US Federal Reserve to lift rates as stocks remain at record highs

US stocks rose to new highs last week as investors played down fears of an all-out trade war with China.

In the week ahead, new tariffs come into effect on $US200 billion of tariffs on Chinese imports, first at 10% and then rising to 25% at the end of the year.

“While [trade talks] aren’t as adversarial” as they were several months earlier, US Bank Wealth Management senior portfolio manager Eric Wiegand says, “we’re not at a resolution either.”

Investors have focused more on the strong fundamental outlook that has underpinned the stock market this year, including solid corporate earnings and a robust US economy, which is growing at its fastest rate since 2014.

“We’re clearly anxious to get back to earnings season in a few weeks,” he adds.

Interest rate rise
A further test will come this week as the US Federal Reserve is poised to raise its interest rate.

“With the economy doing well and inflation not picking up much, it has been easy for the Fed this year,” says Eaton Vance co-director of global income Eric Stein, who is also expecting another rate increase in December. “A year from now is where it gets more interesting.”

The Fed releases its policy statement on Wednesday and holds a press conference that is expected to raise its benchmark rate from its current range between 1.75% and 2%.

The yield on the benchmark 10-year Treasury note has climbed back to near a seven-year high. Last week, it traded as high as 3.10% in intraday trading, up from 2.85% at the start of September and near its 2018 closing high of 3.11% reached on May 17.

The Dow Jones Industrial Average capped off its strongest two-week stretch since February. It has climbed for eight of the past 10 sessions, adding more than 800 points, or 3.2%.

The Dow rose 86.52 points, or 0.3%, to 26,743.50 on Friday, its 13th record close of the year. The S&P 500 slipped less than 0.1% to 2929.67 while the Nasdaq Composite fell 0.5% to 7986.96.

Like the Dow, the S&P 500 ended the week 0.8% higher. The Nasdaq, however, slipped 0.3% and has fallen two of the past three weeks.

The tech sector is on course for its worst month since March yet remains the biggest drivers of the stock rally. Non-tech sectors, such as industrials and healthcare, have rebounded in September as the strong economy offsets uncertainty over global trade policies.

Consumer staples sector have continued to lag behind the S&P 500, hurt by competition from e-commerce giants, changing consumer tastes and rising costs.

Financial companies, which had been out of favour for much of the year, have also recovered as banks such as JPMorgan Chase and Goldman Sachs benefited from rising bond yields.

Economic news ahead
In economic news this week, the Commerce Department releases August durable goods data. Economists expect orders have risen 1.7% after they fell 1.7% in July.

The third estimate of second-quarter gross domestic product is also due. No change is expected from 4.2% annual rate reported earlier.

At the end of the week, August personal income and spending will likely show rises of 0.4%and 0.3% respectively month on month, economists predict.

The University of Michigan will release its final September consumer sentiment reading. The preliminary release showed this indicator at its second-highest level since 2004.

Comcast gets SKY TV
In corporate news, Comcast topped 21st Century Fox in a rare auction for the UK’s Sky TV with a $38.8 billion bid.

Comcast’s offer of £17.28 a share surpassed Fox’s highest bid of £15.67 after three rounds of a sealed-bid auction resulted in a £29.7 billion valuation – more than double Sky’s value before Rupert Murdoch’s Fox put Sky in play some 21 months ago.

In commodities, Saudi Arabia and Russia signalled they have the capacity to further ramp up production to match global supply disruptions while keeping the crude price steady.

However, they have deferred any concrete decisions on output levels to later this year. The oil producers’ next meeting is on November 11.

US crude ended the week at $US70.71 a barrel and Brent, the world benchmark, at $US78.77.

Brexit talks at 'impasse'
On the political front, the stalled Brexit talks are starting to make investors more nervous,

On Friday, the UK pound fell 1.4% against the US dollar and 1.2% against the euro as leaders from both sides accused the other of unreasonable demands.

European leaders rejected UK Prime Minister Theresa May’s post-Brexit plans as unworkable while she says the talks are at an "impasse" and it is now up to the Europeans to smooth the path for a Brexit that doesn’t cause both sides undue economic and commercial pain.

Northern Ireland remains a key sticking point. The European Union wants Northern Ireland to continue with EU rules for customs and regulatory checks. But Mrs May says separating Northern Ireland from the UK is unacceptable.

The Stoxx Europe 600 rose 0.4% on Friday to push its weekly gain to 1.7%.  The UK FTSE 100 jumped 1.7% on Friday, France’s CAC 40 rose 0.8%, as did Germany’s DAX.

Most indexes in Asia rallied, with Chinese stocks registering their largest one-week percentage gain since 2016. On Friday, the Shanghai Composite surged 2.5% and Hong Kong’s Hang Seng rose 1.7%. Japan’s Nikkei 225 was up 0.8%.