LONDON (Reuters) - Market bulls resumed their charge on Thursday, as strong data from the world’s biggest economies sent stock index records tumbling and oil prices to their highest since mid-2015.
In an apparent acceleration of last year’s global equity boom, MSCI's world index .MIWD00000PUS and London's FTSE .FTSE both set records in Europe, and the Dow Jones .DJI was expected to break the 25,000 barrier when Wall Street reopens. [.N]
Tokyo's Nikkei .N225 - Asia's biggest market - had earlier shot to its highest since 1991 with a 3.3 percent surge. [.T]Asia-Pacific excluding Japan .MIAPJ0000PUS scaled a decade-high peak as a fifth day of gains in China helped emerging market stocks .MSCIEF to a 6 1/2-year high as well [EMRG/FRX].
“It is a continuation of the goldilocks story,” said Michael Metcalfe, State Street Global Markets’ head of macro strategy. “The main theme last year was strong growth and accommodative (monetary) policy, and the data we have had so far suggest that the growth is expected to accelerate, and without inflation.”
The data published on Thursday reinforced expectations that solid world growth will boost demand for goods, including oil, and lift corporate earnings.
China’s services sector activity hit its highest level in more than three years, manufacturing data from Japan came in strong and euro zone surveys showed the bloc enjoying its strongest run in nearly seven years.
IHS Markit’s Final Composite Purchasing Managers’ Index - considered a good overall growth indicator for euro zone - rose to 58.1 in December from 57.5 in November and up slightly from a flash estimate of 58.0.
“A stellar end to 2017 for the euro zone rounded off the best year for over a decade, continuing to confound widely held fears that rising political uncertainty would curb economic growth,” said Chris Williamson, chief business economist at IHS Markit.
Another factor behind the upbeat mood was that minutes of the Federal Reserve’s mid-December meeting released on Wednesday did little to change that view that it will stick to measured increases in U.S. interest rates.
They showed policymakers expect U.S. President Donald Trump’s tax overhaul will to boost consumer spending but are still uncertain about the wider impact the stimulus would have on things like inflation.
Fed funds rate futures moved to price a 75 percent chance of a rate hike by March, compared with around 60 percent at the end of last year. But markets are still not fully pricing in the three rate increases many Fed officials expect this year.
The dollar climbed off a three-month low after the minutes but was backsliding before U.S. markets re-opened [/FRX]. The dollar was at 112.64 yen JPY= and the euro up 0.4 percent at $1.2063 EUR=. If the single currency gets above September's peak of $1.2092, it would return to ground last trod in early 2015.
Analysts are now wondering whether the strength of the euro zone economy could even encourage the European Central Bank to start raising its still-negative interest rates. “We see some very positive euro sentiment in the market right now,” said Commerzbank currency strategist Esther Reichelt in Frankfurt.
Yields on French bonds FR10YT=TWEB held at 0.80 percent as neighboring Germany’s 10-year rates inched up to 0.45 percent DE10YT=TWEB. But Spain’s yields ES10YT=TWEB saw their biggest drop in almost two months as it easily sold 4.6 billion euros of bonds.
The bigger focus, though, was on commodity prices, which often have a big influence on global inflation.
Oil prices were touching levels not seen since before commodity markets slumped in 2014 and 2015, boosted by tensions in key producer Iran and ongoing OPEC-led output cuts. [O/R]
U.S. West Texas Intermediate (WTI) crude futures CLc1 rose as high as $62.17 per barrel, their highest level since mid-2015 before easing back. International benchmark Brent LCOc1 rose to a 2 1/2-year high of $68.19 a barrel.
At the same time, inflation expectations indicated by the gap between 10-year U.S. inflation-linked bonds US10YTIP=RR and conventional bonds US10YT=RR was above 2 percent, at the highest level since March.
“Oil appears to be traded at a premium compared to economic fundamentals because of concerns over development in Iran,” said Motofumi Okoshi, senior economist at Nomura Securities.
At the moment though, forward contracts are trading cheaper than expected spot prices, a condition known as “backwardation”, suggesting investors expect any supply shortages to be temporary.
“If conditions in Iran deteriorate further, I expect forward contracts will begin to be bought as well,” Okoshi said.
Political concerns were also supporting safe-haven gold, which fetched $1,310 per ounce XAU=, after hitting a 3 1/2-month high of $1,321.5 on Wednesday.
Still, investors expect financial markets to stay stable overall. The Cboe Volatility index .VIX, which measures implied price volatility of U.S. stocks in the next one month, closed at 9.15 on Wednesday, just short of its record closing low of 9.14 touched on Nov. 3.
Additional reporting by Jemima Kelly in London and Hideyuki Sano in London; editing by Larry King
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.