Stocks snap weekly losing streak on scaled back rate-rise expectations

Global financial markets snapped a losing streak on Friday, registering their first weekly gains this month as fears of a looming recession prompt investors to rethink how aggressive central banks will need to be in order to tame high inflation.

Recent lacklustre economic data has rippled across markets, with traders rapidly scaling back their expectations of how much the Federal Reserve will tighten policy this year as growth cools.

The benchmark S&P 500 climbed 6.4 per cent for the week, including a 3.1 per cent rally on Friday, with 96 per cent of the companies in the index advancing. The tech-heavy Nasdaq Composite rose 7.5 per cent, its largest weekly gain since March. Technology stocks’ higher valuations have made them particularly exposed to rising interest rates.

The rally in the US set the pace for a broad global rally, with the FTSE All-World index of developed and emerging market shares posting a 4.7 per cent gain for the week.

The FTSE index has fallen almost a fifth this year, with other global stock benchmarks deeply in the red, as the rate of inflation has pressed central banks into a relatively co-ordinated tightening push. That rocked sovereign bond markets, sending yields surging and weighing on the prospects of riskier corners of the US stock market.

Investors say the weakening economic data have sparked hopes that a slowdown could calm inflation, reducing the need for central banks to lift interest rates ever higher.

“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”, Guillaume Paillat, portfolio manager at Aviva Investors, added.

Purchasing managers’ indices produced by S&P Global — viewed by investors as real-time gauges of business activity — indicated on Thursday that the US expansion decelerated 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 Fed 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’s 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.

Overnight funding markets on Friday showed traders were betting the Fed would continue to lift rates this year but that a December move would be its last before reversing policy to support a weakening economy.

Investors are pencilling in one quarter-point rate cut next year, followed by further easing in 2024.

The yield on the benchmark 10-year US Treasury note, which sets the tone for borrowing costs worldwide, has declined markedly over the past two weeks as fears of a recession have come to the fore. The yield stood at 3.13 per cent on Friday, down nearly 0.4 percentage points from an 11-year high hit on June 14.

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 more speculative tech stocks whose peak earnings are projected far into the future.

In Europe, the Stoxx 600 share index closed 2.6 per cent higher. Hong Kong’s Hang Seng index added 2.1 per cent.

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.”