Janet Yellen drives shares higher

Sterling climbed for the first time in four days against the dollar yesterday as the dollar weakened after US Federal Reserve chair Janet Yellen’s comments on low inflation were interpreted as dovish.

At one stage, the S&P 500 Index advanced within 11 points of an all-time high. US property and energy shares led gains. The Russell 2000 Index added 0.9% and headed for an all-time closing high. The Stoxx Europe 600 Index added 1.5%, led by builders and energy companies. The FTSE 100 rose 1.2%

Sterling whipsawed yesterday, falling early on after Bank of England deputy governor Ben Broadbent said he isn’t ready to support an increase in interest rates, and then paring those losses as UK labour figures showed earnings increased more than expected.

The currency extended its advance after Ms Yellen said that while gradual rate hikes were warranted, there was uncertainty on how inflation will respond to tighter resources. Against the euro, sterling traded at 88.5p.

Meanwhile, US stocks rose toward records and US Treasuries rallied on the Ms Yellen signal that the Federal Reserve won’t rush to tighten monetary policy as inflation remains persistently below target.

The Dow Jones Industrial Average jumped more than 120 points to a fresh all-time high at one stage, small caps rallied more than 1% and emerging-market equities surged as Ms Yellen expressed confidence in the US economy while suggesting inflation rates won’t force the Fed’s hand.

The dollar fell versus most major peers, while 10-year Treasury yields slid below 2.32% and gold futures rose.

The statement from Ms Yellen diverted attention from the release of emails by Donald Trump Jr about his controversial meeting with a Russian lawyer, though concern remains that the latest saga in Washington may be an unwelcome distraction for the Fed seeking to dismantle a decade of monetary stimulus.

The scandal could delay fiscal stimulus initiatives in the US, keeping companies hesitant to deploy spending plans, commentators at Pacific Investment Management Co to UBS Group warn.

“At the margin this does muddy the waters,” Bhanu Baweja, a cross-asset strategist at UBS, said.

“There is greater political uncertainty.

“All of a sudden that capex [capital expenditure] rebound that all of us have been waiting for such a long time, might get postponed even further.”

Bloomberg


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