Accelerating economic activity, inflation sustain investors' festive fizz

EghtesadOnline: Upbeat global economic data and growing signs that inflation on both sides of the Atlantic is accelerating fueled a second day of 2017 gains across world stock markets on Wednesday, and lifted the euro and oil prices.

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04 January 2017

A batch of reports from Europe showed that French consumer confidence hit a nine-year high, business activity across the euro zone rose at the fastest pace in more than five years and inflation in the euro zone is its highest in over three years, Reuters reported.

This followed similarly upbeat reports this week on U.S., British, Chinese and Japanese business activity and helped steer investors toward riskier assets that benefit from higher interest rates - such as equities - and away from lower-yielding assets, including bonds.

"Over the month, confidence increased in the manufacturing sector and stabilized in services, amid solid new orders and businesses, strong optimism and elevated backlog of works," said Apolline Menut, economist at Barclays.

"This suggests that euro area activity is poised for a strong start in 2017," she said.

Economists at HSBC on Wednesday raised their 2017 and 2018 forecasts for global growth and inflation, the first time in nearly five years they have upped these outlooks over a two-year horizon.

At midsession in Europe on Wednesday, Europe's index of leading 300 shares was flat at 1,445 points, supported by a 0.5-percent rise in financials but capped by the strength of the single currency.

The FTSEuroFirst 300 hit a 1-year high on Tuesday.

One of the biggest movers on major European bourses was UK retailer Next. Its shares fell as much as 14 percent after a profit warning. The stock has lost nearly 40 percent over the past year.

MSCI's benchmark global index rose for a second day to trade 0.3 percent higher, and its index of major Asian shares excluding Japan rose for a seventh consecutive day, gaining 0.4 percent.

U.S. futures pointed to a higher opening of up to 0.2 percent on Wall Street, priming the Dow Jones for another test of the 20,000-point mark.

FED MINUTES

The potential for further U.S. rate hikes this year ensured profit-taking on the dollar's run on Tuesday was limited to 0.2 percent against a basket of currencies.

The dollar's strength in Asian trading helped Japan's exporter-heavy stock market rally toward its biggest daily increase for almost two months.

In its first trading day of the year, the Nikkei climbed 2.50 percent and looked set for the highest close since December 2015. It was further aided by domestic data showing factory activity had expanded at the fastest pace in a year.

The euro rose 0.3 percent to $1.0435, and the dollar gave up earlier gains against the yen to trade little changed at 117.75 yen.

The continued grind higher in euro zone inflation is lifting inflation expectations closer to the European Central Bank's target of just below 2 percent. This offers some welcome relief to ECB policymakers who for years have struggled to lift growth and inflation.

The focus for investors now turns to the minutes of the Federal Reserve's policy meeting last month, when it raised rates.

"It will be interesting to see just how much the (incoming Trump administration's) fiscal stimulus plans contributed to the interest rate forecasts from Fed policymakers in December and whether there is potential for the pace to be faster still," said Craig Erlam, senior market analyst at Oanda.

U.S. Treasury yields inched up marginally, rising almost two basis points to 2.47 percent before easing back, but German and UK yields were down a basis point at 0.25 percent and 1.31 percent , respectively.

Germany's 10-year yield had hit a two-week high of 0.29 percent on Tuesday.

In commodity markets, oil prices recovered from a fall of more than 2 percent on Tuesday. U.S. crude bounced back 0.5 percent to stand at $52.58 a barrel, while Brent futures rose 0.5 percent to $55.74.

Gold took advantage of the dollar's slip to trade 0.6 percent higher at $1,165 an ounce.