It’s been a week when almost everything rallied — from emerging markets to global bonds and the S&P 500 — all buoyed by faith that the Federal Reserve is finally winning the fight against inflation.
(Bloomberg) — It’s been a week when almost everything rallied — from emerging markets to global bonds and the S&P 500 — all buoyed by faith that the Federal Reserve is finally winning the fight against inflation.
While trading was subdued on Friday as second-quarter earnings started to roll in, the week is ending with blockbuster gains across asset classes. The first batch of results from big US banks broadly underscored the economy’s resilience.
MSCI’s global stock benchmark has leaped 3.5% in the past five days, the biggest advance since November. Bonds climbed too over the week with the US two-year rate, the most sensitive to short-term policy moves, dropping as much as 30 basis points.
As investors embraced risk, multiple currencies gained against the dollar amid questions over whether the greenback is now in a sustained selloff.
The bullish trades reflect hope that the US is heading toward a “Goldilocks scenario” with inflation quickly easing while the economy avoids a recession. To be sure, the Fed is still likely to lift its benchmark rate later this month and central bankers continue to warn that more than one rate increase may still be necessary after that.
“The market has been partying like it’s 1999 this week,” said Jim Reid, a strategist at Deutsche Bank AG. “It’s hard to stand in the way of that narrative at the moment regardless of what eventually happens.”
Treasuries dipped on Friday after their biggest two-day gain since early May. The yield on two-year notes rose four basis points to around 4.68%, holding near the lowest level in one month.
While S&P 500 and Nasdaq 100 futures were little changed, Microsoft Corp. and Activision Blizzard Inc. rose in premarket trading after a report they’re considering measures to appease regulators so that they can complete their $69 billion merger.
In earnings news:
- Citigroup Inc. rose after posting net income and revenue that mostly met analysts’ expectations, and reaffirmed guidance for the full year
- JPMorgan Chase & Co. climbed after revenue soared to a record, boosted by Fed rate hikes, and CEO Jamie Dimon said the economy remains resilient
- Wells Fargo jumped after earning more net interest income than analysts expected in the second quarter and lifting its guidance for the full year
- BlackRock Inc. declined after net inflows and revenue fell
- UnitedHealth Group Inc. gained after a beat
Among individual stock movers in Europe, Nokia Oyj slumped more than 8% after the Finnish vendor of 5G equipment lowered its guidance. Ericsson dropped almost 8% as analysts pointed to a weak margin outlook for the Swedish telecom equipment maker. Swiss money manager Partners Group Holding AG gained more than 7% after assets under management rose in the first half.
In commodities, oil headed for a third weekly gain as supply disruptions in Africa and a reduction in shipments from Russia tightened the market. Gold was set for the best week since April.
‘Corner Turned’
US producer inflation showed the smallest advance since 2020, a report showed Thursday. The figures came just a day after data showed consumer prices increased at the slowest pace since 2021. An index of import prices fell more than analysts’ expectations, data showed Friday.
“While there have been occasions when stock markets have performed well this year despite not appearing to reflect the fundamental reality of rapid economy-threatening rate hikes, the inability to really turn a corner on inflation has held them back,” said Craig Erlam, a market analyst at Oanda. “But perhaps that corner is now being turned. The light at the end of the tightening tunnel is getting brighter and investors are increasingly confident of emerging after one more hike in two weeks.”
Fed Bank of San Francisco President Mary Daly, however, told CNBC Thursday that it’s too soon for policymakers to say they have done enough to return US inflation to their target. Fed Governor Christopher Waller also said he expects the US central bank will need to raise rates twice more this year to bring inflation down to its target.
Traders are now looking to earnings reports to reignite the rally. The focus is going to be mostly on the corporate outlooks given that beating profit expectations seems to be a low hurdle — even as some estimates have started to rise slowly.
“Given that consensus expectations appear reasonable and valuations are already rich (not only in tech), only strong beats are likely to result in substantial price gains, while even small misses may lead to sharper drops,” said Wolf von Rotberg, an equity strategist at Bank J Safra Sarasin.
Meanwhile, most stock indexes advanced in Asia. Stocks fluctuated in Japan as the yen headed for a seven-day winning streak, which would mark its best performance since 2018.
The offshore yuan ticked higher. China has ample foreign exchange reserves and will “resolutely” prevent wild swings in the yuan exchange rate, People’s Bank of China Deputy Governor Liu Guoqiang said at a briefing Friday. The currency’s short-term movement cannot be predicted accurately, but it hasn’t deviated from its fundamentals, Liu added.
Key events this week:
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- S&P 500 futures rose 0.2% as of 8:17 a.m. New York time
- Nasdaq 100 futures were little changed
- Futures on the Dow Jones Industrial Average rose 0.5%
- The Stoxx Europe 600 was little changed
- The MSCI World index rose 0.1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro was little changed at $1.1218
- The British pound fell 0.2% to $1.3105
- The Japanese yen fell 0.5% to 138.69 per dollar
Cryptocurrencies
- Bitcoin fell 0.6% to $31,198.89
- Ether rose 0.4% to $1,994.18
Bonds
- The yield on 10-year Treasuries advanced one basis point to 3.78%
- Germany’s 10-year yield was little changed at 2.48%
- Britain’s 10-year yield declined three basis points to 4.39%
Commodities
- West Texas Intermediate crude fell 0.2% to $76.75 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Yumi Teso and Tassia Sipahutar.
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