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    US stock rally gets some welcome company

    Synopsis

    &P 500 is trading near its long term average risk premium when compared with bonds

    5 stocks to bet on next weekThinkStock Photos
    Much of the focus in the currency market Monday was on Mexico’s peso, which was the biggest gainer among the world’s most-traded currencies by appreciating as much as 1.62 per cent amid the trade agreement with the US Even so, that only left the peso at its strongest level since Wednesday.

    By Robert Burgess

    Since the current bull market in US stocks set the record last week for longevity by some measures, the debate over how much longer it will continue has intensified. There’s no way of knowing when it will end, but a few recent developments suggest that there’s no reason to be anxious — at least in the near future.

    First, after severely underperforming in the first half of August, stocks outside of the US are starting to rebound and even outgain American equities. The MSCI All-Country World Index excluding the US is up 2.92per cent since Aug. 17, compared with 1.64per cent for the S&P 500 Index. Rising confidence in international equities should help alleviate concern that the US stocks would be able to buck a global slump for only so long. Second, despite the S&P 500 setting yet another record Monday, equities aren’t that expensive. Bloomberg Intelligence noted in a report Monday that the S&P 500 is trading near its longterm average risk premium when compared with bonds, or about the same level as both the midpoint of the first post-World War II bull market and in the early 1980s. Although the current premium of 320 basis points might be below the long run average of 500, it’s above the low of 105 in the 1960s rally and minus 20 when the last bull market ended in 2000.


    CHINA DELIVERS A GLOBAL BOOST

    Globally, stocks had their biggest day since April, with the MSCI All-Country Index rising as much as 1.02per cent. Much of the credit for the gains was pinned to optimism over an easing of global trade tensions as the Trump administration closed a bilateral trade deal with Mexico. That certainly helped, but don’t overlook a new development in China’s foreign-exchange policy. The offshore yuan strengthened to its best level of the month on Monday after the People’s Bank of China said late Friday that it was taking action to support the currency through its daily fixing. The announcement adds to signs that China is pushing back against yuan declines, with the central bank this month boosting the cost to short the currency and urging lenders to prevent any “herd behavior” in the foreign-exchange market, Bloomberg News reported. Recall that a surprise effort by China’s government to weaken the yuan in August 2015 triggered a global slump in stocks that lasted until February 2016. Many investors have been worried about a replay if China intended to allow the yuan to depreciate much further to support domestic exporters and counter US tariffs. “The central bank’s statement to support the yuan has boosted market sentiment,” said Kang Chongli, an analyst with Lianxun Securities in Beijing, according to Bloomberg News.

    BORROWING CONTINUES

    US Treasuries fell as the US government embarked on a heavy week of borrowing, offering $121 billion in fixed- and floating-rate notes in addition to the usual complement of bills. Even though many bond traders will be away on vacation, which may make the results more volatile than usual, the sales will surely receive a lot of scrutiny. That’s because these are the first auctions since the Treasury Department released data late on Aug. 15 that showed foreigners sold a net $48.6 billion of Treasury notes and bonds in June, the most since October 2016. Foreign private holders, rather than foreign official ones such as central banks and finance ministries, were responsible for the bulk of the sales. Assigning a reason for the sales would be pure speculation, but it’s no secret that US debt outstanding is ballooning along with the federal budget deficit. US marketable government debt outstanding has just topped $15 trillion for the first time. At the same time, US Commodity Futures Trading Commission data show hedge funds and other large speculators hold a record number of contracts betting on a decline in 10-year Treasuries. The first auction of this week was relatively uneventful, with investors submitting bids for 2.89 times the $36 billion offered, in line with the average of 2.81 times over the previous 12 monthly sales of that maturity.

    THE EURO’S ON THE MOVE

    Much of the focus in the currency market Monday was on Mexico’s peso, which was the biggest gainer among the world’s most-traded currencies by appreciating as much as 1.62 per cent amid the trade agreement with the US Even so, that only left the peso at its strongest level since Wednesday.





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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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