Wall St and European stocks inch higher

Wall Street and European stocks are inching higher, while benchmark bonds are little changed, as investors exhibit caution ahead of key corporate earnings and central bank meetings over the next few days.

The pan-European Stoxx 600 equity index is up 0.2 per cent after the FTSE Asia Pacific index shed 0.2 per cent amid mixed action. In New York, the S&P 500 is adding just 0.2 per cent to 2,092.

In one of the busiest weeks of the year for company reporting, traders are keen to see how Apple performed in the first three months of 2015, with the tech behemoth due to release its results after the Wall Street closing bell on Tuesday.

Analysts in recent months have sharply cut first-quarter earnings expectation for S&P 500 companies and this has helped 75 per cent of those that have already reported to beat forecasts, against a historic average of 66 per cent, according to S&P Global market Intelligence.

This trend has contributed to the S&P 500 climbing to only about 2 per cent shy of last May’s record level.

Profits

One of the biggest expected drags on aggregate profits globally are the energy companies amid weakness in the price of oil. Many large producers will present their results this week: including BP, which trumped forecasts on Tuesday; Total on Wednesday; ConocoPhilips on Thursday; Eni, ExxonMobil and Chevron on Friday.

In the meantime, the price of crude is flirting with four-month highs. After hitting a 12-year low of $27.10 a barrel in January on oversupply fears, Brent oil, the international benchmark, is up 1.6 per cent on the day at $45.21.

The rebound in energy costs has encouraged inflation expectations to rise and this has helped firm up some government bond yields of late, even though most investors think central bank policy will remain highly accommodative for a while yet.

The US Federal Reserve, which has started lifting borrowing costs off post-crisis record lows, is nevertheless expected to tighten policy at a very slow pace.

The Fed will deliver its new policy decision on Wednesday. The market is expecting no rate change this month and is pricing in just a 52 per cent probability of a 25 basis point rate rise by November.

Kit Juckes at Société Générale said the odds of an increase in June are about 20 per cent, adding that the US central bank may be unable to signal a move without triggering market turmoil.

Rates

"That would be anathema to Janet Yellen, but can the Fed really leave rates at these levels indefinitely just because they don't want to disturb asset markets that are only where they are because of Fed policy? A neutral/dovish message may provide a modicum of short-term comfort to markets and hold down the dollar but wouldn't solve the problem of how to prepare markets for further policy normalisation," he said.

The dollar index, which measures the buck against a basket of its peers, is down 0.5 per cent to 94.59 and the 10-year Treasury yield, which moves inversely to the bond price, is up one basis point to 1.91 per cent. Equivalent maturity Bunds are adding 2bp to 0.29 per cent.

Gold is benefiting from a weaker greenback, jumping $6 to $1,243 an ounce.

The Japanese yen is 0.3 per cent stronger at ¥110.91 per dollar and the 10-year government bond fell 2bp to minus 0.10 per cent ahead of the Bank of Japan’s policy decision on Thursday.

The Japanese currency last week had its worst weekly performance since the Bank of Japan boosted its bond-buying programme in October 2014, as markets anticipated that the central bank will need to step up its efforts on Thursday, possibly by cutting interest rates further into negative territory or expanding the size of its asset purchases.

The exporter-sensitive Tokyo stock market tends not to like a rising yen and sure enough the Nikkei 225 dipped 0.5 per cent, tracking a mostly soft performance across the Asia-Pacific region.

Slippage

Australia's S&P/ASX 200 slipped 0.3 per cent as investors returned from a long weekend but Hong Kong's Hang Seng rose 0.5 per cent and mainland China's Shanghai Composite managed to gain 0.6 per cent.

Malaysia’s ringgit was a standout mover in an otherwise quiet forex market, at one point sliding more than 1 per cent - now off 0.5 per cent – against the dollar after 1MDB, the state’s embattled development fund, said it was in default after not making an interest payment on a $1.75 billion bond. The Kuala Lumpur stock market lost 1.3 per cent.

Sterling is up 1 per cent to $1.4632, trading at a two-month high, and the cost of hedging against volatility in the currency has fallen sharply, as “Brexit” fears seem to fade.

Copyright The Financial Times Limited 2016