after Andrés Manuel López Obrador looked set to lose a two-thirds majority in Mexico’s lower house of Congress he had needed for significant constitutional changes The euro dipped 0.1 per cent to purchase $1.2158.
Source: Economy - ft.com
