American futures are trading higher while European futures are flat after stock markets in the United States touched record highs in yesterday’s session. Investors are optimistic regarding the earnings reports of technology companies but should weigh their potential gains against risks of rising coronavirus cases and surging inflation.
Stock traders will be digesting today’s consumer confidence and manufacturing index data to get a better idea of how current factors like inflation and supply chain bottlenecks are likely affecting the business environment.
In Monday’s session, the Dow Jones Industrial Average surged 0.18%, while the S&P 500 index jumped 0.47%. The Nasdaq, the tech-savvy index, rose 0.90%, and the Russell 2000, the small-cap index, climbed 0.93%.
Stock Market
So far, the earnings by companies have been outperforming expectations and sending stock markets over the moon. However, the case with the technology sector is somewhat different because these companies have already shown robust growth in the first half of 2021 and hence have a higher base to compete with this time around. Hence, investors will be looking for any growth metrics that will support peak valuations that these big tech companies are currently at.
Investors should note that the stock price of PayPal surged after the company declared that it is not interested in acquiring Pinterest in a $45 billion deal. Moreover, the stock price of Tesla also jumped after the company joined Microsoft, Apple, and Amazon in the $1 trillion club.
Tesla gained support from a fresh order by Hertz, of 100,000 vehicles, to build its portfolio of electric cars for its rental services. The news helped Tesla’s share price to climb to a record high of $1,045 before rebounding and closing at $1,024, rising nearly 12.6% from a day earlier.
Moving onwards, investors will have to be pickier about the stocks they purchase, as until now, because of the strong economic recovery, all companies have somewhat benefited due to increased liquidity and supportive fiscal and monetary measures. However, going forward, as the U.S. economy continues to face risks of higher inflation and a forthcoming power crisis, along with tapering, investors should likely expect an uptick in volatility. Thus, qualitative measures of how a company is performing, such as good management and innovative products, will become crucial for investors in coming months.
Stock traders should understand that stagflation is also a concern now as the economy slows down while consumer prices continue to rise. However, as per the Federal Reserve, although inflation may linger longer than initially anticipated, it will likely subside by the second half of 2022. Accordingly, the Fed is expected to announce its tapering timeline at its FOMC meeting scheduled to be held next week.
Economic Data
Global supply chain issues have clearly harmed Germany’s manufacturing sector, as can be seen by the country’s ifo business climate data. The index fell to 97.7, its lowest level in six months. The metric has been falling for the last four consecutive months and fell more than expectations in October as well. This is significant because the German economy is heavily reliant on its manufacturing sector, and a slowdown in Germany’s economic activity will most likely have implications for other European Union countries as well.
Today, investors will also be looking at new home sales data. Home sales are projected to have expanded from 740,000 in August to 760,000 in September.
Oil
Brent crude, the benchmark for crude oil, rose to its highest level since October 2018, $86.70 per barrel, before levelling off and settling at $85.99 per barrel. Similarly, WTI crude oil also shattered the $85 mark, a level that hadn’t been breached since 2014. Both benchmarks have nearly risen 20% since the beginning of September.
The hike in oil prices is because of narrow supply and an ever expanding demand. Moreover, the power supply debacle around the world is also showing its colors and supporting the upward surge in oil prices. According to Goldman Sachs, the retracement seen in oil demand could push crude oil prices well above its projected $90 per barrel before the end of 2021.
Gold
Gold prices jumped above the $1,800 level after yields on short-term treasury bonds dropped after Jerome Powell, chairman of the Federal Reserve, indicated that inflation could persist longer than expected. This update fuelled expectations of a sooner than expected interest rate hike to check surging commodity prices.
Asian Pacific Markets
Following reports of a massive slowdown in the Chinese economy, authorities in Beijing are attempting to assuage fears by pleading that the government is working hard to reduce risks and is confident that the country will be able to meet its targets for the year. According to Beijing, shrinking low base effects and temporary shocks such as rising covid cases and floods are also weighing on economic growth. These factors, however, are likely to diminish over time.
As of 11.30 p.m. EST, the Nikkei jumped 1.75% and the Shanghai index fell 0.06%. The Hang Seng index, in Hong Kong, dropped 0.40%. The ASX 200 index climbed 0.14% and the Seoul Kospi jumped 0.63%.