S&P 500 hits record high as Treasuries retreat

Tuesday 18:30 BST

What you need to know

  • Gains for financials help push S&P close to 2,500 level
  • 10-year Treasury yield at two-week high
  • Sterling jumps against dollar and euro, FTSE 100 slips
  • Brent oil back above $54 a barrel mark

Overview

Another positive session for global equities saw the S&P 500 climb to record highs — once again led by the financial sector as worries over the economic damage from Hurricane Irma continued to ease and Treasury yields rebounded further.

That dollar maintained its upward trend against the yen — pushing back above the ¥110 level — although it was sterling that caught the eye as it hit a one-year high versus the US currency and a one-month peak against the euro.

Hot topic

By midday in New York, the S&P was up 0.2 per cent at 2,493, putting it on track for a second successive record closing high. The benchmark US equity index earlier hit an all-time intraday peak of 2,495.69.

“With Hurricane Irma having merely caused ‘staggering’ rather than ‘atrocious’ economic damage, US equities once again whooshed to fresh record highs,” said Michael Every, senior strategist at Rabobank.

“Whether that equity reaction is Panglossian complacency or a sign of wonderful underlying fundamentals remains open to question.

“Note that this was matched by 10-year Treasury yields popping up a few basis points, although they are still a far cry from where the market — and surely the Federal Reserve — had expected to see them at this point in the year.”

Meanwhile, the imposition of “watered down” sanctions on the country by the UN Security Council late on Monday did little to deter equity bulls.

“The resolution passed seeks to cut imports of refined petroleum products to 2m barrels per annum and ban textile exports, but does not include the more stringent oil embargo, likely reflecting the lack of support from China and Russia,” noted Craig Nicol, macro strategist at Deutsche Bank.

“One would have to imagine that the outcome helps near-term sentiment insofar as not antagonising China, but the reality is that it still doesn’t come closer to solving much.”

European and Asian stock indices generally put in positive performances on Tuesday, with the Euro Stoxx 600 index rising 0.5 per cent and the Topix in Tokyo up 0.9 per cent to a one-month high. The Kospi in Seoul rose a further 0.3 per cent.

One exception was the FTSE 100 in London, which slipped 0.2 per cent as the pound rose sharply following the release of stronger than expected UK inflation data.

Forex and fixed income

Consumer prices rose 2.9 per cent in the year to August, up from the 2.6 per cent annual increase recorded in July.

Strategists at Scotiabank noted that the annual CPI increase was now close to the 3 per cent point that would require Bank of England governor Mark Carney to write a letter to the government explaining why inflation was running so far above its 2 per cent target.

“That has triggered expectations — already simmering under the market — that Thursday’s BoE policy meeting could see the hawks more in control,” Scotiabank said. “A rate hike still looks a long shot but central banks are perhaps more willing to surprise as the global economy strengthens.”

Sterling was up 0.8 per cent against the dollar at $1.3270, while the euro was down 0.7 per cent at £0.9010. The yield on the 10-year UK government bond, which moves in the opposite direction to its price, jumped 10 basis points to 1.15 per cent.

The yield on the 10-year US Treasury, meanwhile, was up 4 basis points at a two-week high of 2.17 per cent, after falling as low as 2.016 per cent on Friday. The two-year US yield was 2bp higher at 1.33 per cent.

The rebound in yields over the past two days helped support the dollar as it rallied off a 10-month low against the yen of ¥107.31 to stand at ¥110.04, up 0.6 per cent on the day.

“Last week’s collapse in bond yields increasingly seems like a cathartic cleansing of positions,” said Kit Juckes, strategist at Société Générale.

“If the dollar can’t stage a short-covering bounce now, when will it?”

But FX strategists at Morgan Stanley sounded a note of caution regarding the dollar’s latest rally.

“The risk for FX investors is that dollar sentiment in the market is at extreme lows, with surveys suggesting on Friday that only 7 per cent of traders were bullish on the US currency,” Morgan Stanley said.

“In contrast, 93 per cent of traders are bullish on euro/dollar currently.”

The single currency — which on Friday touched a 33-month high against the dollar of $1.2092 — was up 0.1 per cent on Tuesday at $1.1963.

Meanwhile, China’s currency continued to attract attention after its daily “fix” against the dollar was lowered by 0.4 per cent — the most since January — to Rmb6.5277.

“That follows Friday’s move by the People’s Bank of China removing the reserve requirement on forward positions, effectively making it cheaper to short the renminbi,” said Elsa Lignos, FX strategist at RBC Capital Markets.

Commodities

Brent oil rallied back towards the four-month intraday high it touched last week amid fresh reports that Opec was considering further output cuts.

Brent was up 1 per cent at $54.36 a barrel. It touched $54.87 on Friday.

Copper, however, retreated further from last week’s three-year high, ending 1.2 per cent lower in London at $6,668 a tonne. Nevertheless, the price is still up about 20 per cent this year.

Gold was flat at $1,326 an ounce, after last week hitting a 13-month high of $1,357.

Additional reporting by Michael Hunter in London and Edward White in Hong Kong

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