Global stocks consolidate rally

Global stocks are consolidating near 2016 highs following a big rally in which falling bond yields, stronger commodity prices and a weak dollar played important roles.

The FTSE All-World equity index is barely changed on the day at 261.72 as the pan-European Stoxx 600 gains 0.3 per cent following a mixed Asian session. US index futures suggest the S&P 500 will gain just 0.1 per cent to 2,043.

The Wall Street barometer’s swift rebound off its February 11 low has been a main driver of a five-week, 12.1 per cent bull run that has taken the All-World to its best level since the start of the year.

Integral to this rally are the recent actions of central banks. The European Central Bank last Thursday delivered a big monetary stimulus in an effort to support the euro zone economy. The Bank of Japan stood pat earlier this week, though some analysts believe it retains an easing bias.

And the latest lift to sentiment comes courtesy of a more dovish tone from the Federal Reserve, which on Wednesday moved closer to market expectations by trimming from four to two its mooted 25 basis point interest rate rises this year.

The Fed’s shift has put more weight behind trends that are seen having a positive influence on risk appetite: lower government bond yields and a softer dollar.

The prospect of interest rates staying low for longer has helped push Treasury yields down from recent multi-week highs. The two-year note is off 2bp to 0.85 per cent and the 10-year yield is slipping 1bp to 1.89 per cent.

Ten-year German bond yields are down 1bp to 0.22 per cent and equivalent maturity Japanese paper at one point on Friday hit a record low of minus 0.135 per cent.

Such meagre payouts from fixed income assets make equities appear relatively more attractive. And bourses have received an additional boost from rebounds in the shares of resources companies as base metals and energy prices have rallied.

Oil has been particularly chipper of late. The price of Brent crude is up 1.6 per cent to a three-month high of $42.19 a barrel, an advance of more than 50 per cent from the 12-year low of $27 hit in mid-January.

Hopes for production cuts that will help trim a global oil glut are contributing to Brent’s good run. But the energy benchmark, and other dollar-denominated commodities, are also getting assistance from fresh weakness in the greenback following the Fed’s less hawkish stance.

The dollar index, which measures the buck against a basket of its peers, is currently recovering 0.2 per cent to 94.92, but is down 1.7 per cent over just the last three sessions, having on Thursday hit a five-month trough.

With the BoJ and ECB having failed to weaken their currencies by pushing interest rates even lower, Kit Juckes at Société Générale says a stronger US dollar now depends on the Fed being more hawkish than the markets expect.

“That clearly is not happening. So, no reason to buy the dollar, and while neither yen nor euro look attractive either, the higher-yielding - or less low-yielding - currencies all benefit,” he said.

Markets are becoming less confident the Fed will stick to its pace of policy normalisation, but analysts at Goldman Sachs still expect the central bank to raise interest rates three times this year. Owing to that divergence in expectations, they remain bullish on the greenback.

“And there is admittedly a genuine tension there. On the one hand, some Fed speakers have recently flagged the importance of financial conditions in their decision-making process. On the other hand, labour market slack is steadily diminishing and core PCE [inflation] is rising towards 2 per cent . . . Ultimately, we believe that the dollar rally is far from over,” they said.

Gold is seeing some profit-taking as the recently softer buck steadies, the bullion retreating $7 to $1,250 an ounce.

The weaker US dollar of late has also put upward pressure on the Chinese currency. The People’s Bank of China set the reference rate around which the renminbi is allowed to trade higher by 0.51 per cent to Rmb6.4628 per dollar. That is its strongest level since December 16, and the largest strengthening since November 2.

On the mainland, the Shanghai Composite rose 1.7 per cent while over in Hong Kong the Hang Seng advanced 0.8 per cent.

Australia’s S&P/ASX 200 closed 0.3 per cent higher, with the market buoyed this week by a recovery in commodity stocks.

But yet again overnight strength in the yen - it moved to less than 111 yen per dollar - left the exporter-sensitive Tokyo stock market as a laggard, the Nikkei 225 falling 1.3 per cent.

Copyright The Financial Times Limited 2016