Stock Markets Rally as Dollar Weakens on Optimism About US Inflation Data

World stock markets continued to rise on Friday, fueled by investor optimism that the U.S. Federal Reserve was nearing the end of its rate-hiking cycle. This optimism was sparked by recent U.S. inflation data, which showed slow growth in consumer prices and producer inflation, as well as a drop in import prices. Additionally, U.S. consumer sentiment reached its highest level in nearly two years.

The MSCI World Equity index rose to its highest level so far this year, with a 0.1% increase on Friday. This week’s gains put the index on track for its biggest weekly rise since November 2022 and its highest levels since early 2022.

On Wall Street, the Dow Jones Industrial Average rose 0.45%, the S&P 500 gained 0.10%, and the Nasdaq Composite added 0.12%. The positive performance was driven by strong second-quarter earnings from top lenders such as JPMorgan Chase and insurer UnitedHealth Group.

In Europe, stock indexes were relatively unchanged, with the STOXX down 0.11% and London’s FTSE 100 down 0.08%. Germany’s DAX also pulled back slightly after recent gains.

However, some experts are urging caution. Michele Morganti, senior equity strategist at Generali Investments, highlighted concerns about high price-to-earnings ratios compared to real rates and economic growth, particularly in the U.S. Morganti emphasized sticky core inflation, tightening credit conditions, and macro indicators pointing south as reasons for caution.

In the bond market, U.S. government bond yields rebounded slightly after sharp declines earlier in the week. The yield on 10-year Treasury notes was up 5.7 basis points at 3.817%, while the two-year U.S. Treasury yield rose 14 bps to 4.751%. Euro zone government bond yields remained relatively unchanged, holding on to their gains following a two-day rally triggered by soft U.S. inflation numbers.

Money market traders still expect the Fed to raise rates by 25 bps on July 26, but the chances of another rate hike this year have been reduced.

The dollar continued to hover near a 15-month low on Friday, experiencing its biggest weekly decline since November. This was driven by softening U.S. inflation data. The euro remained steady at $1.1232, reaching its highest level in over 16 months.

In oil markets, global benchmark Brent crude hovered around $80 a barrel, supported by bullish sentiment over U.S. demand and supply disruptions in Libya and Nigeria. Brent crude was at $79.87, down 1.83% on the day, while U.S. crude fell 1.91% to $75.42 per barrel.

Gold prices edged lower on Friday after five consecutive sessions of gains. Growing expectations of a pause in U.S. rate hikes contributed to bullion’s biggest weekly gain since April. Spot gold was priced at $1,960.24 an ounce.

Overall, the positive sentiment in stock markets and the lower dollar reflect investor optimism about the U.S. inflation outlook and the potential end of the rate-hiking cycle by the Federal Reserve. However, experts caution that there are still risks to consider, such as sticky core inflation and tightening credit conditions.

What factors, such as rising interest rates and slowing global growth, could potentially trigger a market downturn despite recent gains

Ts the need for careful monitoring of global economic data and ongoing trade tensions. She states, “While the market reaction is positive, we need to be cautious as the global economic outlook remains uncertain. The ongoing U.S.-China trade dispute and other geopolitical factors could still impact investor sentiment.”

Furthermore, analysts warn that despite the recent gains, the stock market remains vulnerable to potential setbacks. Rising interest rates, geopolitical tensions, and slowing global growth are all factors that could dampen investor confidence and trigger a market downturn.

Overall, while investors are currently optimistic about the U.S. Federal Reserve’s cautious stance on interest rates, it is important to remain vigilant and closely monitor economic indicators and global developments that could influence market sentiment in the future.