Global stocks were on course for their first weekly gain this month, as traders questioned whether an economic slowdown would temper central banks’ determination for aggressive rate rises.
By the late morning in London, a FTSE index of developed and emerging market shares had registered a gain of 2.6 per cent from the previous Friday, following three straight weeks of declines.
Europe’s regional Stoxx 600 share gauge added 1.5 per cent, as interest rate-sensitive tech stocks outperformed. Futures contracts tracking Wall Street’s S&P 500 added 0.8 per cent, while those tracking the tech-focused Nasdaq 100 rose 0.9 per cent. Hong Kong’s Hang Seng index closed 2.1 per cent higher.
“The market is moving from a fear of an inflation shock to pricing recession,” said Salman Baig, multi-asset portfolio manager at Unigestion.
What traders were therefore “clinging to is the idea that this reduces inflation pressure and the pressure on central banks to raise interest rates”, said Guillaume Paillat, portfolio manager at Aviva Investors.
Purchasing managers’ indices produced by S&P Global — viewed by investors as real-time gauges of business activity — indicated on Thursday that the US economy slowed sharply in June, while eurozone economic growth slumped to its weakest level in 16 months.
But the US PMI, which collates executives’ responses to questions on topics from order volumes to commodity prices, also showed input costs were rising at their slowest pace in five months.
The closely watched surveys generated optimism that red-hot consumer price inflation, which hit a 40-year high of 8.6 per cent in the US last month and is running at record levels in the eurozone, is about to peak.
“There’s been a really powerful shift from a very aggressive rates and inflation narrative to the idea of an economic slowdown,” said Anita Tanna, head of European equity sales at Barclays.
Central banks worldwide have tightened monetary policy to battle inflation, with the US Federal Reserve implementing an extra-large 0.75 percentage point rate rise this month.
Money markets on Friday anticipated a US federal funds rate of about 3.4 per cent in December, having forecast a rate of 3.6 per cent earlier in the week.
A drop in oil prices, which were driven higher this year by western sanctions against Russia for its invasion of Ukraine, has also lightened the market mood. Brent crude, the global benchmark, traded at $111.48 a barrel on Friday, down from about $122 two weeks ago.
The Stoxx Europe energy sector has lost more than a tenth of its value in a fortnight.
The yield on the benchmark 10-year US Treasury note, which moves inversely to its price and sets the tone for debt costs and asset valuations worldwide, has declined from about 3.28 per cent at the start of this week to 3.12 per cent — rising 0.03 percentage points on Friday.
Ostensibly small moves in the 10-year yield, which investors use as a discount rate for valuing companies’ anticipated future profits, can have outsized effects on equity market valuations.
The S&P 500 index of US technology shares — stocks that can be most sensitive to changes in the discount rate because investors assume their best earnings growth will come far into the future — has gained 3.6 per cent this week.