Global Stocks Hit 21 Month Highs, Futures Point To New Record Ahead Of Inflation Data

The global “risk on” melt-up continues.

After a modestly hawkish Yellen warned that every meeting is live, and refused to take March off the table, sending the dollar and yield higher and the S&P to fresh record highs, world stocks rose hitting a 21-month high on Wednesday with the dollar rising for the 11th straight day, the longest positive streak since July 2015.

Yellen’s comments renewed expectations in some quarters for the Fed to raise rates three times in 2017 rather than twice. The futures market did not share this view amid doubts about the U.S. economy’s ability to sustain three hikes.

Yellen left the possibility of a March move open but at the same time that wasn’t particularly surprising and in any case there was no great guidance on timing of the next hike. As DB’s Jim Reid summarizes In terms of the specifics, Yellen repeated that “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession”. Yellen also said that “incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2%, consistent with the Committee’s expectations”. She added that “at our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”. When quizzed on the Fed’s balance sheet strategy Yellen said that the Fed will provide further guidance “in coming months” but that any shrinkage would be “an orderly process”. The Chair also confirmed that it still too early to know what fiscal policies will be put in place under the new Trump administration and that “we are not basing our judgements about interest rates on speculation” about fiscal policy.

“At the margin, you could say that Yellen’s comments were probably tilted slightly toward to the hawkish side given her upbeat comments around the economic outlook,” said Jim Reid, markets strategist at Deutsche Bank.

Propelled by record highs on Wall Street, MSCI’s benchmark global equity index rose 0.25% to 442.4 points, its highest since May 2015 and two points off its record high. It has not fallen for six sessions, its longest such run since last July.

“A lot of big investors had doubts about this Trump rally, and are now scrambling to unwind negative positions and turn bullish,” Stephane Barbier de la Serre, a strategist at Makor Capital Markets in Geneva told Bloomberg. “It’s risk-on again, thanks to Yellen.” Before Yellen’s testimony, traders expected an increase in U.S. borrowing costs in June. Now they see one as early as May, according to futures data compiled by Bloomberg, further boosted by soaring inflation “exports” coming out of China.

Yellen’s remarks helped push Wall Street by boosting U.S. bank stocks. Goldman Sachs hit a record high, and is up 37% since the U.S. presidential election. Banks elsewhere also led gains in global stocks as traders awaited U.S. inflation data at 8:30am that looks poised to further strengthen the Federal Reserve’s resolve to raise interest rates. Treasuries fell for a fifth day and the dollar extended its advance, nothing its longest winning streak in almost five years after Yellen said on Tuesday the Fed would probably need to raise rates at an upcoming meeting and that delaying could leave the central bank’s policy-making committee behind the curve.

European banking shares advanced the most three weeks, tracking peers in the U.S., as the prospect for tighter monetary policy boosted the profit outlook for lenders who’ve been contending with near-zero rates for years. The yield on 10-year Treasuries held at a two-week high. Copper climbed amid stoppages at the biggest mines. Financials also led the way in Europe, with Credit Agricole up more than 3 percent after France’s biggest retail bank beat forecasts with a smaller than expected earnings drop in the fourth quarter.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.7 percent, rising to its highest since July 2015. Japan’s Nikkei added more than 1 percent, buoyed by a weaker yen.

The dollar index against a basket of major currencies chalked up its longest winning streak since May 2015. It was up 0.2 percent at 101.220 near a four-week high of 101.380 scaled overnight. According to CME Group’s FedWatch data, U.S. interest rate futures implied a higher than 30% chance of at least three increases this year, little changed from the previous day – though the chance rose above 40% immediately after Yellen’s comments. “That kind of rate re-think is dollar-friendly, but too timid to derail the risk rally that starts in U.S. equities and spreads into emerging market currencies,” said Kit Juckes, head of FX strategy at Societe Generale in London.

The dollar was supported as U.S. Treasury yields rose on Yellen’s comments, with the benchmark 10-year yield climbing four basis points to an 11-day high of 2.50 percent the previous day. They were last at 2.475%.

Meanwhile, the stronger dollar weighed on crude oil prices. WTI was down 0.5% at $52.91 a barrel and Brent shed 0.4% to $55.75 a barrel. Crude was already under pressure the previous day after API reported a nearly 10 million rise in inventories.In other commodities, spot gold was off 0.15 percent at $1,225.91 an ounce. Copper on the London Metal Exchange CMCU3 rose to $6,068 a tonne but relinquished much of that rally to stand slightly higher on the day at $6,036. The metal has enjoyed support recently following a strike at the world’s biggest copper mine in Chile that took it to a 1-1/2-year high above $6,200 a tonne on Monday.

It’s a packed calendar in the US, with most of the focus will be on the January CPI report while last month’s retail sales numbers will also be closely watched. The market expects headline retail sales to have increased +0.1% mom but core ex-auto sales to have increased +0.4% mom. Also due out in the US will be industrial and manufacturing production, empire manufacturing, NAHB housing market index and business inventories. Away from the data Fed Chair Yellen will deliver a likely repeat of her testimony to the House Financial Services Committee. Fed officials Harker (1pm ) and Rosengren (1:10pm) are also scheduled to speak today. On the politics front, Israeli PM Netanyahu is due to meet with President Trump today, while Trump is also expected to meet with the heads of large US retailers which could be interesting.