LONDON (Reuters) - Global stock indices were inching closer to record highs on Wednesday as Wall Street’s main benchmarks clocked up new gains and the ViX equity volatility index, the so-called fear gauge, dropped to seven-month lows.
U.S. President Donald Trump kept trade talks optimism on the boil by talking on Tuesday of negotiations being in the "final throes" despite repeating concerns over Beijing’s response to Hong Kong’s pro-democracy street protests.
Bond markets, by contrast, were buoyed by a set of tepid U.S. consumer confidence and home sales reports and expectations Federal Reserve policy will remain easy.
Relatively subdued U.S. Treasury yields and a slight flattening of the yield curve between three months and 10 years, to its lowest in a month yesterday, are slightly puzzling against the seeming ebullience on stock markets.
Some of this may be due to expectations of Fed bond buying and liquidity injections over the end of the year, but it also reflects a benign view of the interest rate trajectory as the Fed’s rethink of its overall framework comes to a conclusion.
With the October update of the Fed’s key measure of core inflation due later on Wednesday and expected to remain below the central bank’s target, Fed board member Lael Brainard said on Tuesday it was still "essential" the Fed meet its statutory goals over time despite persistently sub-target inflation.
In its 2020 global economic outlook, released on Tuesday, JPMorgan said it was confident a rebound in the world economy would take hold next year and that it expected the Fed to formalize a strategy to encourage an overshoot of its 2% inflation objective, with another rate cut due by the second quarter of the year.
Early trading on Wednesday was subdued, with MSCI’s all-country world index now within 0.4% of its record high from January 2018. Shanghai and Hong Kong were flat; Tokyo and Seoul gained about 0.3%; and Australia’s main share index reached record highs.
Japanese stocks drew support from the growing chance of extra fiscal stimulus. A senior ruling party official on Wednesday said he believes the government is striving to compile a stimulus spending package worth around 10 trillion yen ($92 billion) to support growth.
Chinese stocks were held back after news that profits at China’s industrial companies shrank at their fastest pace in eight months in October.
In Europe, stocks were expected to open higher. The dollar was stronger against developed and emerging currencies, with dollar/yen holding above 109 and euro/dollar steady.
Sterling continued to weaken as UK opinion polls showed the lead Prime Minister Boris Johnson’s Conservatives held over opposition parties was narrowing, although Johnson remains favoured to gain a majority.
The reaction to the polls has been modest; the prospect of another hung parliament raises the prospect of some form of coalition government of parties supporting a second Brexit referendum.
In emerging markets, traders were watching Brazil’s real, which fell to a record low, below the troughs during the 2015 recession and despite ongoing central bank intervention. The real gained a bit by the close on Tuesday, but concern remains about the current account and government’s push for lower interest rates.
On the European corporate news front, good news from British American Tobacco: it raised its full-year revenue forecast despite a slowdown in the U.S. vaping market. Not so good for pub operator Marston's, which reported its annual profit fell, hurt by lower food sales, rising costs and sluggish consumer spending.
— A look at the day ahead from EMEA Markets Editor Mike Dolan. The views expressed are his own —