U.S. 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.

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The Stoxx Europe 600 index was up by around 0.3% shortly before U.S. markets opened. Auto stocks were particularly strong, with the autos & parts sector of the Stoxx 600 rising by 0.9%.

U.S. equity futures pointed to a small decline in the S&P 500, down 0.1%. Dow Jones Industrial Average futures were flat.

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 Marco Wagner, senior economist at Commerzbank.

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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 such as 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, noting that further interest-rate increases would likely mean less easy financial conditions, crimping stock markets.

In foreign-exchange markets, the greenback pared some of the previous week's losses, with the WSJ Dollar Index rising 0.3%. The dollar was roughly flat against the yen at Yen113.1.

The euro fell 0.5%, 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 ended Jan. 2, according to data released late Friday

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

U.S. stocks edged higher Monday following a run of records in the first week of trading.

Stocks began the year on an upbeat note, buoyed by investors' optimism over the global economy and bets that central banks are unlikely to pressure markets by raising interest rates too quickly.

Many believe the gains will continue in 2018, although some analysts have warned that valuations have made U.S. stocks look pricey relative to their international counterparts.

The Dow Jones Industrial Average rose 4.3 points, or less than 0.1%, to 25300. The S&P 500 gained 0.1% and the Nasdaq Composite rose 0.3%.

Corporate news drove much of the moves in individual stocks Monday.

Kohl's shares jumped 5.2% after the retailer said its comparable sales jumped over the holidays, boosted by stronger store traffic.

Shares of Crocs, which raised its guidance for fourth-quarter revenue, added 11%.

Meanwhile, GoPro shares slid 11% after the company said its fourth-quarter revenue would come in below what it had previously expected, in part due to product price cuts.

Analysts say they will be closely watching companies' forecasts for the rest of the year as the earnings season begins in earnest later this month.

"This is when the accounting department really needs to put pen to paper in terms of what tax reform means for them," said Art Hogan, chief market strategist at B. Riley FBR.

Investors have been keeping a close eye on the recently passed U.S. tax overhaul, which Goldman Sachs analysts estimate could give a 5% boost to per-share earnings for the S&P 500 in 2018.

"The critical signpoint for the earnings season will be where companies plan to use their cash, and where their guidance ends up," Mr. Hogan said.

Elsewhere, the Stoxx Europe 600 rose 0.3% on Monday, lifted by gains in shares of basic resources companies.

Solid economic data also helped pull European stocks higher, analysts said.

The European Commission's 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.

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 foreign-exchange markets, the U.S. dollar pared some of the previous week's losses, with the WSJ Dollar Index -- which measures the currency against a basket of 16 others -- rising 0.3%.

Write to Akane Otani at akane.otani@wsj.com and Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

January 08, 2018 14:23 ET (19:23 GMT)