Global stocks were on course for their first weekly rise this month, as traders questioned whether an economic slowdown would temper central banks’ plans for aggressive monetary policy tightening.
The FTSE All-World index of developed and emerging market shares had registered a weekly gain of 2.4 per cent by Friday morning in London, having not ended a week on a positive note since late May.
Europe’s regional Stoxx 600 share gauge added 0.5 per cent in early dealings, while futures trading implied Wall Street’s blue-chip S&P 500 and the technology-focused Nasdaq 100 would turn higher later in the day. Hong Kong’s Hang Seng index rose 2 per cent.
“The market is moving from a fear of an inflation shock to pricing recession,” said Salman Baig, multi-asset portfolio manager at Unigestion.
“Markets are rushing to factor in [monetary] policy relief on the back of slowing growth,” said Themistoklis Fiotakis, head of FX research at Barclays.
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 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 fresh 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.
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. Still, money markets on Friday were pricing in a US federal funds rate of about 3.4 per cent in December, down from expectations of more than 3.6 per cent earlier in the week.
A drop in oil prices, 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 $109.76 a barrel on Friday morning in London, down from about $122 two weeks ago.
The yield on the benchmark 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 under 3.05 per cent.
Ostensibly small moves in the benchmark Treasury bond 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.
Barclays’ Fiotakis cautioned, however, that this week’s bout of optimistic market pricing, which has looked through the economic slowdown to begin forecasting easier financial conditions, was the result of an “outdated” investment playbook.
“The market seems confused,” he wrote in a note to clients. “Inflation is proving much more persistent than previously assumed,” he added. “For the first time since 2007/early 2008, central banks will need to tighten policy amid and despite slowing growth.”