Inflation expectations weigh on US stocks - 18.10.2016

The live dollar index data show the ICE US Dollar Index, a measure of the dollar’s value against a basket of six major currencies, slipped 0.22% to 97.855. The Dow Jones industrial average fell 0.3% to 18086.40 led by McDonald’s shares. The S&P 500 closed 0.3% lower settling at 2126.50 led by consumer discretionary and energy stocks. The Nasdaq composite ended 0.3% lower at 5199.82. Warnings from Bank of America and Jeffrey Gundlach, founder of DoubleLine Capital investment firm, about negative impact of accelerating inflation on stocks added to concerns about high valuations of equities while corporate earnings are on decline. Concerns about high stock valuations overshadowed better than expected earnings report from Bank of America after similar reports last week from financials including JP Morgan, Citigroup and Wells Fargo. The S&P 500’s price-to-earnings ratio currently is at 28.2, above its historical average. In economic news, manufacturing activity in the New York area contracted in October for the second straight month, reducing somewhat expectations for a December rate hike. On the positive side, US industrial Production increased marginally in September. Discussing factors that negatively affect US economic growth Fed Vice Chairman Stanley Fischer said weak productivity and an aging population were among the factors holding back interest rates. It is widely expected the Fed will raise rates at its December meeting. Accelerating inflation would be a strong argument in favor of a rate hike sooner than later. Today at 14:30 CET September Consumer Price Index will be published in US, the outlook is positive for US dollar.

The Stoxx Europe 600 closed 0.7% lower. Spanish Repsol lost 1.7% and France’s Total ended 1.2% lower. Positive economic data showing final September annual inflation rose to 0.4% in euro-zone in line with expectations, its highest level since 2014, did little to help euro-zone markets close higher. Italian stocks outperformed though after Banco Popolare and Banco Popolare di Milano shareholders approved their merger agreement on hopes the merger will help troubled banks to cope with the problems of nonperforming loans. ECB monetary policy makers meet on Thursday. Germany’s DAX 30 index fell 0.7% to 10503.57. France’s CAC 40 ended 0.5% lower and UK’s FTSE 100 tumbled 0.9% to 6947.55. Today at 10:30 CET September Consumer Price Index will be released in UK, the outlook is positive for the Pound.