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Jan 4, 2019

U.S. stocks rally as Fed's Powell signals no set path

BNN Bloomberg's mid-morning market update: Jan. 4, 2019

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Stocks surged, the dollar weakened and Treasuries tumbled with gold as a risk-on tone gripped financial markets after investors got good news on the economy, Federal Reserve policy and trade tensions.

The S&P 500 rallied 3.4 per cent, the Dow Jones Industrial Average roared higher by almost 750 points and the Nasdaq 100’s surge topped 4 per cent. All of the blue-chip index’s 30 members advanced. The rally didn’t surpass the post-Christmas breakout, but it ranked among the steepest of the bull market.

Stocks opened sharply higher after data showed a spike in hiring last month that was accompanied by faster wage growth and an increase in participation, abruptly tamping down concern that a recession was growing likely. Stocks surged to session highs after Jerome Powell said Fed policy is flexible and officials are “listening carefully” to the financial markets. Futures had advanced overnight on news the U.S. and China will hold trade talks next week.

The convergence of good news for equity markets emboldened fixed-income bears, who had been hammered in recent weeks as investors sought havens. The 10-year Treasury yield spiked above 2.65 per cent, halting a rout that took it down 25 basis points in the prior week. Gold pulled back sharply after briefly topping US$1,300 an ounce overnight. The yen weakened. The biggest leveraged loan exchange-traded fund, Invesco Senior Loan ETF, jumped.

Powell’s remarks soothed investors who’d grown concerned the Fed was determined to raise rates even as signs of slowing growth emerging. Stocks got hammered Thursday after a factory reading fell the most in a decade and Apple warned its sales would miss targets. Jitters over the economy got calmed further Friday by services sector data that topped estimates.

Trade remains in focus, with mid-level officials from the U.S traveling to China for talks next week just as tariff effects have started to show up in corporate profit warnings. China moved to secure liquidity for its slowing economy, and political drama in Washington persists, with the shutdown showing no signs of resolution.

“The strong December jobs report is a net positive for stocks because investors’ biggest concern has been slowing growth,” said Alec Young, managing director of global markets research at FTSE Russell. “December’s strong job gains help ease that concern. It’s hard to square recession worries with the strongest job growth we’ve seen in years.”

Even with Friday’s surge, the gains did little to dent the rout that’s hit global equities in the past month, with major averages off well over 10 per cent from previous highs. Treasury yields that topped 3.2 per cent in November now sit 60 basis points lower as investors reassess the prospects for growth in 2019. Gold has surged to multimonth highs and crude has plunged, adding to angst that demand is flagging.

These are the main moves in markets:

Stocks

The S&P 500 Index climbed 3.4 per cent as of 4 p.m. New York time, the most since Dec. 26. The Dow Jones Industrial Average advanced 745 points, and the Nasdaq 100 added 4.5 per cent. The Stoxx Europe 600 Index rose 2.8 per cent. Germany’s DAX Index surged 3.4 per cent. The MSCI Asia Pacific Index rose 0.1 per cent. The MSCI Emerging Market Index rose 1.8 per cent.

Currencies

The Bloomberg Dollar Spot Index fell 0.2 per cent. The euro rose 0.1 per cent to US$1.1399. The British pound gained 0.9 per cent at US$1.2735. The Japanese yen declined 0.8 per cent to 108.52 per dollar.

Bonds

The yield on 10-year Treasuries climbed 11 basis points to 2.66 per cent, the biggest increase since Oct. 3. The two-year rate jumped 11 basis points to 2.485 per cent. Germany’s 10-year yield climbed six basis points to 0.208 per cent.

Commodities

West Texas Intermediate crude climbed 1.8 per cent to US$47.92 a barrel, hitting the highest in more than two weeks. Gold futures fell 0.8 per cent to US$1,285.40 an ounce, the first retreat in more than a week.

Credit

The Markit CDX North America High Yield Index was up 1.27 per cent at 102.675, the largest one-day gain in more than four years. Best-performing sectors were energy, health care. iShares iBoxx High Yield Corporate Bond ETF, the biggest junk bond exchange traded fund, jumped 1.64 per cent. Invesco Senior Loan ETF, the biggest leveraged loan ETF, jumped 1.73 per cent -- the most since August 2011.

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