Friday 21:00 GMT
Overview
US stocks and industrial commodities were riding high and the dollar forged ahead at the end of a week in which an outbreak of worries over forthcoming European elections was replaced by renewed bullishness about the policies of Donald Trump, US president.
The more confident mood was also driven by optimism about corporate earnings and evidence of strong trade growth in China.
Hot topic
On Wall Street, the S&P 500 equity index rose 0.4 per cent to a record closing high of of 2,316, after earlier hitting an intraday all-time peak of 2,319.23. For the week, the benchmark measure was 0.8 per cent firmer.
The Dow Jones Industrial Average and the Nasdaq Composite also hit all-time highs while the small-cap Russell 2000 neared record levels.
In Europe, the Stoxx 600 index rose 0.2 per cent for a five-day gain of 0.9 per cent. The Tokyo market stood out as the Nikkei 225 rallied 2.5 per cent on Friday, securing its biggest weekly rise since early December.
The end-of-week rally for riskier assets was largely triggered by Mr Trump’s promise on Thursday of a “phenomenal” announcement on taxes in the next few weeks — potentially at his February 28 State of the Union address to Congress.
Given that the “reflation trade” in markets since Mr Trump’s election win was largely fuelled by his promises of fiscal stimulus, infrastructure spending and deregulation, it was not surprising to see equity bulls relieved that further clarity might soon be forthcoming.
However, some cautioned that considerable uncertainty remained.
“The tax cuts could be delayed if the House Republicans insist on packaging them together with the more contentious proposals like the switch to a destination-based cash flow corporate tax,” said Capital Economics’ Paul Ashworth.
“Getting agreement on the latter might take much longer, in which case the fiscal stimulus could be delayed until well into the second half of 2017.”
Meanwhile, a further boost to risk appetite came from news that Mr Trump had told China’s President Xi Jinping that he would respect the “One China” policy — soothing concerns in the market about potential tensions between the two countries
Corporate profitability was also seen providing support.
“Fourth-quarter earnings growth appears to be strong with an expected increase of 8.5 per cent on the aggregate, led by the financial and technology sectors,” said Strategas Research in a note to clients. “Overall this will be the strongest growth rate for earnings since 3Q’14.”
Commodities
Raw material prices were chipper, boosted by the broad market optimism and more specifically evidence contained in Chinese trade data that showed the country buying up commodities at a near record pace.
Overall, the trade data showed a 7.9 per cent year-on-year gain in exports and a 16.7 per cent jump in imports, in dollar terms.
“Such a robust pace of imports reflects steady progress on the crucial front of reorienting the main engine of China’s economy toward domestic consumption and away from exports,” said Anthony Karydakis, chief economic strategist at Miller Tabak.
“The combined trends in both exports and imports makes us even more confident that the residual risk for a ‘hard landing’ in China is steadily retreating.”
Brent oil settled at $56.70 a barrel, up 1.9 per cent — but little changed on the week — while copper jumped 4.6 per cent in London to $6,090 a tonne, the highest since May 2015.
Gold was up $2 at $1,233 an ounce — up $14 on the week, but off a three-month high of $1,244 hit on Wednesday
Forex
The big rise for the Nikkei stock average in Tokyo was supported by the dollar’s jump to a one-week high against the yen on Thursday.
The US currency rose a further 0.2 per cent to ¥113.39 on Friday — up 0.7 per cent on the week — as a summit began between Mr Trump and Shinzo Abe, Japan’s prime minister.
Political uncertainty in Europe helped drive a steady retreat for the euro against the dollar to a three-week low of $1.0636 — down 0.2 per cent on Friday and 1.3 per cent lower for the week.
Fixed income
Government bond markets this week were dominated by a jump in the yield premium demanded by investors to hold French rather than German debt.
Indeed, the spread between 10-year French and German yields reached the highest for more than four years at the start of the week amid concerns about the possibility of a presidential election victory for Marine Le Pen, the anti-EU and eurozone far right candidate.
Although the 10-year French yield edged up 6 basis points to 1.05 per cent on Friday, it was well off the week’s high of 1.15 per cent. Its spread over the 10-year Bund narrowed from as much as 79bp this week to 73bp.
“We continue to think that Ms Le Pen will make it to the second round [of the presidential election], but stop there, defeated by a mainstream candidate,” said analysts at UniCredit
“Even if Ms Le Pen makes it to the Elysée, the Front National is unlikely to gain a meaningful number of seats at June’s legislative elections, which makes a referendum on eurozone membership a low-probability event.”
The yield on the 10-year US Treasury was up 1bp at 2.41 per cent on Friday, but down 8bp for the week.
Additional reporting by Hudson Lockett in Hong Kong
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