Investors Take On More Risk After Central Bank Signals -- Update

By Jon Sindreu Features Dow Jones Newswires

Investors continued to bet on risky assets Thursday, on signs that central bankers are confident enough about economic growth to start tightening policy.

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The Stoxx Europe 600 edged down 0.1% in the European morning, despite a positive opening, but the banking sector--one of investors' favorite ways to bet on higher growth and inflation--was up 1.4%. By contrast, utilities and food and beverage shares, sectors considered to be safer, were both down about 0.8%.

The FTSE 100 rose 0.5% and futures pointed to a 0.3% opening gain for the S&P 500. In Asia, Japan's Nikkei Stock Average, Hong Kong's Hang Seng and Australia's S&P/ASX 200 rose 0.5%, 1% and 1.1% respectively.

Bank shares got a further bump by the Federal Reserve's decision Wednesday to allow all major U.S. financial institutions to ramp up dividend payouts and share buybacks.

Investors were already broadly confident on economic growth, but global inflation has remained weak, leading markets to doubt whether policy makers will be able to start rolling back their easy-money policies. A raft of statements Wednesday by policy makers at the European Central Bank, the Bank of England and the Bank of Canada, however, convinced many that the progressive end of monetary stimulus is coming nearer.

While ECB officials later left investors with mixed signals, Thursday's moves in bonds and currencies confirmed that investors now expect interest rates to be higher in the near future.

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They have "concluded that the ECB must have intended to push investors closer toward normalization rather than further from it," said Stephen Gallo, European head of foreign-exchange strategy at BMO Financial Group. "From my perspective, this is true even when we account for the attempt by ECB sources yesterday to dilute some of the hawkishness."

Yields on 10-year German and British bond yields rose to 0.414% and 1.202% respectively, compared with the previous day's closes of 0.363% and 1.15%. Even 10-year Treasury felt the strength of the tide and edged up to 2.246% from 2.215%. Bond yields move opposite to prices.

Higher returns in Europe and the U.K. bolstered the euro and the pound, which were both up roughly 0.4% against the U.S. dollar. The WSJ Dollar Index, which measures the dollar against a basket of currencies, was down 0.2% and is below where it was before Donald Trump's election on Nov. 8.

Some analysts warned that money managers may have read too much into Wednesday's statements.

"The market sort of got carried away, there was very little new information in it," said Willem Verhagen, a senior economist at NN Investment Partners. "When we are in the territory of unconventional monetary policy, expectations of what the central bank will do in the future have no anchor."

The key test for investors is whether economic data and corporate profits come in strong enough to justify borrowing costs going up, analysts said. While optimism from central bankers can give stocks a boost, higher rates can also make them look less attractive.

"What's surprising is that equities continue to take it so well," said Philippe Gijsels, chief strategy officer at BNP Paribas Fortis, who believes it is now time to cash in some of the gains made this year in European equities.

"Markets have benefited enormously from the very loose monetary policy, it would be logical to assume that if this stops you'll have an impact on markets," he added.

Yet, the positive reaction of the market also fuels hopes that stocks have further to go, especially if President Donald Trump can deliver on his pledge to cut taxes for corporations.

"We think most investors don't want to miss out on a bull market," said Myra Natter, wealth adviser at Titus Wealth Management. "If we see that the tax cuts are moving along and people see they are being implemented, this will continue being an upward bias in the market."

Crude-oil prices joined the global rally despite data showing an increase in U.S. stockpiles. The front-month futures for Brent crude, the international benchmark, gained 0.7% to trade at $47.85 a barrel.

Gold, a traditional haven, was down 0.2%.

Kenan Machado contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

June 29, 2017 05:50 ET (09:50 GMT)