European equities hovered around record levels, the dollar dropped and government bonds nudged higher on Monday as markets continued to cheer strong economic data while also banking on continued support from the US Federal Reserve.
The regional Stoxx Europe 600 index gained 0.3 per cent during the morning to set a new record, before falling back to trade flat by lunchtime.
This follows a week of upbeat earnings from US banks as investors await results from big businesses including Coca-Cola and IBM later on Monday. Data released last week showed US homebuilding surged to a near 15-year high in March while retail sales increased by the most in 10 months.
The dollar, as measured against a basket of currencies, fell 0.5 per cent as bets on higher interest rates receded. The euro rose 0.4 per cent against the dollar to buy at $1.2034 while sterling climbed 0.7 per cent to €1.3931.
Federal Reserve chair Jay Powell told the Economic Club of Washington DC last week that the central bank would not taper its $120bn of monthly asset purchases until it saw “substantial further progress” towards full employment.
Demand for haven assets such as government debt cooled. As prices dipped, the yield on the benchmark 10-year US Treasury note rose 0.02 percentage points to 1.59 per cent, while the yield on the equivalent German Bund increased 0.03 percentage points to minus 0.23 per cent.
Investing convention assumes that US Treasuries and global equities move in opposite directions to cushion against falls in either asset class, but both have now rallied in tandem for an unusually sustained period.
The S&P 500, the blue-chip US stock index, has risen for four consecutive weeks to set new records. The yield on the 10-year Treasury has fallen from about 1.74 per cent at the end of March to just under 1.56 per cent on Monday as investors bought the debt. Treasuries and US stocks have not risen together for so long since 2008, according to Deutsche Bank.
Futures markets indicated the S&P would drift 0.2 per cent lower as Wall Street trading opens.
“I am not saying it’s a rational time in the markets,” said Yuko Takano, equity fund manager at Newton Investment Management. A reason for caution, she added, was signs of “bubbles” in alternative assets such as cryptocurrencies and non-fungible tokens. “There is really an abundance of liquidity. There will be a correction at some point but it is hard to time when it will come.”
“Markets may have become temporarily overbought,” strategists at Credit Suisse commented. “For now, we prefer to keep equity allocations at neutral” rather than buying more stocks, they said.
In Asia, Hong Kong’s Hang Seng index closed up 0.5 per cent and Japan’s Topix slid 0.2 per cent.
Global oil benchmark Brent crude fell 0.3 per cent to $66.57 a barrel.