Date: 15 January 2021
Author(s): David Carnevali and Naomi Rovnick
Source: Financial Times
Wall Street stocks went on to hit record highs before losing momentum in the afternoon as investors stood by in keen anticipation details regarding a further stimulus package coming out of Washington.
The blue-chip S&P 500 index closed the day with a decrease of 0.4 per cent after having ridden above par for most of the day. The tech-heavy Nasdaq Composite was one of the benchmarks climbing to intraday peaks in the morning session before it fell to wipe out all its gains to close the day on a 0.1 per cent decrease. The Dow Jones Industrial Average and Russell 2000 index of small-cap companies were also at record levels in the first part of the session.
Joe Biden is expected to make public plans for a relief package on Thursday as data showed the number of new unemployment claimants in the US rose last week at the fastest pace since August. The president-elect intends to spend “trillions of dollars” on cheques for individuals, unemployment benefits and investments in clean energy and infrastructure.
Head of European equity strategy at the investment bank UBS, Nick Nelson, said the stimulus announcement would be “key” for market sentiment. “If we are going to get considerably more spending, that creates a stronger global growth backdrop,” he said.
In Europe, the continent-wide Stoxx 600 index closed at 0.7 per cent higher, while London’s FTSE 100 benchmark saw a rise of 0.8 per cent, taking its gain this month to more than 5 per cent. Investors have responded to Mr. Biden’s fiscal plans by selling off US government debt because of concerns that the spending will lead to higher inflation and subsequently eroding the value of Treasuries’ fixed-interest payment.
On Thursday, the yield on the US 10-year note, which moves inversely to its price, rose another 0.04 percentage points to 1.12 per cent. It has crossed 1 per cent last week for the first time since March.
US investors also have their eye on impending company results. The US corporate earnings season kicks off on Friday with reports from JPMorgan Chase, Citigroup and other large banks.
Over the next week, investors’ attention may “swivel back” from the macroeconomic outlook and politics to how companies are faring, said Mr Nelson, with traders keen to find out management teams’ forecasts for a vaccine-led recovery. But “it remains difficult for businesses to look round corners”, he added.
Louise Dudley, global equities portfolio manager at Federated Hermes said, “from a global portfolio perspective the focus at the moment is Biden and the Fed.”
In a highly observed speech, Federal Reserve chairman Jay Powell reiterated that a US interest rate rise is most probably not going to happen. His comments came a day after his vice-chairman, Richard Clarida, pushed back against refuted fears that the US central bank would respond to rising inflation by increasing rates. “We are not going to hike” until inflation reaches 2 per cent, he said in remarks reported by Reuters at a Hoover Institution event.
Analysts at Citigroup have noted that the 10-year break-even inflation rate is above 2 per cent for the first time since 2018 and the 5y5y inflation swap is at the highest level since the global tapering in end-2018.
The US labour department reported on Wednesday that consumer prices rose 1.4 per cent y-o-y in December, slightly higher than the 1.3 per cent expected by economists polled by Reuters and Bloomberg.
Negative real interest rates, where inflation exceeds benchmark borrowing costs, would “continue to provide strong support for stock markets”, said Emily Penn, capital and investment director at the insurer LV, as investors would pay higher-than-usual valuations for companies’ future earnings.
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