- US stock futures lingered at record highs while bitcoin and ether scaled new heights.
- Equities have been boosted by a strong third-quarter earnings season.
- Yet the Federal Reserve cautioned that asset prices may be vulnerable to sharp falls if sentiment changes.
US stock futures were little changed and traded around record highs Tuesday after a stellar rally, even as the Federal Reserve sounded the alarm on high asset prices.
The S&P 500, the benchmark US equity index, rose to its eighth record finish in a row on Monday – the longest such streak since 1997. Global stocks wobbled in September, but have powered higher again due to a range of factors.
In the US, third-quarter company earnings season has been a strong one, with little sign that supply chain problems or strong inflation are hurting major companies. Meanwhile, the Federal Reserve has signaled it will be cautious about raising interest rates.
“Robust demand is making it easier for companies to handle cost pressures,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note Tuesday.
“Logistics, energy, and labor costs are all headwinds to varying degrees. But for the average company, these are not strong enough to crimp profit margins.”
Investors watching inflation will get the October producer price index reading later Tuesday, ahead of the key consumer price index update on Wednesday.
Cryptocurrencies continued their march higher, with the global market capitalization of all tokens approaching $3 trillion.
Bitcoin rose to an all-time high above $68,500 overnight, and was last up 3.3% to $68,198 on the Bitstamp exchange. Ether climbed to a new record above $4,820, and was last up 1.8% to $4,816 on Bitstamp.
As ever with cryptocurrencies, analysts found it difficult to pinpoint the exact reason for the latest rally. One factor has been the recent approval of a bitcoin futures exchange-traded fund in the US.
Also, a number of major investors appear to be warming to the idea that bitcoin and digital tokens could be hedges against inflation, which is running at its highest level in more than a decade.
“The re-emergence of inflation concerns among investors during September/October 2021 appears to have renewed interest in the usage of bitcoin as an inflation hedge,” JPMorgan strategist Nikolaos Panigirtzoglou said in a recent report.
However, with US stocks and cryptocurrencies at all-time highs, the Federal Reserve issued a note of caution on Monday in its financial stability report, saying high asset prices are vulnerable to sharp drops.
“Valuations for some assets are elevated relative to historical norms even when using measures that account for Treasury yields,” the Fed said. “In this setting, asset prices may be vulnerable to significant declines should risk appetite fall.”
The central bank also sounded the alarm on stablecoins, which are cryptocurrencies that track currencies such as the dollar and are backed by stable assets such as bonds. Sudden redemptions could cause stress across a range of markets, the Fed suggested.
Elsewhere, bond yields fell, with the 10-year yield down 2.5 basis points at 1.472%. Markets may have been reacting to Bloomberg’s report that Lael Brainard, a Fed governor who’s widely seen as being in favour of looser monetary policy, had been interviewed for the role of the central bank’s chair.