Global equity markets rose while U.S. Treasury yields fell on Friday as investors tempered their expectations of the scale of the Federal Reserve’s interest rate raising cycle as falling oil prices helped to cool inflation.
Market sentiment has been buoyed by U.S. Labor Department data this week showing a slowdown in consumer and producer prices in July following a series of interest rate hikes by the Fed.
“With inflation now backing off, all the managers who stayed in cash and didn’t believe we could move off the June lows are now being forced back into the market,” said Thomas Hayes, chairman at Great Hill Capital.
The MSCI world equity index, which tracks shares in 50 countries, was up 0.63%. The pan-European STOXX 600 index gained 0.16%.
U.S. Treasury yields were down as traders weighed a likely moderation of the Fed’s monetary policy stance. Benchmark 10-year note yields dipped to 2.8639%, after reaching 2.902% on Thursday, the highest since July 22.
“With inflation coming down, consumer confidence is going to be coming back, and employment is still strong, you could see a situation where the market has stabilized and the economic numbers continue to slow based on the lag effect of the Fed tightening that has already happened,” Hayes added.
Canada’s main stock index rose on Friday as the country’s two main telecoms firms made headway with their merger deal, but gains were capped on worries over “soft landing” challenges for the economy.
The Toronto Stock Exchange’s S&P/TSX composite index unofficially closed up 187.93 points, or 0.94%, at 20,179.81. The index rose almost 2.5% for the week, getting a bump from softer-than-expected inflation data in the United States.
Rogers Communications Inc and Shaw Communications Inc finalized an agreement to sell Freedom Mobile to Videotron, a unit of Quebecor Inc, in a $2.85-billion deal.
The spinoff comes at a time when Canada’s antitrust agency has kept the Rogers’ $20-billion acquisition of Shaw on hold since May, citing competition concerns.
Keeping investors on edge, the Canadian 10-year government bond yield curve fell some 50 basis points below the 2-year yield, signaling the Bank of Canada may raise interest rates to a level that triggers a recession.
It is the biggest inversion of Canada’s yield curve as per Reuters data going back to 1994, deeper than the U.S. Treasury yield curve inversion. Canada’s inflation data is set to be released next week.
“The market is worried that the Bank of Canada will over-tighten interest rates and push the economy into a recession,” said Angelo Kourkafas, investment strategist at Edward Jones Investments.
“There are clear signs that growth is slowing because the economy is more interest rate sensitive than the U.S. because of the housing imbalances in the economy.”
Despite falling 6% this year, Canadian stocks have fared better than their peers in the developed world. U.S. benchmark index S&P 500 has shed 11% in the same period.
Analysts are saying that the TSX is seen as an inflation hedge, given the cyclical nature of its composition, and are overweight on sectors such as financials, energy and materials.
Wall Street closed higher on Friday as signs that inflation may have peaked in July increased investor confidence that a bull market could be under way and spurred the S&P 500 and the Nasdaq to post their fourth straight week of gains.
The S&P 500 is up 17.7% from a mid-June low, with the latest gains coming from data this week showing a slower-than-expected rise in the consumer price index and a surprise drop in producer prices last month.
The S&P 500 crossed a closely watched technical level of 4,231 points, indicating the benchmark index has recouped half its losses since tumbling from the all-time peak in January. A 50% retracement for some signals a bull market.
“It’s really just a number, but it certainly makes investors feel better - at least those who bought near the bottom,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
“I wouldn’t declare victory over this bear market yet. There’s likely some bad news still out there. But there’s a very good chance we’ve seen the bottom.”
The Dow Jones Industrial Average rose 424.38 points, or 1.27%, to 33,761.05, while the S&P 500 gained 72.88 points, or 1.73%, to 4,280.15 and the Nasdaq Composite added 267.27 points, or 2.09%, to 13,047.19.
For the week, the S&P 500 added 3.25%, the Dow rose 2.92% and the Nasdaq gained 3.8%.
Volume on U.S. exchanges was 9.99 billion shares, compared with the 11.04 billion average for the full session over the last 20 trading days.
As the S&P 500 and Nasdaq posted their longest weekly winning streaks since November, analysts noted the Federal Reserve still has its work cut out as it seeks to tame inflation by aggressively raising interest rates without sparking a recession.
“Markets certainly got great news this week on inflation,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.
“A victory lap in some respects was in order, but it’s not ‘mission accomplished’ by any means. It’s still a very slow grind ahead.”
Inflation by year-end might decelerate to 7% or a bit lower, but getting core inflation under 4%, which is double the Fed’s target, will be tougher than markets anticipate, Mullarkey said.
Traders are pricing in a less hawkish Fed, with fed fund futures showing a 55.5% chance of Fed policymakers raising rates by 50 basis points when they meet in September, instead of 75 basis points.
It was a sea of green on Wall Street for a second straight day, with all 11 major S&P 500 sectors rising, along with semiconductors, small caps and Dow transports . Growth stocks rose 2.1%, while value advanced 1.4%.
Investors bought $7.1 billion in equities in the week to Wednesday, according to a Bank of America note, with U.S. growth stocks recording their largest weekly inflow since December last year.
Also driving optimism was data showing U.S. consumer sentiment ticked further up in August from a record low this summer and American households’ near-term outlook for inflation eased again on softening gasoline prices.
After a rough start to the year, better-than-expected second-quarter earnings from Corporate America have supported the upbeat sentiment for U.S. equities.
Analysts in aggregate believe the S&P 500 posted year-over-year earnings growth of 9.7% in the April to June period, much stronger than the 5.6% predicted at quarter-end, per Refinitiv.
Banks rose 1.4% to extend their rally for a sixth straight week.
GlobalFoundries Inc jumped 11.9% on being added to BofA Global Research’s “U.S. 1 list.”
Oil prices plunged around 2% on Friday, on expectations that supply disruptions in the U.S. Gulf of Mexico would be short-term, while recession fears clouded the demand outlook.
Futures, however, were still on track for a weekly gain.
Brent crude futures fell $1.45, or 1.5%, to settle at $98.15 a barrel, while U.S. West Texas Intermediate (WTI) crude fell $2.25, or 2.4%, to settle at $92.09 a barrel. Both contracts gained more than 2% on Thursday.
“We are pulling back a little bit after the big run up yesterday,” said Phil Flynn, an analyst at Price Futures group.
Brent gained 3.4% this week after last week’s 14% tumble on fears that rising inflation and interest rates will hit economic growth and demand for fuel. WTI rose 3.5%.
The U.S. dollar rallied but was set for a weekly drop as traders weighed the improving U.S. inflation data against comments from Fed officials who cautioned that the battle against rising prices was far from over.
San Francisco Federal Reserve Bank President Mary Daly on Thursday said she was open to the possibility of another 75 basis point hike in September.
The dollar index rose 0.561%, while the euro was down 0.61%.
Gold prices advanced, helped by a drop in U.S. Treasury yields, and setting bullion on path for a fourth straight week of gains.
Spot gold added 0.4% to $1,797.30 an ounce, while U.S. gold futures rose 0.1% to $1,808.50.
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