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World stocks markets at highest in two weeks, what's driving the rise

posted onAugust 27, 2018

World stocks rose to their highest level in more than two weeks on Monday as dovish comments from the head of the Federal Reserve regarding interest rates, China's central bank announcement that is taking measures to stabilize the yuan and a stronger-than-expected German business sentiment survey lifted risk appetite. 

Investors picked up a record-breaking lead from Wall Street, where all three major US indices pushed higher on Friday. The S&P 500 rallied by 0.6%, notching its first closing record since January and the tech-rich Nasdaq added 0.9% to smash past a record set last month. The Dow Jones Industrial Average surged 0.5%.The gains cemented Wall Street's longest-running bull market, as defined by some investors. 

Speaking at the Jackson Hole symposium on Friday, Federal Reserve Chair Jerome Powell  said there was no sign of an overheating economy and that the U.S. central bank was sticking with its strategy of gradual rate hikes.

"As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate" Powell said.

US Federal Reserve Chairman Jerome Powell
US Federal Reserve Chairman Jerome Powell

His comments bolstered confidence among investors and sparked a rally in stocks. 

Chinese stocks hit their highest levels in two weeks while  the offshore yuan hit a one-month high on Monday as the People’s Bank of China announced changes to the methodology for the fixing of the yuan's daily midpoint. The move spurred optimism that a stronger yuan will reduce foreign debt burden. The central bank also said the adjustment is expected to play an active role in keeping the yuan at a reasonable and stable level in the future.  

The MSCI All-Country World index which tracks shares in 47 countries closed on Monday at its highest level since Aug. 9. MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.1 percent.  Japan's Nikkei closed at a 10-week high  on Wall Street Friday supporting underlying sentiment. In Australia, the ASX 200 was up by 0.35 percent to close at 6,268.9  

In Europe, stock markets in Paris and Frankfurt were up 0.4 percent each. In London, the stock exchange is closed for the UK summer bank holiday on Monday.

Helping to brighten the mood, German business climate improved in August according to the latest report released by the Ifo Institute. The Ifo Business Climate Index rose to 103.8 points this month from July's 101.7 points, the Munich-based institute said. The expected score was 101.8.  A "robust domestic economic situation," as well as improving trade relations with the United States, contributed significantly to the upbeat business climate, the report explained.

Market players also monitored news that talks continue between the U.S. and Mexico over the future of the North American Free Trade Agreement (NAFTA), the key North American trade agreement that's faced an uncertain fate for more than a year. 

On Saturday, U.S. President Donald Trump tweeted that America's "relationship with Mexico is getting closer by the hour" and that "a big Trade Agreement with Mexico could be happening soon!" 

On Sunday, Reuters quoted Mexican Economy Minister Ildefonso Guajardo as saying that talks have “continued to make progress”. 

The Mexican peso climbed after people familiar with the discussions said that U.S. and Mexican trade negotiators are seen as close to reaching a common position on the NAFTA as soon as Monday. Proposals under consideration include exempting some industries from dispute settlement provisions, the Wall Street Journal reported. 

U.S. stock index futures trade higher on Monday following Powell's upbeat remarks, suggesting Wall Street would extend its push into record territory. Dow futures were seen trading 83 points higher, indicating a gain of 87 points, while S&P 500 and Nasdaq 100 futures were also in the black. 

Key events coming up this week: 
Monday: The Dallas Federal Reserve is set to release manufacturing numbers 
Tuesday: US home price data released for June  
Friday: Eurozone unemployment data released for July, the Bank of Korea sets policy. 

Earnings are due from companies including Canada’s largest banks and China Construction Bank Corp, ICBC, Pernod Ricard, Best Buy, Dollar General, Abercrombie & Fitch, Tifanny, Campbell Soup, Lululemon.

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