Happy new year, new highs

Week in review

For the week ending 5th January

Stocks got off to a strong start in the first week of 2018, bringing all of the major indexes to new highs. The Dow Jones Industrial Average, although narrowly focused, garnered the most attention by passing the 25,000 threshold on Thursday—less than a year after breaking through 20,000 for the first time.

Less noticed but perhaps more telling was a new record low on Wednesday for the CBOE Volatility Index (the VIX), Wall Street’s so-called “fear index.” Energy stocks were particularly strong, helped by a climb in domestic oil prices to their best levels in three years. Information technology and materials shares also performed especially well. Utilities and real estate stocks were weak, held back by a sharp rise in long-term bond yields, which makes their dividend yields less attractive in comparison.

European equity markets began 2018 on a subdued note, but momentum from strong regional and global economic data helped to fuel a rally by the end of the week. The blue chip FTSE 100 Index hit yet another record high, while the STOXX Europe 600, Germany’s DAX, and other key indexes ended the week up. Some of the key drivers included automobile makers, buoyed by better-than-expected sales, and banks, which benefited from higher yields and steeper yield curves. Earlier in the week, technology and retail stocks drove market gains amid favorable reports of increased sales and demand. On Wednesday, according to FactSet, the STOXX Europe 600 Technology Index recorded its biggest one-day gain in nearly six months. Investors were encouraged that German retail sales were strong in November, but a report that UK retail prices fell in December signaled that consumers were less willing to spend, weighing on the market. ECB Governing Council member and rate-setter Ewald Nowotny told a German newspaper that the ECB may end its stimulus program this year if the eurozone economy continues to grow strongly, according to Reuters. One of the goals of the stimulus program is to revive the eurozone inflation rate, but data at the end of the week showed that the euro-area inflation rate had slowed to 1.4% in December from 1.5% in November. In addition, the pace of inflation in Italy slowed in December to 1.0%, its lowest level in 2017. Some observers reflect that it might be difficult to end the stimulus program if the inflation rate remains weak. But other fresh economic data during the week showed that the eurozone recorded its strongest growth in nearly seven years. The eurozone core CPI (which excludes food and energy prices) came in at 0.9%, slightly below expectations of 1.0%.

The Week Ahead

Following a week that was dominated by macroeconomic news, featuring the release of the Federal Reserve's December meeting minutes and December's jobs report, investors will likely shift their attention to the start of the fourth quarter's earnings season. Additionally, economic data to be released next week include inflation data and retail sales on Friday.

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