The euro shot to a three-year high yesterday as optimism around growth buoyed expectations of tighter monetary policy from European Central Bank, while the chance of a pro-European Union coalition in Germany also boosted confidence in the continent.
With the world in general and Europe in particular showing signs of sustained economic growth, global stock benchmarks jumped to new highs, even though investors are now pricing in the withdrawal of central banks’ stimulus.
That view was given further fuel last week by an account of ECB discussions that suggested policymakers may soon start preparing the ground for a reduction in support.
The single currency climbed as much as 0.8 per cent to $1.22965 at one stage yesterday, a price last seen in December 2014, just before the ECB first announced its government bond purchase programme.
In addition, Bank of Japan Governor Haruhiko Kuroda offered a positive view on his nation’s economy and inflation yesterday, sending the yen to a four-month high against the dollar.
Euro zone money markets now price in a 70 per cent chance of a 10-basis-point rate increase by the ECB by the end of the year, up from 50 per cent a week before.
The strength in the euro pushed European stocks a touch lower, as exporters were hit by the currency strength. An index of pan-European stocks was down 0.1 per cent on the day, but still not far from multi-year high hit last week.
The slight decline comes in the wider context of boom for stocks so far in 2018, as investors bask in strong growth numbers from most of the world’s largest economies.
MSCI’s all-country index of world stocks soared to new records overnight and MSCI’s Asia ex-Japan index breached its 2007 high for the first time to set a new all-time record.
Stocks in Hong Kong jumped 0.9 per cent from Friday’s record closing high. Investors were optimistic that Chinese gross domestic product data for the December quarter due on Thursday would show growth of at least 6.7 per cent for the world’s second-biggest economy.
The momentum of global economic growth through the closing months of last year is being underlined by the early stages of the fourth-quarter earnings season.
Earnings for S&P 500 companies are expected to increase on average by 12.1 per cent in the quarter, with profit for financial services companies likely to increase 13.2 per cent, according to Thomson Reuters.
Meanwhile, oil prices dropped following six straight sessions of gains, with output cuts led by Opec and Russia as well as healthy demand keeping crude near December 2014 highs.
Brent crude futures fell 19 cents to $69.68 a barrel, while US crude was lower 12 cents at $64.19.