Stocks Extend Gains After Starting 2018 on a High Note

By Mike Bird Features Dow Jones Newswires

The rally in global equities rolled on Monday, with European stocks following Asian markets higher after last week's rise.

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The Stoxx Europe 600 index was up by around 0.2% as markets opened in the region, driven by a 0.3% rise in Germany's DAX.

German economic data released early Monday showed an unexpected drop in factory orders, which fell 0.4% between October and November. But factory orders were still up 8.7% year-over-year in November.

"The signs for the coming months continue to point to a strong increase in industrial production," said Dr. Marco Wagner, senior economist at Commerzbank AG.

Likewise, U.S. equity futures pointed to another rise, with the S&P 500 up by 0.1%, and the Dow Jones Industrial Average up by 0.2%.

In the Asia-Pacific region, last week's rally continued across most equity markets. China's Shenzhen A-Share index rose by 0.2%, as did Hong Kong's Hang Seng Index.

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Taiwan's Taiex closed at a fresh 28-year high, up 0.3%. Likewise, Australia's S&P/ASX 200 hit a new 10-year high Monday, up 0.1%. Japanese markets were closed.

In foreign exchange markets, the greenback pared some of the previous week's losses, with the WSJ Dollar Index rising 0.2%. The dollar rose 0.2% against the yen to Yen113.3.

The euro dipped 0.3%, falling back to around $1.20. Investors are more heavily positioned in the euro's favor than ever before, according to data from the U.S. Commodity Futures Trading Commission.

Speculators held 127,868 more long contracts--bullish bets on the euro's value--than short contracts in the week ending Jan. 2, according to data released late Friday by the CFTC.

Write to Mike Bird at Mike.Bird@wsj.com

The rally in global equities pushed on, with European stocks following Asian markets higher on Monday after last week's rise.

The Stoxx Europe 600 index was up by around 0.3% in early trading in the region, driven by a 0.3% rise in Germany's DAX.

German economic data released early Monday showed an unexpected drop in factory orders, which fell 0.4% between October and November. However, factory orders were still up 8.7% year-over-year in November.

"The signs for the coming months continue to point to a strong increase in industrial production," said Dr. Marco Wagner, senior economist at Commerzbank AG.

Auto stocks were particularly strong Monday, with the autos & parts sector of the Stoxx 600 rising by 1%.

Likewise, U.S. equity futures pointed to another rise, with the S&P 500 up by 0.1% and the Dow Jones Industrial Average up by 0.2%, while the S&P 500 was up by less than 0.1%.

In the Asia-Pacific region, last week's rally continued across most equity markets. China's Shenzhen A-Share index rose by 0.2%, while Hong Kong's Hang Seng Index rose by 0.3%.

Taiwan's Taiex closed at a fresh 28-year high, up 0.3%. Likewise, Australia's S&P/ASX 200 hit a new 10-year high Monday, up 0.1%. Japanese markets were closed.

A rise in inflation expectations is one of the factors buoying markets internationally. In the U.S., 10-year inflation break-even rates have now returned to 2% for the first time in nine months.

Germany's 10-year inflation break-even rate is currently 1.4%, according to Thomson Reuters data, close to its highest levels for the past four years. The last time the measure was above 1.5% was in late 2013.

As inflation and interest rate expectations rise, cyclical stock sectors like basic resources and financial services tend to outperform, while defensive sectors like utilities lag.

Cyclical stocks outperformed their defensive peers by 1.5% in Europe last week, according to Goldman Sachs analysts.

Some forecasters suggest that a period of more sustained inflation would be negative for stock markets, especially if economic growth plateaus.

"The 'Goldilocks' environment has been a massive boon to risk assets as it typically is historically. A move into a period of reflation would be less bullish for equities," said Citi analysts in a research note Monday.

In foreign exchange markets, the greenback pared some of the previous week's losses, with the WSJ Dollar Index rising 0.2%. The dollar rose 0.2% against the yen to Yen113.3.

The euro dipped 0.4%, falling back to just below $1.20 for the first time since Jan. 1. Investors are more heavily positioned in the euro's favor than ever before, according to data from the U.S. Commodity Futures Trading Commission.

Speculators held 127,868 more long contracts -- bullish bets on the euro's value -- than short contracts in the week ending Jan. 2, according to data released late Friday by the CFTC.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

January 08, 2018 04:56 ET (09:56 GMT)