Stocks Steady as Investors Remain Cautious Ahead of Trump Inauguration -- 2nd Update

By Jon Sindreu 

Global markets were broadly flat Wednesday, a further sign of the caution in financial markets ahead of earnings reports by large U.S. banks and President-elect Donald Trump's inauguration later this week.

U.S. futures pointed to the S&P 500 index remaining unchanged, ahead of a session in which financial giants Goldman Sachs Group Inc. and Citigroup Inc. will report on their fourth-quarter earnings.

Goldman Sachs futures were up 0.1%, while Citigroup's fell 0.34%. Goldman shares have edged close to the all-time high they reached in October 2007 and investors widely forecast profits to increase from a year ago, but a lower-than-expected figure could dent market optimism.

Corporate profits will be key to determine whether the U.S. stock market is overvalued after the recent rally, analysts say.

The Stoxx Europe 600 remained mostly unchanged in early European trade and later edged down 0.2%. The biggest loser was the media sector, which was sandbagged by Pearson PLC's 26% drop, after the London-based publisher warned of lower future dividends on the back of lower profit expectations.

Despite Pearson's drag, the FTSE 100 gained 0.1%. Asian shares were mixed, but the main developed index, the Japanese Nikkei, closed 0.4% higher.

Financial markets have struck a prudent tone ahead of Mr. Trump taking office Friday, with investors appearing to have some second thoughts about the risk-driven trades that have dominated since the U.S. election on Nov. 8. While Mr. Trump's rhetoric against free trade has long scared many analysts, markets initially focused on his plans to slash taxes and regulations and boost infrastructure spending.

Investors are now waiting for further clarity on such policies, as well as corporate earnings, to decide whether growth and inflation will come through, or whether markets got ahead of themselves after the election.

"A lot of the indicators we follow are now pointing at the market being overstretched," said Andrew Pease, global head of strategy at London-based Russell Investments. "The U.S. economy's fine, but markets have fully priced that in already."

In currencies, the pound fell 0.8% against the U.S. dollar to $1.2299 after its 3% surge Tuesday, the biggest daily rise in eight years. Sterling was bolstered by U.K. Prime Minister Theresa May pledging to subject the final Brexit deal to a parliamentary vote.

Nevertheless, many analysts said that Mrs. May's announcement that Britain is set to leave the European single market will end up weighing on sterling at the first sign of weak economic data.

"Enjoy the party but make sure you dance close to the door," said Antje Praefcke, an analyst at German lender Commerzbank AG.

The WSJ Dollar Index, which tracks the currency against a basket of 16 others, rose 0.4%. On Tuesday, it hit a one-month low after Mr. Trump described the currency as "too strong" in an interview with The Wall Street Journal.

Comments by Federal Reserve Bank of San Francisco President John Williams, who argued that gradual interest-rate increases would leave the economy unharmed, helped the dollar to recover.

Bond yields in the U.S. and Europe rose to reflect investors' belief that monetary policy is unlikely to become much looser. After falling to 2.327% on Tuesday, the lowest closing since late November, yields on 10-year Treasurys recovered to 2.360%.

Haven assets, which had been propped up as investors became jittery ahead of Mr. Trump's inauguration, also changed direction. Gold was broadly flat Wednesday and the Japanese yen retreated against all major currencies.

Traders will closely monitor Wednesday evening's speech by Fed Chairwoman Janet Yellen to gauge whether interest rates are likely to rise at a faster or slower pace than they are currently expecting. Further signs of tighter-than-expected policy in the U.S. could depress Treasurys again, boosting the dollar.

"Markets have traveled on hope, now they are going to have to deal with the facts," said Neil Dwane, global strategist at Allianz Global Investors.

Write to Jon Sindreu at [e-mail]

(END) Dow Jones Newswires

January 18, 2017 07:37 ET (12:37 GMT)

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