© Reuters. FILE PHOTO: A man wearing a protective face mask, following an outbreak of the coronavirus, talks on his mobile phone in front of a screen showing the Nikkei index outside a brokerage in Tokyo, Japan, February 26, 2020. REUTERS/Athit Perawongmetha
By Saikat Chatterjee
LONDON (Reuters) – World stocks paused near six-week highs on Monday as investors girded for the busiest week of third quarter earnings in the backdrop of slowing growth, with widening inflation risks from multi-year-high crude oil prices weighing on sentiment.
Risky assets have staged a comeback in recent weeks after a torrid September as investors shunned bonds. Allocations to bond markets dropped to the lowest level on record in October, BofA Securities’ monthly fund manager survey showed.
The shift in allocations show equity investors are broadly unfazed in the face of broadly slowing economic momentum and market-implied inflation risks on both sides of the Atlantic racing to multi-year highs.
European stocks edged higher with energy, healthcare and financials leading gains while U.S. stock futures held firm as investors shrugged off the possible impact from news of a pilot property tax in China and continuing troubles in the sector.
“This resilience might reflect the cheerful earnings season so far but rising yields, consumers getting squeezed by higher energy bills, and no imminent relief for paralyzed supply chains seems like a recipe for greater volatility from record heights,” said Marios Hadjikyriacos, a senior investment analyst at brokerage IM.
The S&P 500 is just below its record peak and the number of companies that have beaten expectations in the third quarter is now close to 84%, while STOXX 600 beats in Europe are past 60% so far, per Refinitiv I/B/E/S data.
On Monday, Facebook (NASDAQ:FB) will kick off earnings for tech giants with other heavyweights including Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL), and European and Asian financial behemoths from Deutsche Bank (DE:DBKGn) to Lloyds (LON:LLOY) will report later in the week.
“Equity markets have had a kitchen sink of worries thrown at them – slower growth, rising costs, and higher interest rates. However, corporate earnings have more than offset those declines so far in 2021,” said Marija Veitmane, a senior strategist at State Street (NYSE:STT) Global Markets.
“Peak growth clearly is not peak earnings as we have been highlighting.”
Goldman Sachs (NYSE:GS) strategists said net inflows into global equity funds were positive last week with equity assets as a percentage of total assets is currently at its highest level since at least 2010.
MSCI’s broadest index of world stocks steadied below an early September high after notching up eight consecutive sessions of gains, its longest winning streak since late May, according to Refinitiv data.
DOLLAR RISE STALLS
Strong corporate earnings have also stalled the U.S. dollar’s recent advance even as money markets have advanced their expectations of policy tightening.
The dollar index held near a one-month low of 93.483, broadly steady as hedge funds cut their dollar long positions for a second consecutive week.
The risk-friendlier mood has weighed on safe-haven currencies like the yen, as have rising energy prices which supported currencies including the Aussie and Canadian dollars.
Traders are awaiting the third-quarter U.S. GDP figures due Thursday, with flash euro area CPI readings for October also a key indicator after the gauge jumped to a 2008 high last month.
Federal Reserve Chairman Jerome Powell said on Friday the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch interest rates.
As tapering looms, U.S. benchmark yields have been rising and yields on 10-year Treasury notes held below a five-month high of 1.7064% touched last week.
Oil prices rose further, with U.S. crude hitting a seven-year high as global supply remained tight amid strong demand worldwide. Brent crude rose 0.83% to $86.24 a barrel, while U.S. crude rose 0.80% to $84.51.
Spot gold rose 0.36% to $1,798 an ounce after posting gains for the past two weeks on rising inflation concerns, and the weakening dollar.
Bitcoin, another asset often described as an inflation hedge, was last at $62,000, up 3% after last week’s turbulent trade when it hit a new high of $67,016.
(GRAPHIC: FAANG market cap – https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkemggvx/FAANG%20market%20cap.PNG)