World stocks ride to record high, dollar retreats

February 16, 2017 09:17 AM

World stocks hit an all-time high on Thursday as the latest round of robust global data matched hopes that major economies like the United States will soon be serving up large helpings of fiscal stimulus.

MSCI's All Country World index, spanning 46 countries, nursed the milestone as a record high the financial market readied to reopen and Asia and Europe had consolidated the rough 10 % gains both have made since December.

There were surges in exports from Indonesia and Taiwan, falls in unemployment in Europe from Sweden to the Netherlands while Donald Trump had already tweeted his joy at record stocks prices as he again promised mass tax cuts.

"With the exception of politics, I have rarely seen such as network of positive signals," said ABN Amro's chief investment officer Didier Duret.

"There is a momentum, we don't know when it will stop, but at the moment it is strong," he said. "Investors are rather underinvested anyway and there is lots of cash so equities are the asset class of default in this environment."

Another reason for the upbeat mood has been that, unlike in recent years, the prospect of U.S. interest rate rises—which tend to set the bar for global borrowing costs—does not seem to be spooking markets.

The dollar is still down for the year despite a strong run over the last couple of weeks, while Treasury yields have barely risen, which has helped propel emerging market bonds, stocks and many currencies higher.

The dollar hit the brakes again on Thursday as the glow of the previous day's upbeat data faded. U.S. government bond yields eased too, taking German Bunds and Europe's other benchmarks with them.

Upcoming elections in the Netherlands, France, Germany and possibly Italy, have kept investors interested in "safe" government bonds particularly with an anti-euro and anti-EU sentiment on the increase throughout the continent.

Minutes from the last European Central Bank meeting showed its members agreeing that a careful approach to their stimulus in the euro zone was needed to reassure markets and that they should look through the bloc's current rise in inflation.

"The Governing Council was seen as well advised to remain patient and maintain a 'steady hand' to provide stability and predictability in an environment still characterized by a high level of uncertainty," the ECB said.

The euro saw a brief tremble but then recovered to where it had been beforehand at $1.0645. It was also flat against Britain's sterling.

Icarus trade
U.S. stocks futures pointed a slight pull back from the record high the financial market later, though they were already digesting a flurry of data from jobless claims figures to a batch of Philly Fed economic surveys.

In commodity markets, which have also been enjoying a strong year so far, oil prices recovered from a knock from data showing record-high U.S. crude and gasoline inventories.

Brent and U.S. crude both inched up 0.3 % to $55.92 and $53.28 a barrel respectively, while gold prices also rose as the dollar drifted down.

Industrial bellwether copper, which has surged 30 % since late October, eased however to $6,028 a tonne after China's overseas investment weakened. China is the world's top copper user, but prices were supported by the prospect of supply disruptions in Chile and Indonesia.

The mildly weaker metals prices meant European shares couldn't quite hold their ground either despite the sentiment boost from the new record high in global stocks.

The region's STOXX 600 index was 0.3 % lower by 1000 GMT but this year's rally has been underpinned by the fact European company earnings are expected to grow 14 % this year, according to Thomson Reuters I/B/E/S data.

Asia had no such problems overnight. MSCI's main Asia index rose 0.2 % to its highest since July 2015 after the financial market had again pushed relentlessly into record-high territory.

Some investors said markets were looking slightly overvalued from a technical perspective after the bounce in recent weeks. For example, on a relative strength index (RSI), the MSCI Asia-ex Japan index was at its most overbought since 2015.

"We are seeing some profit-taking at these levels and unless there is a big correction, the broader uptrend in the Hong Kong market seems broadly intact," said Alex Wong, Hong Kong-based director of Ample Finance Group.

Analysts at Bank of America Merrill Lynch have regularly been warning since the start of the year of an "Icarus trade" where there is "one last melt-up in risky assets" before the ground rushes up.

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