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Wall St eyes dip from record ahead of Fed minutes

Wednesday 12:45 GMT

Overview

US equity futures suggest Wall Street will dip from record levels that were reached amid a positive outlook for economic growth.

Political concerns leave the euro carrying the wooden spoon in the forex markets, while the rush for supposed havens pushes short term German bond yields to their lowest ever.

Hot topic

The FTSE All-World equity index is at another record, up 0.1 per cent to 294.92, as investors are buoyed by signs of improvement in the global economy.

A batch of national and regional manufacturing and service sector surveys released on Tuesday provided the latest evidence that activity is picking up.

With US stocks making up about 50 per cent of the All-World, it is Wall Street that is the main driver of the global rally.

After US investors returned from a long weekend, the S&P 500 rose 0.6 per cent on Tuesday to a new closing peak of 2,365. The US benchmark has now gone 90 days without closing lower by more than 1 per cent as the Vix, a popular measure of market volatility, hovers at 11.6, around historically low levels.

The blue-chip Dow Jones Industrial Average and the tech-heavy Nasdaq Composite also registered fresh record highs, with the Dow adding 0.6 per cent and now sitting just 257 points from breaching the 21,000-point level. The Dow broke through 20,000 for the first time less than four weeks ago.

Positive earnings recently from US companies — including Walmart this week — have helped sustain a rally sparked by expectations of infrastructure investment and tweaks to financial regulations and corporate taxes under President Donald Trump’s administration.

US futures suggest the S&P 500 may dip 7 points at the open on Wednesday. But Kathleen Brooks, research director at City Index, warned against assuming Wall Street is ripe for a correction. “For those predicting the market’s demise beware, a Bank of America Survey found that historically the six months before the end of a market rally produces returns close to 15 per cent. So, even when markets look overpriced and ripe to fall, the market can still push higher.”

What to watch

The Federal Reserve is due at 19:00 GMT on Wednesday to release the minutes of its first monetary policy meeting of the year, and traders will scan the report for clues on when to expect the next rate rise.

In testimony to Congress last week, Fed chair Janet Yellen warned it would be “unwise” to wait too long before raising borrowing costs again. Recent data have pointed to the world’s biggest economy running at a reasonable clip with signs of tightness in the labour market.

“Federal Open Market Committee minutes are generally seen as dated but given the recent hawkish lean of Fedspeak, some traders are nervous that the minutes will carry more risk than usual given market conversations around March pricing. Comments on inflation and elaboration, if any, on the balance sheet discussions will be in close focus,” said analysts at Citi.

The US dollar index (DXY), which measures the buck against a basket of its peers, is up 0.2 per cent to 101.61. The DXY hit a 14-year intraday high of 103.82 at the start of the year amid expectations that Mr Trump’s mooted policies would cause the Fed to raise interest rates at a faster pace.

Futures markets are pricing in a 36 per cent chance the Fed will hike rates by 25 basis points at its March meeting, up from 31 per cent a month ago.

The policy-sensitive US 2-year government bond yield, which moves inversely to the price, is down 1 basis point to 1.22 per cent, only several basis points shy of its highest level since August 2009. The 10-year note is off 2bp on the day at 2.41 per cent.

Fixed income

Some parts of the sovereign bond sector are haughtily dismissive of the better economic data of late, which include Wednesday’s news of eurozone inflation and German business confidence at four-year highs.

The 2-year German Schatz yield has fallen through minus 90 basis points for the first time and 10-year Bunds are off 5 basis points to just 0.25 per cent.

“The dissonance between sound economic news flow and a flourishing bond market is becoming more pronounced by the day,” said Markus Allenspach, head of fixed income research at Julius Baer.

Mr Allenspach added that under such economic conditions the ECB would normally be tightening policy but “investors are increasingly concerned about the chances of Marine Le Pen winning the French presidential elections in May, and [are] shift[ing] their money out of the French market into “safe” German assets”.

French 10-year yields, by contrast, are 1.06 per cent.

Forex

Such political angst is weighing on the euro, which is slipping on Wednesday by 0.2 per cent to $1.0510, a six-week low.

Sterling has lost early gains and is retreating 0.2 per cent to $1.2442 after a mixed report on UK fourth-quarter GDP.

Strength in the Japanese yen, up 0.6 per cent to ¥113.06 per buck, suggests building risk aversion.

The Mexican peso is holding at a three-month highs as worries about president Trump’s protectionist stance ease somewhat and after the central bank unveiled a currency-calming $20bn hedging programme.

Equities

The overnight Wall Street record is helping underpin global sentiment. The pan-European Stoxx 600 is down just 0.1 per cent, easing from its highest since December 2015 as miners give ground.

Japan’s Topix added just 0.1 per cent as it was held back by a stronger yen, although shares in Toshiba jumped 22.5 per cent as the beleaguered conglomerate looks set to restart negotiations for the sale of a majority stake in its memory chip business.

Hong Kong’s Hang Seng gained 1 per cent, helped by gains for property developers, and mainland China’s Shanghai Composite rose 0.2 per cent.

Commodities

Oil prices are relinquishing some of Tuesday’s gains, which came on signs Opec was sticking to its agreed production cuts. Brent crude is down 0.7 per cent to $56.29 a barrel and West Texas Intermediate is off 0.7 per cent to $53.95 a barrel.

Gold is up 0.5 per cent at $1,238 an ounce as it takes heart from the latest dip in Treasury yields. Base metals are mostly softer as the dollar gains ground.

Additional reporting by Alice Woodhouse in Hong Kong

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