Stocks set for first weekly gains in June on reduced rate hike expectations

U.S. and global equities were on track for their first weekly gains this month, as signs of slowing growth and fears of a looming recession have investors rethinking how much central banks will have to. be aggressive to control high inflation.

The lackluster economic data and shift in sentiment rippled through financial markets, with traders rapidly lowering their expectations of Federal Reserve policy tightening this year as growth slows.

The benchmark S&P 500 index climbed 5.8% for the week, including a 2.5% rally on Friday, with 95% of companies in the index advancing. The tech-heavy Nasdaq Composite rose 6.7% for the week, its best weekly gain since May. The higher valuations of technology stocks have made them particularly exposed to rising interest rates.

The US rally set the tone for a broad global rally, with a FTSE index of developed and emerging market stocks snapping a three-week losing streak to post a 4.3% gain.

The FTSE All-World has fallen by nearly a fifth this year, with other global equity indices deep in the red, as the rate of inflation pushed central banks into relatively coordinated tightening. It rattled sovereign bond markets, pushing yields higher and weighing on the outlook for the riskiest corners of the US stock market.

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

“There has been a really powerful shift from a very aggressive talk of rates and inflation to the idea of ​​an economic slowdown,” said Anita Tanna, head of European equity sales at Barclays.

Traders are now “hooking on this idea” of deteriorating economic conditions “reducing pressure on central banks to raise interest rates,” added Guillaume Paillat, portfolio manager at Aviva Investors.

Purchasing managers’ indices produced by S&P Global – seen by investors as real-time indicators of business activity – indicated on Thursday that the US expansion slowed in June, while economic growth in the zone euro fell to its weakest level in 16 months.

Annual consumer price inflation hit a 40-year high of 8.6% in the United States last month and hit record highs in the eurozone. The Fed implemented a very steep rate hike of 0.75 percentage points this month and the European Central Bank is poised for its first hike in more than a decade in July.

But the U.S. Purchasing Managers’ Index, which compiles executives’ views on topics ranging from order volumes to commodity prices, also showed input costs rising at their slowest pace in five months.

On Friday, overnight funding markets showed traders betting the Fed would continue raising rates this year, but a December move would be the last before reversing policy to support a flagging economy.

Investors expect a quarter-point rate cut next year, followed by further easing in 2024.

The yield on the benchmark 10-year US Treasury, which sets the tone for borrowing costs around the world, has fallen sharply over the past two weeks as fears of a recession have come to the fore. The yield stood at 3.12% on Friday, down nearly 0.4 percentage points from the 11-year high reached on June 14.

Small swings in the 10-year Treasury yield, which investors use as a discount rate to price anticipated corporate earnings, can have outsized effects on stock valuations, especially for more speculative tech stocks whose earnings are projected far into the future.

In Europe, the Stoxx 600 stock index closed up 2.6%. Hong Kong’s Hang Seng Index rose 2.1%.

Still, some analysts have warned that the improvement in 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 not convinced that central banks will stop tightening if economies slow down.”

Comments are closed.