Global stocks fall after US consumer prices post their fastest gain in 13 years, while bitcoin drops to $31,900

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Global stocks edged lower on Wednesday after US consumer prices rose at their fastest monthly rate since 2008, raising fears the Federal Reserve may have to wind down some of the accommodative polices it’s had in place since the pandemic sooner than expected.

The Consumer Price Index reading rose 0.9% between May and June, higher than the consensus forecast for a rise of 0.5% according to a Bloomberg poll. This marks the fastest monthly gain in prices since a 1.0% increase in April 2008.

Futures on the Dow Jones, S&P 500, and Nasdaq fell 0.2%, suggesting a lower start to trading later in the day.

Prices have been rising faster than ever over the past several months as demand for goods and services exceeds supply. The latest reading showed consumer inflation rose by 5.4% compared with last year, above the 4.9% economists expected. This was also the strongest rise in 13 years.

While most global asset managers see inflation as a transitory affair, Deutsche Bank said forecasts are still creeping up for next year. That indicates economists are starting to price in longer lasting inflation, which would make it more difficult for the Fed to maintain its argument that rising price pressures will be transitory, Deutsche research strategist Jim Reid said.

“Either that, or the transitory definition will have to be revised to cover several quarters rather than just months,” he said.

Bitcoin fell 4% to around $31,945 as of 4:00 a.m. ET, bringing losses over the last three months to 35%. Bitcoin bulls have long argued it is a hedge against inflation, but the idea that it serves a purpose similar to gold seems to be dwindling, particularly in light of Tuesday’s consumer price data.

Elsewhere in Europe, prices in the UK too rose at their fastest rate in three years in June. The Consumer Price Index rose 2.5% in the year to June, from 2.1% in May, higher than economists’ expectations for a 2.2% increase.

The release of eurozone industrial production later on Wednesday could give an insight into the recovery in the region’s manufacturing, mining, and utilities sectors.

London’s FTSE 100 fell 0.3%, the Euro Stoxx 50 fell 0.2%, and Frankfurt’s DAX fell 0.2%.

Asian markets lost ground as investors digested US inflation data. Investors will be tuning into Fed Chair Jerome Powell’s semi-annual testimony to Congress on Wednesday for any clues as to whether the central bank will take more aggressive action to halt rising prices.

The Shanghai Composite fell 1%, Tokyo’s Nikkei fell 0.3%, and Hong Kong’s Hang Seng fell 0.5%.

Read More: These 5 stocks are ripe for a short squeeze after surging in popularity this past month, according to Fintel. 2 even have the meme-friendly appeal of AMC and GameStop.

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European stocks edge lower as investors eye the spread of the Delta variant, while China’s tech sector weighs regulatory scrutiny

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European markets opened mostly lower on Monday as the spread of the Delta variant had a dampening effect on some of the reopening bullishness, while US markets were closed, meaning trading volumes would likely be thinner.

London’s FTSE 100 fell 0.02%, the Euro Stoxx 50 fell 0.4%, and Frankfurt’s DAX fell 0.5%.

US markets were closed for the Independence Day holiday, but futures pointed to a 0.1% dip for Tuesday’s open.

UK Prime Minister Boris Johnson was set to announce later on Monday a further relaxation of coronavirus restrictions, involving voluntary use of face masks in public, despite a spike in new infections. The country reported more than 170,000 cases in the past seven days, a 67% jump from last week.

The final stage of the four-step plan to end lockdown, scheduled to come into effect on July 19, will be “an enormous test case as to whether heavily vaccinated countries can live with the virus,” Deutsche Bank strategist Jim Reid said.

French Health Minister Olivier Véran warned in a tweet on Sunday that based on the UK’s current situation, France too could be hit by a wave of the contagious Delta-variant infections by the end of July.

Covid-sensitive assets struggled on news of the spread, with the STOXX 600 Travel & Leisure index down 0.13%, extending the previous week’s losses.

British supermarket Morrisons gained 11% after US investment firm Apollo said it was considering making a rival offer to buy the chain. Apollo’s bid could trump a £6.3 billion ($8.7 billion) offer, to which the chain has already agreed to, from Softbank-backed Fortress, according to Bloomberg.

Asian markets traded mostly lower after investors digested China’s expanding crackdown on technology platforms that targets more US-listed companies. Regulators ordered the removal of ride-hailing firm Didi Chuxing from app stores, days after its successful New York IPO, on the grounds that it had been collecting and using personal user data.

The Shanghai Composite rose 0.4%, Tokyo’s Nikkei lost 0.6%, and Hong Kong’s Hang Seng declined 0.3%.

Oil prices remained largely unchanged ahead of the OPEC+ meeting that is set to resume on Monday after disagreements over production cuts last week. The United Arab Emirates is against extending the deal to increase production until the end of 2022 and is demanding better terms for itself, according to Deutsche Bank analysts.

Brent crude rose 0.03% to $76.19 per barrel. Gold rose 0.5% to $1,792 an ounce.

Read More: RBC: Buy these 19 stocks that should outperform in the 3rd quarter on the way to upside of at least 20% over the next year

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US stocks head for 7th day of record highs, while oil tops $75 for the first time since 2018

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US stocks were set to log their seventh day of record highs on Friday as investors looked forward to a major indicator of recovery, the Labor Department’s June jobs report.

Futures on the Dow Jones, S&P 500, and Nasdaq rose 0.2%, suggesting a higher start to trading later on.

Deutsche Bank’s US economists expect monthly non-farm payroll data, due later on Friday, to show a 700,000 gain for the month, which should help cut the unemployment rate to a post-pandemic low of 5.7%.

Weekly jobless claims data on Thursday showed the number of Americans filing for unemployment insurance sank to a post-pandemic low of 364,000, versus 388,000 expected, for the week through June 26.

Markets got the second half of the year off to a strong start on Thursday, with risk assets resuming their upward march, Deutsche Bank research strategist Jim Reid said. “Indeed, the mood was pretty buoyant across multiple asset classes,” he added.

The VIX index, which measures the market’s expectations of volatility in the coming 30 days, fell -0.4 points to 15.41 to reach its lowest level since the pandemic began.

While volatility is subdued, the potential catalysts that could cause it to flare up again include inflation concerns, persistent COVID-19 worries, and ongoing geopolitical tensions, according to UBS.

“Although we believe a risk-on stance is still warranted, we think investors can use this period of low volatility to ensure their portfolios are prepared for any turbulence ahead,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.

Elsewhere in Europe, the UK reported more than 27,000 new COVID-19 cases on Thursday – its highest level since the end of January. But equities followed Wall Street in tracking the closely-watched US jobs report.

London’s FTSE 100 rose 0.4% and Frankfurt’s DAX rose 0.5%. The pan-European Euro Stoxx 600 rose 0.5%, with travel and leisure stocks climbing 1.2% to lead gains.

West Texas Intermediate crude oil prices traded above $75 a barrel for a second day on Friday, a near three-year high, ahead of a key OPEC decision on production policy for the second half of the year. But a standoff between the UAE and other key exporters could mean the group may not increase production at all, Bloomberg reported, citing a source. Brent crude was meanwhile trading slightly lower on the day at $75.71 a barrel.

Asian markets fell a day after Xi Jinping marked the centennial of the Chinese Communist party’s founding with a nationalistic address in Beijing. It seems likely that his hawkish comments on geopolitics are continuing to weigh on the region’s markets, Deutsche’s Reid said.

The Shanghai Composite fell 1.95%, Hong Kong’s Hang Seng fell 1.9%, while Tokyo’s Nikkei rose 0.2%.

Read More: Bank of America names 5 semiconductor stocks to buy for the second half of 2021 – and breaks down why each has ‘catch-up potential’ after lagging since January

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US stocks hover near record highs at the start of the 2nd half of 2021, but the Delta variant knocks Asian equities and boosts the dollar

A stock trader claps at the end of trade at the New York Stock Exchange
  • US stocks traded near record-highs on Thursday, while Asian markets dipped on worries over the Delta variant.
  • But according to JPMorgan, the variant’s spread doesn’t pose a risk to the stock market.
  • The S&P 500 recorded one of its strongest first-half performances in 23 years this year.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

US stocks hovered near record-highs on the arrival of the second half of the year on Thursday, but investor sentiment that has been dampened by the spread of the Delta variant put Asian markets on a weaker footing.

Futures on the Dow Jones, and Nasdaq rose between 0.2% and 0.4%, suggesting a higher start to trading later in the day. The S&P 500 rose 0.3%. The index is up 14% year-to-date, the second-biggest gain for the first half of the year since 1998.

Data suggests the highly infectious variant may be the most common strain in the US, leading many to question how well the economy will continue to fare. But the spread doesn’t pose a direct risk to equities, and could instead drive a rebound in value stocks and bond yields, JPMorgan said in a note on Wednesday.

US private payrolls data released by the ADP beat expectations on Thursday, rising by 692,000 in June. Economists polled by Bloomberg held a median estimate of a 600,000 payroll gain. But traders think the government’s own jobs report on Friday could jostle markets from a slumber, according to Reuters.

The dollar index advanced ahead of US labor data, after having gained 2.6% in June – its biggest monthly rise since March 2020.

In Europe, the UK recorded more than 26,000 new COVID-19 cases on Wednesday, the biggest daily rise since late January. However, one bright spot so far is hospitalizations and deaths are far more subdued than in the spike in infections at the start of the year, Deutsche Bank analysts said.

Inflation in the UK may be the defining economic theme of the post COVID-19 recovery with important consequences for both monetary and fiscal policy, Sanjay Raja, senior economist at Deutsche Bank, said on Thursday.

London’s FTSE 100 rose 1.2%, the Euro Stoxx 50 rose 1.1%, and Frankfurt’s DAX rose 1.1%.

Asian equities all traded lower on Thursday, while markets in Hong Kong were closed for a holiday. President Xi Jinping marked the 100th anniversary of the Chinese Communist Party’s founding in a speech Thursday, noting the country’s quest to gain control of Taiwan was a “historic mission” and an unshakable party commitment. His address did little to calm geopolitical nerves as the Shanghai Composite fell 0.07% and Tokyo’s Nikkei fell 0.2%.

Read More: The founder and CIO of a $2.2 billion money manager that invested early in Didi is set to reap ‘one of the largest profits’ it’s made as the Chinese ride-hailing giant goes public. Christopher Zook explains why he bought in – and shares 3 other opportunities on his radar.

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Global stocks edge higher as investors focus on post-pandemic era growth, while bitcoin continues to slide

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Global stocks rose slightly on Tuesday even after a number of key Federal Reserve speakers reminded market participants the central bank would continue to support the economy, leaving investors to focus on the prospects for post-pandemic growth.

Futures on the Dow Jones and S&P 500 dipped slightly, while those on the Nasdaq fell 0.3%, suggesting a lower start to trading later in the day.

After a more hawkish Fed outlook last week, New York Fed President John Williams offered a more relaxed view on Monday by saying he expects the recent spike in inflation to be temporary.

St. Louis Fed President Bullard said the Fed ought to set up its taper so it could be adjusted if necessary, raising the prospect that the pace could change depending on the strength of the economic recovery and inflation outcomes, Deutsche Bank analysts said.

But Williams, who expects inflation to return to the Fed’s target of 2% next year, said he still sees tapering as “quite a ways off,” suggesting it was too soon to change current central bank policy. According to Deutsche Bank, a dispersion of views from the Fed committee is more healthy compared to a year of its coordinated messaging.

UBS said the time for investors to look ahead and position their portfolios for key trends that will shape the second half of 2021 and beyond is now, not at a later date.

“If we look around today, we see economies reopening, inflation spiking, and equity volatility at its lowest level since before the pandemic,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said. “But if we look forward, we see something different.”

Fed Chair Jerome Powell said late Monday the Fed would do everything it can to support the economy “for as long as it takes to complete the recovery.” He remained optimistic, saying the job market should pick up in coming months as vaccinations rise.

“Given that financial markets were panicking over the end of the global reflation trade in the days before, it is impossible to guess whether the Powell comments are merely a temporary pause to the global reflation trade unwind or mark the end to the correction,” Jeffrey Halley, a senior market analyst at OANDA, said.

The broad cryptocurrency sell-off continued on Tuesday after China summoned leaders of the country’s largest banks to reiterate a ban on crypto services. Bitcoin fell 2% to $32,355, ether fell 4% to $1,920, and dogecoin fell 23% to 19 cents.

Elsewhere in Europe, Prime Minister Boris Johnson said it is “looking good” for July 19 to mark the lifting of coronavirus restrictions. But he didn’t rule out the chance of further lockdowns in the winter.

London’s FTSE 100 rose 0.2%, while the Euro Stoxx 50 and Frankfurt’s DAX fell 0.2%.

Asian markets mostly rose on the prospect of global recovery trade, following their retreat a day earlier, after Powell’s dovish comments.

China’s Shanghai Composite rose 0.8%, Tokyo’s Nikkei rose 3%, and Hong Kong’s Hang Seng fell 0.7%.

Read More: 26-year-old Ricky Gutierrez is one of YouTube’s biggest investing influencers, with nearly 1 million subscribers. He told us his top 3 strategies for trading blue-chip stocks like Twitter and Tesla.

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Global stocks wobble as investors focus on post-pandemic era growth, while bitcoin continues to slide

NYSE Trader smile happy

Global stocks wavered on Tuesday even after a number of key Federal Reserve speakers reminded market participants the central bank would continue to support the economy, leaving investors to focus on the prospects for post-pandemic growth.

Futures on the Dow Jones and S&P 500 dipped slightly, while those on the Nasdaq fell 0.3%, suggesting a lower start to trading later in the day.

After a more hawkish Fed outlook last week, New York Fed President John Williams offered a more relaxed view on Monday by saying he expects the recent spike in inflation to be temporary.

St. Louis Fed President Bullard said the Fed ought to set up its taper so it could be adjusted if necessary, raising the prospect that the pace could change depending on the strength of the economic recovery and inflation outcomes, Deutsche Bank analysts said.

But Williams, who expects inflation to return to the Fed’s target of 2% next year, said he still sees tapering as “quite a ways off,” suggesting it was too soon to change current central bank policy. According to Deutsche Bank, a dispersion of views from the Fed committee is more healthy compared to a year of its coordinated messaging.

UBS said the time for investors to look ahead and position their portfolios for key trends that will shape the second half of 2021 and beyond is now, not at a later date.

“If we look around today, we see economies reopening, inflation spiking, and equity volatility at its lowest level since before the pandemic,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said. “But if we look forward, we see something different.”

Fed Chair Jerome Powell said late Monday the Fed would do everything it can to support the economy “for as long as it takes to complete the recovery.” He remained optimistic, saying the job market should pick up in coming months as vaccinations rise.

“Given that financial markets were panicking over the end of the global reflation trade in the days before, it is impossible to guess whether the Powell comments are merely a temporary pause to the global reflation trade unwind or mark the end to the correction,” Jeffrey Halley, a senior market analyst at OANDA, said.

The broad cryptocurrency sell-off continued on Tuesday after China summoned leaders of the country’s largest banks to reiterate a ban on crypto services. Bitcoin fell 2% to $32,355, ether fell 4% to $1,920, and dogecoin fell 23% to 19 cents.

Elsewhere in Europe, Prime Minister Boris Johnson said it is “looking good” for July 19 to mark the lifting of coronavirus restrictions. But he didn’t rule out the chance of further lockdowns in the winter.

London’s FTSE 100 rose 0.2%, while the Euro Stoxx 50 and Frankfurt’s DAX fell 0.2%.

Asian markets mostly rose on the prospect of global recovery trade, following their retreat a day earlier, after Powell’s dovish comments.

China’s Shanghai Composite rose 0.8%, Tokyo’s Nikkei rose 3%, and Hong Kong’s Hang Seng fell 0.7%.

Read More: 26-year-old Ricky Gutierrez is one of YouTube’s biggest investing influencers, with nearly 1 million subscribers. He told us his top 3 strategies for trading blue-chip stocks like Twitter and Tesla.

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Global stocks hover below record highs ahead of US inflation data, while oil falls for a 2nd day as demand optimism fades

Traders work on the floor of the New York Stock Exchange (NYSE)

Global stocks mostly edged lower on Tuesday as investors remained focused on inflation data, with the US consumer price index report due on Thursday.

Futures on the Dow Jones, S&P 500, and Nasdaq fell 0.1%, indicating a slightly lower start to trading later in the day.

The S&P index was still less than a quarter of a percent away from its all-time closing high a month ago, Deutsche Bank strategists said.

Biotech stocks added 1.13% to the Nasdaq the previous day, driven primarily by a record 38% jump in Biogen’s closing price after the company received FDA approval for its new drug to treat Alzheimer’s.

The growth rate of weekly COVID-19 cases is currently at its slowest since mid-March, according to Deutsche Bank. Cases in the US are rising at their slowest pace since March 2020, while India reported fewer than 100,000 daily cases for the first time in over two months. Numbers in the UK, however, have jumped 53% compared to last week, as the Delta variant spreads.

“While we remain alert to inflation risks, we believe the backdrop remains benign for stocks – with benefits most obvious for cyclical parts of the market, including energy and financials,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.

Separately, lower commodity prices weighed on European stocks with basic resources declining 1.6% and energy down 0.25%, while auto stocks rose 0.8% and consumer products added 0.7%.

London’s FTSE 100 rose 0.2%, the Euro Stoxx 50 rose 0.0.7%, and Frankfurt’s DAX fell 0.1%.

Bitcoin traded 9% lower on Tuesday, while ethereum and dogecoin dropped more than 10%. The main cause behind this most recent crypto sell-off is unclear, but one theory suggests that US federal officials recovering a majority of the ransom Colonial Pipeline paid to a hacker group shows the digital asset can still come under official control.

President Joe Biden is expected to discuss cryptocurrencies at the G7 summit in the UK’s coastal county of Cornwall this weekend.

“Cryptos face an existential threat from major economies regulating or banning them,” said Jeffrey Halley, a senior market analyst at OANDA. “China has started, and the wolves are circling. The Colonial Pipeline saga was a case of flying too close to the sun. Attacks on critical infrastructure will not go unnoticed by important and powerful people.”

Asian equities mostly traded flat or lower. “In general, commodity-related sectors like materials and energy are leading the underperformance,” Deutsche Bank said.

The Shanghai Composite fell 0.5%, Tokyo’s Nikkei fell 0.2%, and Hong Kong’s Hang Seng fell 0.1%.

Oil prices retreated from highs as Brent crude fell 0.7% to $70.96, and West Texas Intermediate fell 0.6% to $68.75 per barrel.

“The price action has all the hallmarks of a very long speculative market getting nervous at the highs and is not indicative of an overall change in sentiment for energy,” Halley said.

“With some improvement in the pandemic situation in India and the recovery in the US, China and Europe remaining on track, oil should remain a buy on dips, with no warning signs coming from the technical momentum indicators,” he said.

Read More: UBS handpicks 7 real estate stocks to own in the post-pandemic world as they benefit from major changes brought on by the ongoing economic reopening

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Global stocks rise as China’s commodity crackdown eases inflation worries, while bitcoin stabilizes

Traders work on the floor of the New York Stock Exchange (NYSE)

Global stocks rose on Monday as easing inflation worries bolstered markets, and bitcoin rallied from last week’s lows.

Futures on the Dow Jones, S&P 500, and Nasdaq rose 0.5%, suggesting a higher start to trading later in the day.

The Nasdaq posted its first weekly gain in five weeks. Cyclical sectors underperformed their growth counterparts, with banks sliding back as yields fell slightly. The yield on the 10-year Treasury note saw its fifth drop in the last seven weeks to 1.617%.

Bitcoin continued a volatile session after sizeable downswings last week. The digital asset rose back above $40,000 on Friday, traded as low as $31,133 on Sunday afternoon, and recovered to around $36,700 on Monday. Ethereum’s ether, Litecoin, and Ripple’s XRP saw similar movements over the weekend.

The largest cryptocurrency by market cap is on track for its worst monthly performance in almost a decade, having lost over 37% since its April high, Deutsche Bank strategists said.

Some central bank rate decisions are expected this week including from New Zealand, South Korea, and Indonesia. Deutsche Bank economists expect the latter two to keep their policy rates steady, while markets will be eyeing forecast revisions for clues to their policy bias.

China’s economic planning agency said on Monday that it would escalate efforts to curb soaring commodity prices to crack down on monopolies within the market. Prices of iron ore, the ingredient used in steelmaking, fell sharply with the main futures contract sliding 7% to $163 a tonne on China’s Dalian exchange.

An iron ore core sample is handled at a prospective mine near Port Hedland, Australia, May 26, 2008. REUTERS/Tim Wimborne"
An iron ore core sample.

Given that China is a large net importer of ores, there is a limit to what they will be able to achieve in the medium to long term, according to Jeffrey Halley, a senior market analyst at OANDA. “However, in the short-term, their rumblings seem to be having the desired effect,” he said.

China’s Shanghai Composite rose 0.3%, Japan’s Nikkei rose 0.2%, and Hong Kong’s Hang Seng rose 0.04%.

Elsewhere in Europe, EU leaders will be meeting in Brussels over Monday and Tuesday for a special summit to discuss matters including the COVID-19 response, relations with Russia and the UK, and climate change.

“A crackdown on commodity prices in China allowed the European markets to creep higher on Monday,” said Connor Campbell, a financial analyst at SpreadEx. Tackling the “speculators and hoarders” that have so aggressively driven up the price of raw materials, China warned it would show zero tolerance towards the “excessive speculation” of recent months, he said.

London’s FTSE 100 rose 0.3%. Germany and France have a public holiday.

Read More: GOLDMAN SACHS: Buy these 15 stocks with ‘clear, unique’ catalysts that set them up to crush the market in the post-pandemic era

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Global stocks wobble as concerns of rising COVID-19 virus cases overshadow robust earnings

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  • Concerns of recovery optimism affected world stocks on Wednesday, casting doubt on global growth.
  • The latest jump in case counts undermines the global recovery narrative, Deutsche strategists said.
  • Travel-related concerns prompted by fears of a COVID-19 variant in India is hanging over markets.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Global stocks were trading lower on Wednesday, as investors weighed up the potential economic impact of rising coronavirus cases across multiple regions in recent days.

The global rate of increase stands at the highest level since the start of the pandemic, as recorded cases are up by more than five million a week, according to Deutsche Bank strategists.

India reported over 2,000 virus-related deaths in the last 24 hours, while Turkey, Argentina, and Japan are also grappling with a new wave.

Futures on the Dow Jones, S&P 500, and Nasdaq were about flat, and suggested a steady open for US indices, which have hit record highs this week, later in the day.

The risk to markets is that the latest jump in case counts undercuts the narrative that the global economy is on an unstoppable path back to normality as vaccinations take place worldwide, Deutsche’s strategists said. Higher numbers also raise the odds of a more dangerous variant emerging that proves resistant to existing vaccines, they said.

On the earnings front, Proctor & Gamble smashed Wall Street estimates, as the company’s quarterly net sales rose 5% to $18.1 billion. Johnson and Johnson also topped estimates, reporting quarterly sales of $100 million of its COVID-19 vaccine. Meanwhile, Netflix shares dropped as much as 12% in after-hours trading as the company added fewer than 4 million customers in the first quarter, compared to the 6 million analysts expected.

Elsewhere in Europe, the UK reported inflation jumped from 0.4% to 0.7% in March, driven by higher costs of fuel and clothes. “The fact it fell short of the 0.8% forecast helped nip any inflationary pressure panic in the bud,” Connor Campbell, a financial analyst at SpreadEx, said.

Optimism over rising vaccination rates in the US, Britain, and Europe is for now overshadowing the question of the risk of the COVID-19 variant, or variants, in India.

London’s FTSE 100 rose 0.6%, the Euro Stoxx 50 rose 0.9%, and Germany’s DAX rose 0.4%.

Asian equities fell, as some countries questioned the outlook for global growth as Japan announced Tokyo would enter a state of emergency on April 29. China’s Shanghai Composite was about flat, Japan’s Nikkei fell 2%, and Hong Kong’s Hang Seng fell 1.6%.

Oil prices were dented by the escalating virus situation in India, which is the world’s third-largest importer of crude. Brent Crude fell 0.2%, to $66.42 a barrel, and West Texas Intermediate fell 0.3%, to $62.48 a barrel.

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A worryingly large number of US stocks are expensive, crowded, and pose a downside risk to the S&P 500, says Bank of America

Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) from Getty Images
  • Mega-cap growth stocks are overcrowded, expensive, and dampen the outlook for the S&P 500 in 2021, BofA said. 
  • A team of strategists said in a Friday note that bullish sentiment and high valuations indicate risk in the stock market. 
  • With the S&P 500 set for flat returns this year, BofA favors value stocks, small-caps, and cyclicals.
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Mega-cap growth stocks are vulnerable to a downturn that could weigh on the whole S&P 500 index, according to Bank of America.

A team of strategists led by Savita Subramanian said in a Friday note that large-capitalization growth stocks – assets which make up a large chunk of the US market – are expensive and crowded, even when accounting for historically low interest rates. 

Stocks are forward-looking instruments, and investors attribute the record rally in stocks during the COVID-19 pandemic to the fact that equities were anticipating future growth. However, Bank of America said that some stocks, particularly those within large-cap growth “overshot,” future growth estimates.

Now, “bullish sentiment, lofty valuations, massive dispersion between rich and cheap stocks, and no rewards for EPS beats all indicate risk,” the strategists said.

All of this has led Bank of America to a 2021 year-end price target of 3,800 for the S&P 500, a slight decline from current levels. 

This doesn’t imply that 2021 won’t be a positive year for the economy, however. With the vaccine rollout underway, a large fiscal stimulus about to be passed, and impressive earnings beats, BofA economists are forecasting 6.5% US GDP growth this year.

The strategists emphasized that the S&P 500 isn’t a pure reflection of the economy-it’s more global, more levered to capex than consumption, has operating leverage, and has more exposure to technology, media, and telecommunications than the broader economy. Therefore, while the S&P 500 will remain flat for this year, profits and economic growth will be strong.

Against this backdrop, the strategists reiterated their recommendation for cyclical and small-cap stocks. They also said value stocks look attractive.

Read more: A CIO who earned up to 90% per trade during last year’s crash is now warning of a potential 20% crash in the S&P 500 by the end of March as 10-year Treasury yields continue to rise

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