U.S. Rate Prospects Strengthen Financial Stocks, Dollar
August 29 2016 - 1:18PM
Dow Jones News
By Riva Gold and Timothy Puko
U.S. stocks rebounded Monday, led by a rally in financial
shares.
Major U.S. stock indexes had their biggest weekly declines since
Brexit after Federal Reserve Chairwoman Janet Yellen said Friday
that the case for a rate rise had improved.
The prospect of higher rates tends to strengthen the dollar and
weaken stock markets, which have been boosted by years of loose
monetary policy. But some said a small increase wouldn't be enough
to shake the long-running rally.
"The bull market ends on a recession, it doesn't end on a rate
hike," said Michael Antonelli, equity sales trader at Robert W.
Baird.
The Dow Jones Industrial Average rose 99 points, or 0.5%, to
18495. The S&P 500 gained 0.5% and the Nasdaq Composite added
0.2%.
Ms. Yellen's statement was later reinforced by Fed Vice Chairman
Stanley Fischer, who suggested that the U.S. central bank could act
as soon as next month.
Fed-fund futures, used by investors to bet on central bank
policy, recently suggested a 30% probability of a rate rise in
September, compared with a 21% chance on Thursday, according to
data from CME Group. The odds for a rate rise by the end of year
were close to 60%.
Financial shares in the S&P 500 rose 1.1%. Higher interest
rates tend to widen the difference between what banks charge on
loans and pay on deposits, which should boost earnings.
The sector has lagged behind the broader index this year as
investors curbed their expectations for rising rates. Financials
are up roughly 2% so far this year, compared with the S&P 500's
gain of nearly 7%.
Shares of Wells Fargo rose 2.1% Monday. Bank of America added
1.2%.
The WSJ Dollar Index, which measures the dollar against a basket
of 16 currencies, rose 0.3%, building on its biggest weekly rise
since May.
Prices for dollar-denominated commodities dropped as the dollar
strengthened. U.S. crude oil declined 1.9% to $46.72 a barrel.
The yield on the 10-year Treasury note fell to 1.594% from
1.631% on Friday. Yields move inversely to prices.
U.S. economic data now faces heavy scrutiny ahead of the next
FOMC meeting on Sept. 20-21.
Consumer spending rose for the fourth straight month in July,
the Commerce Department said Monday. Meanwhile, the
personal-consumption expenditures price index, the Fed's preferred
inflation measure, was flat in July from the prior month.
Fed officials are watching data like inflation and hiring as
they consider the path of interest rates. The monthly jobs report
is due Friday.
In the short term, "strong payrolls would be very bad news for
equities, " said Florian Ielpo at Swiss fund manager Unigestion.
Solid data would strengthen the case for a rate rise in September
and call into question a recent rally in emerging markets, which
hold large quantities of dollar-denominated debt, he said.
Still, longer term, he said, "when a central bank decides to
increase rates, it means the country and companies are doing very
well."
The Stoxx Europe 600 inched down 0.2%. The auto sector led
losses, while markets in the U.K. were closed for a holiday.
In currencies, the euro fell 0.2% against the dollar to $1.1171.
The dollar was recently up 0.3% against the yen at Yen102.125 after
Bank of Japan Gov. Haruhiko Kuroda also said Saturday that the
central bank would take additional monetary easing measures
"without hesitation" to achieve its inflation target.
Japan's Nikkei Stock Average rose 2.3%, as a weaker yen tends to
help exporters such as auto and electronics parts makers.
Shares elsewhere in Asia fell, however, with Hong Kong's Hang
Seng down 0.4% and Australia's S&P ASX 200 down 0.8%. The
Shanghai Composite Index was flat.
Write to Riva Gold at riva.gold@wsj.com and Timothy Puko at
tim.puko@wsj.com
(END) Dow Jones Newswires
August 29, 2016 13:03 ET (17:03 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.