Financial Shares Climb as Investors Bet on U.S. Rate Rise -- 2nd Update

By Riva Gold and Kenan Machado Features Dow Jones Newswires

Bank shares gain as investors digest Fed's stance

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-- Bonds and gold under pressure

-- Bank of Japan keeps policy unchanged

Global bank shares climbed Thursday, while haven assets came under pressure, after the Federal Reserve signaled it remained on track to raise interest rates later in 2017.

The Stoxx Europe 600 rose 0.3% in morning trading, led a 1.7% advance in lenders following gains in their U.S. and Asian peers.

Shares of U.S. financial stocks rose Wednesday, helping lift the Dow Jones Industrial Average and S&P 500 to record highs after the U.S. central bank kept the door open for a December interest-rate rise and said it would begin shrinking its portfolio of bonds in October. Higher rates tend to boost banks' net interest margins, a measure of lending profitability.

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CME Fed-fund futures, used by investors to bet on central bank policy, show investors now see a 68.5% chance of higher U.S. interest rates by the end of the year, compared with 57.7% a day earlier. Officials signalled they continue to expect three rate increases next year, two in 2019 and one in 2020, suggesting continued optimism about the economy despite low inflation.

Many investors "may have expected a more dovish outcome" from the Fed, "especially on the interest-rate projections," said Steven Friedman, a senior economist at BNP Paribas Asset Management.

Futures pointed to a 0.1% opening decline for the S&P 500 on Thursday and a flat opening for the Dow.

Shares of Germany's Commerzbank led gains in European banks following media reports of merger interest by Italy's UniCredit, whose shares were up 2.4%.

Shares of utilities companies in Europe and Asia, considered bond-proxies in the stock market, moved lower. Utilities are a favorite for investors seeking higher yields, so rising interest rates lessen their allure. European utilities companies were down 0.8% and telecommunications companies fell 0.5%, while in Australia, the S&P/ASX 200 slid 0.9% as the utilities subindex fell to its lowest level in 2017.

Also weighing down Australian stocks, but helping those in Japan and Europe was a jump in the U.S. dollar which pulled metals prices lower. The WSJ Dollar Index, which tracks the greenback against a basket of 16 currencies, was last up 0.1%, after its biggest gain in a week on Wednesday.

As assets considered safe came under pressure, gold fell 1.2% to $1,301 an ounce, around its lowest since late August.

Yields on 10-year German government bonds rose to 0.473% Thursday, around a six-week high, from 0.435% Wednesday before the Fed decision, while 10-year Treasury yields steadied at 2.270% after climbing to 2.276% Wednesday. The yield on the two-year U.S. Treasury note, which tends to be more sensitive to market expectations, rose to its highest level since November 2008 after the meeting but steadied on Thursday. Yields move inversely to prices.

In Asian trading, Japan's Nikkei Stock Average edged up 0.2%, with insurers gaining on higher bond yields and exporters benefiting from a weaker yen.

Investors showed little reaction after the Bank of Japan left its policy unchanged Thursday, sticking to its massive stimulus program. New board member Goushi Kataoka voted against keeping the interest rate targets unchanged, saying they were insufficient for reaching the bank's inflation target.

Taiwan's Taiex index rose 0.6% in the wake of HTC's $1.1 billion smartphone deal with Google.

Indexes elsewhere in Asia were little changed, with slight declines in Hong Kong, Shanghai and South Korea.

Write to Riva Gold at riva.gold@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

September 21, 2017 05:29 ET (09:29 GMT)