By Jon Sindreu
Stock markets continued to make gains Tuesday as data painted a rosier picture for the world’s largest economies heading into the final quarter of the year.
In the U.S., futures markets pointed to a 0.1% opening gain for the S&P 500. In Europe, the Stoxx Europe 600 rose 0.2% in the European morning, led by the basic resources and the telecommunications sectors.
Investors also rewarded Syngenta AG’s shares, which rose 1.7% after news that its acquisition by ChemChina is likely to be delayed into early 2017. The Swiss seed and pesticide maker announced third-quarter sales of $ 2.5 billion, in line with analyst expectations. Shares in another Swiss giant to report figures Tuesday, pharmaceutical conglomerate Novartis AG, edged down 1.3%, despite its net income rising in the three months to September.
Meanwhile, shares in troubled Italian lender Banca Monte dei Paschi di Siena SpA were taken for a roller-coaster ride after the bank announced it would slash 2,600 jobs and shut 500 branches as part of a turnaround plan. After rising more than 20% in the early morning, the stock fell to minus 14%–but is still up roughly 60% in the past month.
Markets have steadied this week, amid a better-than-expected earnings season and signs of stronger health in developed nations across the globe. Business confidence in the German manufacturing sector hit a two-year high in October, according to data released Tuesday. On Monday, purchasing managers’ surveys showed activity in the eurozone at a ten-month high.
Most investors are cautiously optimistic but reluctant to get carried away.
“Many of the uncertainties plaguing the eurozone economy may have faded somewhat, but concerns about geopolitical risks, instability in the financial sector and monetary policy are far from likely to fade into the background permanently,” said Bert Colijn, analyst at Dutch bank ING.
U.S. investment manager BlackRock warned Tuesday that U.S. earnings look better because analysts had previously lowered their expectations.
“Early third-quarter earnings have beaten these reduced expectations at a higher-than-average rate,” said Richard Turnill, BlackRock’s chief investment strategist. “Yet fewer companies are raising their future guidance than in a typical quarter.”
Nevertheless, U.S. economic data for the third quarter, set to be released Friday, is broadly forecast to show the world’s biggest economy growing at a faster pace. Markets currently price in a 74% chance that interest rates will be higher by December, since strong growth would clear the way for the Federal Reserve to tighten policy.
As a result, the dollar has risen against other major currencies this month, pushing the euro to an eight-month low and the Chinese renminbi to its lowest since 2010. Earlier this year, analysts were fretting at the prospect of a sudden devaluation of the renminbi, but markets are now playing down such fears.
“We don’t think that the renminbi will depreciate much this year, because the U.S. dollar does not have so much potential to appreciate,” said Bastien Drut, strategist at Amundi Asset Management. “We don’t believe there can be an acceleration of growth next year” in the U.S., he added.
On Thursday, U.K. officials will provide a first glimpse at post-Brexit Britain by releasing gross domestic product figures for the third quarter. Economists polled by The Wall Street Journal expect the economy to have expanded 0.4% from 0.6% in the previous quarter, which would suggest households and businesses have shrugged off any immediate adverse effects stemming from the U.K.’s vote to leave the European Union in June.
Strong data could lead markets to expect less monetary stimulus from the Bank of England, which recently reignited its bond-buying program–known as quantitative easing, or QE.
For global investors, the question now is whether to fully embrace risky assets after years in which ultrasafe bonds have been the star performers due to loose policies by central driving interest rates to record-lows. This in turn pushes down bond yields, which move opposite to prices.
This month, bond yields have started creeping up, a tentative sign that stronger economic growth–and worries that central banks have reached the limits of their powers–may put an end to the rally in fixed income. BlackRock has already warned that 2017 could be “a rough year” for bonds.
Paul Griffiths, chief investor at First State Investments, believes bonds remain globally overvalued, but stresses they can remain this way for years before they sell off.
“Whilst there is a steady level of QE happening across the world the ability for bond yields to move in a sustained manner to more normal levels is unlikely,” he said.
Asian equity markets painted a mixed picture Tuesday, dragged down by disappointing South Korean GDP data, which drove the Kospi index to edge down 0.5%. By contrast, a weaker yen boosted the Japanese Nikkei 225, which rose 0.8% and reached a six-month high.
Write to Jon Sindreu at jon.sindreu@wsj.com
(END) Dow Jones Newswires 10-25-160652ET Copyright (c) 2016 Dow Jones & Company, Inc.
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