Stocks Rally With Commodities as Fed Speculation Weakens Dollar

New York (Oct 18)  Stocks rallied around the world, commodities jumped and the dollar sank on speculation that the Federal Reserve will look past a pick-up in the global inflation and stick with a gradual tightening of monetary policy.

The MSCI All Country World Index of equities headed for its biggest advance in almost four weeks as investors parsed earnings reports. The Bloomberg Dollar Spot Index extended Monday’s retreat from a seven-month high after reports showed New York manufacturing unexpectedly shrank and U.S. factory output barely grew. The Mexican peso led gains in emerging-market currencies. The Bloomberg Commodity Index rose for a fourth day to the highest in a week, with oil and metals climbing.

“The market has clearly come to a stronger view that they will raise rates in December but that has very little influence on where rates are perceived to go in the longer term,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. “In a more normal interest-rate cycle, if the market had moved to discount a December interest rate hike, it would probably have moved to discount three or four hikes next year and that’s simply not the case any more.”

While Fed fund futures indicate the probability of a rate increase by the December meeting has risen to 66 percent, from about 55 percent a month ago, data releases have signaled that there’s still reason for officials to be cautious. The Bloomberg U.S. ECO surprise index -- which measures whether data have exceeded or fallen short of analysts’ estimates -- fell below zero for the first time in two weeks. Officials are still to form a consensus view to support a faster pace of tightening, with Chair Janet Yellen last week pondering whether a “high-pressure economy” could reverse some of the damage done in the recession.

Stocks

The Stoxx Europe 600 Index rose 1.4 percent at 7:59 a.m. in New York. Miners led gains as commodity prices advanced. Italian banks propelled lenders higher, with Banca Monte dei Paschi di Siena SpA jumping 6.5 percent after Il Sole 24 Ore reported that the board of directors will discuss a proposal to bolster the lender’s financial health from Corrado Passera, Italy’s former economic development minister. Ryanair Holdings Plc rose 2.7 percent, reversing an early drop of as much as 3.2 percent after the airline lowered its profit guidance amid Brexit-induced losses in sterling.

Among stocks moving on earnings-related news:

S&P 500 Index futures advanced 0.6 percent, after U.S. equities fell 0.3 percent on Monday amid a slide in health-care companies. Data on inflation scheduled for release Tuesday.

Netflix Inc. surged 19 percent in early trading in New York after saying its streaming service signed up 3.57 million subscribers in the third quarter, vanquishing -- for now -- investor concerns about slowing growth at the world’s largest online TV network. Goldman Sachs Group Inc. gained 1.6 percent after reporting a 47 percent increase in third-quarter earnings, spurred on by revenue from bond trading that surpassed analysts’ predictions.

The Hang Seng China Enterprises Index of mainland companies in Hong Kong rose 1.9 percent, its biggest advance since Aug. 1. A report will show on Wednesday that Asia’s largest economy expanded 6.7 percent in the three months through September, the same as in the previous two quarters, according to the median estimate of analysts surveyed by Bloomberg.

The Philippine Stock Exchange Index climbed 2.9 percent, the most in five months. President Rodrigo Duterte starts a four-day trip to China on Tuesday, and there’s optimism it will yield investment deals and boost tourism, said James Lago, head of research at PCCI Securities Brokers Corp. in Manila.

Currencies

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, declined 0.2 percent.

“The dollar has struggled to gain upside momentum today because of further evidence that the Fed’s tightening cycle will be very gradual,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney.

The pound rose 0.7 percent to $1.2265 as the Office for National Statistics said the annual inflation rate accelerated to 1 percent last month, from 0.6 percent in August. That’s above the 0.9 percent rate forecast by economists and is the highest since 2014.

The New Zealand dollar climbed 0.9 percent after the country’s consumer prices rose in the last quarter faster than economists predicted, a reading some analysts said may weaken the case for interest-rate reductions beyond November.

The Australian dollar strengthened 0.6 percent and touched a two-week high. Reserve Bank of Australia Governor Philip Lowe said Tuesday that trying to revive inflation too quickly could threaten financial stability by inciting a new round of borrowing by heavily indebted consumers. He spoke before the release of minutes from the RBA’s last policy meeting, which showed economic expansion was forecast to continue at a moderate pace.

The MSCI Emerging Markets Currency Index rose 0.4 percent as Mexico’s peso advanced 0.9 percent, followed by a 0.8 percent gain by the South Korean won. South Africa’s rand climbed to a one-week high.

Commodities

Crude was up 0.7 percent at $50.29 a barrel in New York, after slipping 0.8 percent in the last session. The price has fluctuated near $50 for most of this month amid skepticism that the Organization of Petroleum Exporting Countries will implement a Sept. 28 agreement to reduce supply. An OPEC committee will meet later this month to try to resolve differences over how much individual members should pump.

Gold rose 0.4 percent in London trading to $1,260.92 an ounce while silver, platinum and palladium all gained. Copper gained 0.2 percent to $4,684 a metric ton.

U.K. day-ahead natural gas rose an 11th day, buoyed by forecasts for cooler-than-normal temperatures. The contract is in the longest rising streak in at least nine years, according to broker data compiled by Bloomberg going back to 2007. 

On the Chicago Board of Trade, soybeans gained 0.4 percent to $9.825 a bushel, touching the highest since Sept. 21.

Bonds

The yield on Treasuries due in a decade was little changed at 1.77 percent, after dropping three basis points the previous day.

Longer-dated notes have slumped this month amid concern inflation is gathering pace and Tuesday’s data are forecast to show American consumer prices increased 1.5 percent in September from a year earlier, the fastest pace in almost two years.

This month’s selloff in Treasuries has had knock-on effects on bond markets across much of the world. Taiwan’s 10-year bond yield increased by eight basis points to 0.9 percent on Tuesday, the biggest gain in three years.

Germany’s 10-year bond yield was little changed at 0.049 percent, while that on similar-maturity U.K. gilts fell three basis points to 1.09 percent, after rising 10 basis points over the previous two days.

The Czech Republic is challenging Switzerland as the country with the world’s lowest yields, with the rate on the former communist nation’s two-year notes dipping below that on their Swiss peers, before rising again.

Bonds of Petroleos de Venezuela SA fell as the company said it would extend a deadline for investors to agree to swap as much as $5.325 billion of bonds for debt coming due at a later date.

Source: Bloomberg