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Confident remarks by Jay Powell on the outlook for the US economy helped US and European stock markets push higher

StockMarketNews.Today - Upbeat Powell testimony bolsters equities. Dollar holds gains as Fed chair reiterates commitment to gradual rate rises.
StockMarketNews.Today — Tuesday — 2018/07/17/

What you need to know:

>S&P up 0.5% at 5-month high, Nasdaq hits record
>Fed chief plays down US trade policy risks
>Netflix shares pare early fall
>Energy stocks fall even as Brent crude inches higher
>Firm dollar helps drive gold to one-year low
>Pound hit as domestic UK politics increase Brexit uncertainty

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Overview:

Confident remarks by Jay Powell on the outlook for the US economy helped US and European stock markets push higher, in spite of renewed weakness in the energy sector and a steep early fall for Netflix shares in the wake of its disappointing subscriber numbers.

In testimony to the Senate banking committee, the Federal Reserve chairman said the jobs market had continued to strengthen, and suggested that risks from US trade policy could be balanced by fiscal stimulus.

He said that “for now”, the US central bank believed it was best to keep gradually raising interest rates.

“It was interesting he reiterated the view that the Fed will accept inflation above the target rate of 2 per cent on occasion, particularly given the favourable financial backdrop and the stimulus provided by tax cuts,” said Neil Birrell, chief investment officer at Premier Asset Management.

“Today’s comments are supportive of the dollar.”

Indeed, the US currency gained ground against most of its major rivals, with further support coming from news of a rebound in US industrial production last month. Treasury yields initially rose following Mr Powell’s remarks before easing back to stand little changed on the day.

Michael Gapen, economist at Barclays, said the Fed’s outlook was consistent with two further 25 basis point rate increases this year — most likely in September and December.

“The main risk, in our view, is that individuals, business, and financial markets have underestimated the desire of the Trump administration to re-orient trade flows and that further steps to implement tariffs will lead to a reduction in confidence, a slowdown in hiring, and a correction in equity markets.”

It was a bad day for sterling as uncertainty over the prospects for Brexit provided a stiff headwind to the UK currency. The euro, meanwhile, drifted back below the $1.17 mark.

The weaker trend in the pound and the euro provided additional help to UK and European stock indices — with the Xetra Dax in Frankfurt outperforming as it climbed 0.8 per cent.

On Wall Street, Netflix grabbed the headlines as its shares sank as much as 14 per cent, while energy was the only S&P 500 sector in negative territory even as Brent crude staged a modest rally following Monday’s steep decline.

“Perception that Opec exports are increasing, the resumption of Libya production, US shale output that is on track for record highs this month, and prospects for Strategic Petroleum Reserve withdrawals have weighed heavily on crude prices over the past week,” said analysts at Action Economics.

Equities:

By early afternoon in New York, the S&P 500 was up 0.5 per cent at 2,812 — its highest point since early February — having fallen 0.3 per cent in early trade.

The tech-heavy Nasdaq Composite was up 0.6 per cent at a record high of 7,855, also reversing an initial drop, as Netflix shares pared their early fall to trade 5 per cent lower.

European stock indices took their cue from Wall Street’s improved performance, with the region-wide Stoxx 600 gaining 0.3 per cent. London’s FTSE 100 ended 0.3 per cent higher.

Forex and fixed income:

The dollar extended early gains in the wake of Mr Powell’s testimony, with the index tracking the world’s reserve currency up 0.5 per cent. The euro was down 0.5 per cent at $1.1653.

The 10-year US Treasury yield was flat at 2.85 per cent while the two-year note was yielding 2.62 per cent, up 1 basis point on the day — keeping the gap between the two close to an 11-year low.

The three-month T-Bill yield, meanwhile, rose 4bp to 2.02 per cent — its first break above 2 per cent for a decade.

The pound was down 0.7 per cent at $1.3141, but well off a low of $1.3073 after Theresa May, prime minster, narrowly surviving an attempt by pro-European Conservative MPs to keep Britain in a customs union with the EU.

The euro was 0.3 per cent higher against sterling at £0.8874.

Commodities:

Brent crude was up 0.7 per cent at $72.36 a barrel after falling 4.6 per cent on Monday and touching a three-month intraday low. US West Texas Intermediate was up 0.4 per cent on Tuesday at $68.36.

Gold was down $12 at a one-year low of $1,227 an ounce.

 

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