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 Friday's U.S. non-farm payrolls report fed speculation that the
Federal Reserve will hike interest rates by mid-2015 and helped the
dollar notch its 12th straight week of gains.
U.S. stock index futures pointed to further gains on Wall Street on
Monday as investors grow more confident in the strength of the
recovery in the world's biggest economy.
The upbeat U.S. data contrasts starkly with the outlook in Europe,
where German industrial orders posted their biggest monthly drop
since 2009 in August. That strengthened the view that the European
Central Bank will eventually have to launch a Fed-style asset-buying
scheme known as quantitative easing to support growth.
That added to the allure of European equities and euro zone bonds,
which had stumbled last week after the ECB gave no fresh hints of
imminent QE.
The FTSEurofirst 300 index of top European shares was up 0.4
percent, led by German equities as Frankfurt, closed for a public
holiday on Friday, caught up with the rebound in the rest of Europe.
U.S. stock index futures pointed to an extension of Friday's rally
when the S&P 500 index posted its best day since August. As of
Friday, the S&P 500 was about 2.2 percent away from its record
close.
"The key question will be whether the strength of the recovery is
enough to mitigate the risks of a rise in U.S. rates in the first
part of next year," said Michael Hewson, chief strategist at CMC
Markets, "or whether we start to see a plateauing of valuations as
markets start to factor in the effects of events in Europe and China
on U.S. companies' export expectations."
The dollar's climb since early July is its longest ascent in more
than 40 years. The jobs report highlighted the strength of the
United States relative to several other major economies, whose
sluggishness has raised doubts over the strength of the global
recovery.
The U.S. currency paused on Monday. The dollar index, which tracks
the greenback against six major currencies, was down slightly at
86.476 <.DXY>, not far from a four-year high of 86.746 hit on
Friday.
The euro edged up 0.2 percent to trade at $1.2558 <EUR=EBS>, having
fallen to $1.25005 on Friday, its lowest level in more than two
years.
Against the yen the dollar was within touching distance of levels
not reached since before the 2008 financial crisis, but it cooled
off in holiday-thinned Asian trading.
ECB OUTLOOK
Euro zone bond markets were focused on the darkening economic
outlook in the currency bloc, which has reignited speculation the
ECB will have to embark on QE in coming quarters to revive inflation
and the economy.
German industrial orders fell 5.7 percent on the month,
undershooting expectations of a 2.5 percent drop.
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"Looking at these data now and the dynamics that we've seen over the
past couple of months, they are pointing to a scenario where QE will
be invoked at some point," said Elwin de Groot, senior market
economist at Rabobank.
German 10-year bond yields, the benchmark for euro zone borrowing
costs, fell 2 basis points to 0.91 percent - just 4 bps away from
their record lows. They had touched 0.95 percent after the ECB
meeting. All other euro zone bond yields fell 2-3 basis points.
Commodity prices came under pressure from the dollar's relentless
rise. Gold hit a 15-month low of $1,183.46 per ounce before
recovering slightly to last trade at $1,194.35. Bullion has dropped
11 percent from its July high of $1,345.
Brent crude oil prices rose toward $93 a barrel, stabilizing after
sharp falls last week on the back of a strong dollar, weak demand
and ample supply.
Brent fell nearly 5 percent last week, its steepest decline since
April 2013 and earlier on Monday dropped to $91.98 per barrel,
threatening to fall below a 27-month low of $91.48 hit on Friday.
Among emerging markets, investors may focus on Brazil, which faces a
run-off presidential election on Oct. 26 after leftist President
Dilma Rousseff failed to score a big enough victory to settle the
contest in Sunday's first round. She will face pro-business rival
Aecio Neves, who made a dramatic late surge into second place.
Over the past month, the Brazilian real and shares have tended to
weaken when polls show Rousseff gaining, as many investors believe a
more market-friendly administration could help boost demand for
Brazilian assets.
(Additional reporting by Marius Zaharia in London and Blaise
Robinson in Paris; Editing by Hugh Lawson)
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