By Naomi Rovnick
LONDON (Reuters) – Global stocks headed for their best week since November 2023 after encouraging U.S. economic data allayed recession fears, an abrupt reversal from last week’s slump that had left investors warning of a bumpy ride ahead.
The most important global stock index, MSCI, rose by almost four percent within five trading days, thus recovering significantly from the market turbulence of the past week, which was triggered by fears of a recession in the USA and exchange rate fluctuations.
The European stock index STOXX rose 0.5 percent in morning trading on Friday, heading for a weekly gain of 2.6 percent as U.S. stock futures pointed to a blockbuster week for Wall Street.
The U.S. stock volatility index VIX, widely considered the market’s fear indicator, was at a benign level of around 15 after hitting a four-year high of 65 earlier last week.
The sharp change in sentiment came after a series of US data this week showed that inflation eased but retail sales remained robust.
This has helped shift the market narrative from recession concerns triggered by a weak US jobs report in early August to confidence in the economy moving forward. Weaker inflation data has also reinforced expectations of a Fed rate cut in September.
The so-called soft landing scenario may not materialize, warned Sotirios Nakos, multi-asset portfolio manager at Aviva Investors, adding that markets could continue to fluctuate with each new economic data point.
“The market very quickly started to price in further negative data and now, most importantly, we are seeing this development quickly returning to normal,” he said.
“I don’t think there was a lot of money involved in this recovery,” he added, noting that weak trading conditions over the summer exacerbated market moves in August.
S&P 500 futures rose 0.1 percent, putting the blue-chip stock index on track for a weekly gain of nearly 4 percent. Contracts tracking the tech-heavy Nasdaq 100 rose 0.3 percent.
Traders expect the Federal Reserve to cut borrowing costs from a 23-year high next month, but have cut their forecasts for an emergency 50 basis point cut to 25% from 55% a week ago, according to the CME FedWatch tool.
David Aujla, multi-asset fund manager at Invesco, said the US was unlikely to slide into recession, but said markets would likely be more volatile through the end of the year, particularly around the US presidential election in November.
“We prefer to focus on fundamentals in our investment decisions,” he added.
In Asia, Japan’s Topix rose nearly 3 percent on Friday and Hong Kong’s Hang Seng Index rose 1.8 percent.
The Topix was poised for a weekly gain of nearly 8%, its best performance since March 2020, after suffering heavy losses last week after a surprise rate cut by the Bank of Japan pushed the yen higher against the dollar and wrecked yen-funded equity trades.
The Japanese currency fell 0.3 percent to 148.63 against the dollar on Friday, hovering near its two-week low of 149.40 reached in the previous trading session and now some way off last week’s seven-month high.
On the other foreign exchange markets, the Swiss franc, which had also risen sharply last week due to the flight to safe haven assets, fell by 0.5 percent during the day.
The euro struggled to break the $1.10 mark against a firmer dollar, supported by Thursday’s retail sales report.
Meanwhile, trading in government bonds was sluggish as the return of confidence weakened demand for debt instruments seen as a buffer against equity market risks.
The yield on two-year U.S. Treasury bonds, which rises as bond prices fall and reflects interest rate expectations, was last at around 4.068%, close to its highest level in the past ten days. The benchmark yield on 10-year bonds, which influences bond prices worldwide, was 3 basis points lower at 3.907%. (US/)
The corresponding yield on German government bonds fell by the same amount to 2.234%.
Oil markets were choppy as traders weighed renewed optimism about the US against slowing demand from China.
Brent crude futures fell 1.3% to $79.99 a barrel on Friday and rose just 0.4% for the week.
The spot price of gold rose 0.3% to $2,462 per ounce. (GOL/)
(Additional reporting by Rae Wee in Singapore; Editing by Shri Navaratnam, Clarence Fernandez, Ana Nicolaci da Costa and Kim Coghill)
