Wall Street in 2018: the biggest risks for stocks

NEW YORK - Wall Street's rally could have another leg up next year thanks to a sweeping tax cut and economic momentum, but investors are counting the risks that could abruptly end the party.

The S&P 500 is up about 20 percent with less than a week to go of 2017, and many strategists expect the bull run that began in 2009 to extend into next year, albeit with smaller gains. Optimism is high following sweeping tax cuts passed by Congress last week that are expected to give an added boost to corporate profits next year.

But strategists and investors highlight these risks for the year ahead:

FED GETS TOO AGGRESSIVE 

The pace of interest rate hikes, particularly after stronger economic data, could derail the market, say some. The US economy grew at its fastest pace in more than 2 years in the third quarter.

Wall Street's top banks expect the Fed to raise US interest rates 3 times in 2018, matching the number of rate hikes this year and the central bank's own outlook.

"That will be a risk for the market," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. "You're going to risk inverting the yield curve at that point and provide a reasonable competition to equities."

INFLATION ACCELERATES 

Some strategists fear inflation will accelerate too quickly as economic growth picks up, creating margin pressure and putting pressure on the Fed to bump up rates faster than investors expect.

"Inflation could be a global game-changer for stock and credit markets," Bank of America Merrill Lynch analysts said in their 2018 outlook this month, adding that wage inflation was potentially the most important factor for the stock market.

MIDTERM ELECTIONS AND POLITICAL UNCERTAINTY  

Investors will pay close attention to next year's midterm elections. Democrats are hoping to reclaim seats in Congress, now controlled by Republicans.

"If the Republicans lose the House or Senate, or both, then that would probably be a big negative for the market," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. "The market would begin to worry that... the Trump agenda will be stopped in its tracks."

GEOPOLITICAL PROBLEMS GET WORSE  

Rising tensions between the United States and North Korea rattled markets around the world in 2017, but Wall Street was able to shake off those worries. Next year, these and other geopolitical concerns are likely to come up again, strategists said.

"Tensions abound, remaining elevated with North Korea and rising in the Middle East," Keith Lerner, chief market strategist and managing director, portfolio and market strategist, SunTrust Advisory Services, Inc, in Atlanta, Georgia, wrote in his 2018 outlook note.

Also, "the political pendulum is swinging toward populism and nationalism across the globe."

Next year is expected to include key elections in Italy, Mexico and Brazil, among others.

VALUATIONS KEEP RISING, ALONG WITH SENTIMENT  

While strategists expect US earnings to get an added jolt of adrenalin next year because of the tax cuts, some worry it might not be enough to justify stretched valuations.

The S&P 500 is trading at about 18.5 times forward earnings, the highest since 2002, Thomson Reuters data shows.

Investor sentiment could raise some concerns, according to a Dec. 15 note from Citigroup's Chief US Equity Strategist Tobias Levkovich.

Citi's panic/euphoria model is signaling a greater than 60 percent probability of a down market by this time next year, "which is akin to waving a yellow flag of caution," he wrote.

CRYPTOCURRENCY RUN REVERSES FAST   

The world's biggest and best known digital currency, bitcoin, has been on a tear, and could be a wild card for 2018.

"Bitcoin is on a momentum run, and momentum plays go until they don't anymore," said Bob Doll, senior portfolio manager and chief equity strategist at Nuveen Asset Management, adding that investors would ask: "'If Bitcoin can go down a multiple tens of percent, why can't my stocks as well?

source: news.abs-cbn.com

Asia shares hit 2008 highs, dollar in decline on Fed inflation view

SYDNEY - Stocks, bonds and commodities were all on a roll in Asia on Thursday as bulls scented a softening in the Federal Reserve's confidence on inflation that promised to keep U.S. interest rates low for longer.

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.5 percent to heights not seen since January 2008. It has gained nearly 5 percent so far this month.



South Korea added 0.6 percent and Australia 0.2 percent, while Japan's Nikkei was kept flat by a firmer yen.

The Philippine Stock Exchange Index opened at 8,071.22, up 0.42 percent.

The latest rush for risk came after the Fed left U.S. rates unmoved as expected on Thursday but the market seized on tweaks in its wording on inflation.

It noted that both overall and core inflation had declined and removed the qualifier "recently", perhaps suggesting concerns the slowdown might not be temporary.

The Fed also said it expected to start winding down its massive holdings of bonds "relatively soon", cementing expectations of a September start.

While that would be an effective tightening in financial conditions it might also lessen the need for actual hikes in rates, which matter more for currency valuations.

"The dollar's biggest problem is it can't expect help from the Fed for a long time," said Alan Ruskin, global head of forex at Deutsche.

"In the short-term we are still in a risk-favorable loop, whereby subdued goods and services inflation supports a well behaved bond market and asset inflation. It's just another day in paradise."

A Reuters poll showed most primary dealers, the banks authorized to trade directly with the Fed, still see the Fed's next rate rise in December. But Fed funds rate futures are pricing in less than 50 percent chance of a hike by then, compared to more than 50 percent before the Fed's meeting.

DOLLAR BREAKS LOWER

Yields on U.S. 10-year debt duly fell 5 basis points and were last at 2.28 percent.

The dollar followed, falling to a 13-month trough against a basket of currencies at 93.370. It was last down around 0.2 percent at 93.444.

The euro, which had been bumping up against a 23-month top for most of the week, finally broke through to reach $1.1742 , its highest since January, 2015.

The next major chart target was the 200-week average at $1.1807 - a measure the euro has not traded above since August 2014.

Indeed, the dollar was fast approaching the 200-week barrier on both the Canadian and Australian dollars and breaks would be technically bearish.

The dollar even fall back on the yen to 111.04, though the damage was limited by expectations the Bank of Japan would keep its super-easy policies in place longer than most other global central banks.

The prospect of U.S. policy staying stimulative saw Wall Street's fear gauge touch a record low. The Dow ended Wednesday up 0.45 percent, while the S&P 500 added 0.03 percent and the Nasdaq 0.16 percent.

Telecoms was the best performer, propelled by a 5.0 percent gain in AT&T after its results. Boeing soared 9.9 percent after beating estimates and Amazon's market worth topped $500 billion for the first time.

The declining U.S. dollar boosted commodities priced in the currency. Spot gold hit a six-week high and was last trading at $1,262.45, while copper reached territory not trod since May 2015.

Oil prices neared eight-week highs as a surprisingly sharp drop in U.S. inventories encouraged speculation a global crude glut would recede.

A bout of profit-taking in early Asia on Thursday saw Brent crude futures ease 11 cents to $50.86 a barrel, while U.S. crude dipped 9 cents to $48.66.

(Editing by Kim Coghill)

source: news.abs-cbn.com

China expands forex basket, dilutes role of dollar

BEIJING - China said Thursday it would almost double the number of foreign currencies it uses to determine the official value of the yuan, thereby diluting the role of the dollar.

The move to expand the foreign exchange basket used to set a daily reference rate for the yuan, or renminbi, will help Beijing shake off the weakness of the currency against the greenback and project an image of stability in the unit.

The dollar will see its prominence in the basket dented by the newcomers, with its share falling from 26.4 percent to 22.4 percent. It is followed by the euro at 16.34 percent.

Among the 11 currencies to join the 13 existing ones are the South Korean won, the South African rand, the Hungarian forint, the Turkish lira and the Polish zloty, according to the Chinese Foreign Exchange Trade System, which is run by the central bank.

The expansion is designed to "strengthen the representativeness" of the basket and will come into force on January 1, it added.

"The move is aim (ed) to reduce the impact of dollar strength on the overall performance of the basket," said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd.

China's currency has been under pressure from uncertainty over the health of the world's second largest economy, massive capital outflows and the sharp rise in the dollar following Donald Trump's election victory and anticipation of US interest rate hikes.

However, when valued against the "basket of currencies" as a whole, the yuan fares much better, even seeing a rise over the past four months.

China's communist regime likely hopes the move will project an image of stability and strengthen the international stature of the renminbi after it was welcomed by the International Monetary Fund into its elite currency basket in October.

source: news.abs-cbn.com

PH, Indonesian shares lead regional gains after Fed rate hike

BANGKOK - Most Southeast Asian stock markets gained on Thursday after the U.S. Federal Reserve raised interest rates as expected, with the Philippine key stock index rising nearly two percent and the Indonesian benchmark hitting a near two-week high.

The Philippines' key index rose 1.9 percent while the Jakarta composite index gained 1.2 percent, both hovering at their highest levels since Dec. 7.

Share price weakness in Southeast Asia this year in the wake of fund outflows has mostly reflected the rate hike fears, according to brokers.

"Markets have predictably declined heading into the first Fed hike. This, however, presents an opportunity as we expect Fed-related risks to subside thereafter," said broker Nomura Securities in a report.

"A combination of easing China risks and some domestic catalysts makes for a good opportunity to increase our risk exposure in ASEAN," Nomura said.

Nomura upgraded Indonesia to "overweight", the same as the Philippines and Singapore. It remained "underweight" on Malaysia and Thailand.

The Thai SET index rose marginally while telecoms shares such as Total Access Communication came under selling pressure on concerns the high bidding prices of 4G spectrum licences would hurt earnings.

The Fed hiked interest rates for the first time in nearly a decade on Wednesday, signalling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.

The gains in Southeast Asia were in line with a rally on Wall Street overnight and in early Asian stock markets as investors chose to take the historic hike in U.S. interest rates as a mark of confidence in the world's largest economy.

source: www.abs-cbnnews.com

US Fed raises interest rate for first time in nearly a decade

WASHINGTON, United States - The Federal Reserve announced Wednesday its first interest rate increase in more than nine years in a landmark move signaling the US has finally moved beyond the 2008 crisis.

The move, which has repercussions across the global financial system, also imprinted Janet Yellen's personal stamp on US monetary policy after nearly two years as Fed chair spent plotting to reverse course from the easy-money stance bequeathed by predecessor Ben Bernanke.

The Fed raised its benchmark federal funds rate, locked near zero since the financial crisis, by a quarter point to 0.25-0.50 percent, saying the world's biggest economy is growing solidly and should accelerate next year to a respectable 2.4 percent pace.

"This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression," Yellen said.

"It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans."

The move was widely expected and marked the end of an era in which the Fed pumped trillions of cheap dollars into the devastated US economy to fuel what turned out to be an unexpectedly long rebound.

It kicks off a likely series of rate increases which the Federal Open Market Committee, the Fed's policy board, promised would be "gradual" and follow the pace of the economy.

FOMC projections showed they expect the rate will rise to about 1.4 percent by the end of 2016, suggesting four more increases over the coming 12 months.

"The important question is how far, how fast," said economist Edwin Truman at the Peterson Institute for International Economics.

Markets react positively

The announcement, and the Fed's positive outlook for US growth, pushed Asian and US stocks higher, with the S&P 500 finishing with a 1.5 percent gain, most of which came after the Fed's announcement.

Stocks in Australia, Tokyo and Hong Kong were all up, and the dollar rose slightly against the euro.

The rate increase came amid some criticism from prominent economists that the economy was still vulnerable to slower global growth and that there was no compelling reason -- like surging inflation and a tight jobs market -- to justify it.

But FOMC support for the decision was unanimous. The committee pointed to "considerable" improvement in the labor market and said it is "reasonably confident" in inflation rising over the medium term, to its two percent objective.

"The first thing that Americans should realize is that the Fed's decision today reflects our confidence in the US economy," Yellen told a press conference.

"While things may be uneven across regions of the country, and different industrial sectors, we see an economy that is on a path of sustainable improvement."

Yellen predicted the challenges of ultra-low inflation and continued slack in the labor market would both diminish significantly over the coming year.

"What we would like to avoid is a situation where we have waited so long that we are forced to tighten policy abruptly, which risks aborting what I would like to see as a very long-running and sustainable expansion," she explained.

'Source of strength'

Analysts said the immediate policy change was only modest and were focused on how the Fed will move in the next year.

The prospect of more increases of the Fed's rate will have a broad impact on the global financial system.

It means a higher cost of borrowing for everyone from foreign governments and companies to home and car buyers, while also better rewarding savers on their bank accounts.

The Fed argues that US businesses can continue to invest and hire with a modestly tighter dollar policy.

As for foreign economies, especially emerging markets which have already seen capital outflows and falling currencies due to the expected shift by the Fed, Yellen says they had been forewarned and are in better shape than in the crises of the 1990s.

"This action takes place in the context of a US economy that is doing well, and is a source of strength to the emerging markets and other economies around the globe," she said.

Kathy Lien of BK Asset Management noted that "the most important monetary policy event of the year proved to be a dud for market volatility.

"This muted reaction to a historic change in monetary policy is exactly what the Federal Reserve likes to see and despite all of their critics, we see this as a credit to their proper management of market expectations."

source: www.abs-cbnnews.com

Asia stocks gain as Wall Street rises before Fed, dollar stands tall

TOKYO - Asian stocks gained early on Wednesday, with sentiment lifting as Wall Street rose before a likely hike in U.S. interest rates, while the dollar held to large gains made as Treasury yields picked up.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7 percent.

Australian shares climbed 1.5 percent and Japan's Nikkei .N225 gained 1.9 percent.

On Wall Street Tuesday, the Dow .DJI added 0.9 percent and the S&P 500 advanced 1.1 percent. Bank stocks, which will likely benefit from higher rates, were among the market leaders with a 2.4 percent advance on the S&P financial sector index.

The Federal Reserve is expected to announce a hike in interest rates when its two-day policy setting meeting ends later in the day. It would be the first U.S. rate hike in nearly a decade, signaling the beginning of an end to an expansionary monetary policy that has supplied a tidal wave of liquidity to risk asset markets globally.

With a hike seen as a mostly done deal after more than a year of anticipation, investor focus is fixed on how the Fed might opt to pace its tightening cycle next year. The central bank has hinted that it intends to hike rates gradually.

"(Fed chair) Yellen should stress data-dependence in following up with further tightening next year and will surely not drop any heavy hints about the timing of the next move. No one can be confident how the dollar will emerge from all this but volatility seems assured," wrote Sean Callow, a senior strategist at Westpac.

The dollar index last stood at 98.183, having gained 0.6 percent on Tuesday.

The dollar was steady at 121.67 yen, pulling further away from a six-week trough of 120.35 struck Monday. The euro traded near $1.0900 after recoiling from a seven-week peak of $1.1060.

Supporting the greenback, Treasury yields rose overnight as gains on Wall Street reduced the appeal of safe-haven bonds and stable U.S. consumer prices data supported the case for a Fed rate hike.

In commodities, crude oil dipped after gaining for two successive days. U.S. crude was down 1.2 percent at $36.89 a barrel. Concerns of global oversupply had sent crude to a seven-year low of $34.53 earlier this week.

source: www.abs-cbnnews.com