Stocks Extend Gains After Starting 2018 on a High Note

By Mike Bird Features Dow Jones Newswires

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

Continue Reading Below

The Stoxx Europe 600 index was up by around 0.2% in midmorning trading, driven by a 0.3% rise in Germany's DAX. Auto stocks were particularly strong, with the autos & parts sector of the Stoxx 600 rising by 1%.

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

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

German economic data is closely watched because the country is the eurozone's largest economy.

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

Continue Reading Below

Stocks were also buoyed by upbeat data from the European Commission, whose economic sentiment indicator for the European Union reached 116 in December--the highest level since August 2000.

In Asia, last week's rally continued across most equity markets. China's Shenzhen A-Share index rose 0.2%, Hong Kong's Hang Seng Index gained 0.3% and Taiwan's Taiex closed at a fresh 28-year high, up 0.3%. Japanese markets were closed.

In Australia, the S&P/ASX 200 hit a new 10-year high Monday, up 0.1%.

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 analysts at Goldman Sachs.

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," Citi analysts wrote 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 0.1% against the yen to Yen113.1.

The euro dipped 0.3%, 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 05:55 ET (10:55 GMT)