Stocks on course for weekly gain as traders scale back rate rise forecasts

Stock markets were on course for their first weekly gain this month, as traders bet on an economic slowdown tempering central banks’ plans for aggressive rate rises.

By Friday morning in New York, a FTSE index of developed and emerging market shares had registered an increase of 4.3 per cent from the previous Friday, following three straight weeks of declines.

Wall Street’s S&P 500 added 2.3 per cent on Friday, led by tech stocks whose higher valuations have made them particularly exposed to rising interest rates. The tech-focused Nasdaq Composite climbed 2.3 per cent, remaining more than 26 per cent lower for the year.

With the FTSE All-World down almost a fifth this year, weakening economic data have sparked hopes that a short recession could calm red-hot inflation.

“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.

Traders were now “clinging to this idea” of worsening economic conditions “reducing 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.

Annual consumer price inflation hit a 40-year high of 8.6 per cent in the US last month and has reached record levels in the eurozone. The US Federal Reserve implemented an extra-large 0.75 percentage point rate rise this month and the European Central Bank is poised for its first increase in more than a decade in July.

But the US PMI, which collates executives’ views on topics from order volumes to commodity prices, also showed input costs were rising at their slowest pace in five months.

Money markets on Friday anticipated a US federal funds rate of under 3.5 per cent in December, down from forecasts of more than 3.6 per cent earlier in the week.

Brent crude, the international oil benchmark, traded at $113.58 a barrel on Friday, up 3 per cent on the day but down from $122 two weeks ago.

The yield on the benchmark 10-year US Treasury note — which sets the tone for borrowing costs worldwide — added 0.05 percentage points to 3.12 per cent on Friday, after government bond markets rallied in the previous session. Bond yields rise as their prices fall.

Ostensibly small moves in the 10-year Treasury yield, which investors use as a discount rate for valuing companies’ anticipated profits, can have outsized effects on equity valuations, particularly for tech stocks whose peak earnings are projected far out into the future.

In Europe, the Stoxx 600 share index rose 2.5 per cent, led by technology shares. Hong Kong’s Hang Seng index closed 2.1 per cent higher.

Still, some analysts cautioned that the improved market sentiment may not last. “The mood this week is a little too optimistic and forward looking,” said Greg Peters, co-chief investment officer at PGIM Fixed Income. “I’m unconvinced that central banks will stop tightening if economies slow.”

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