Global stocks on course for best week in nine months

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Global equities climbed on Friday, putting markets on course for their best week of the year, as investors shake off a recent bout of concern that the US economy is headed for a recession.

The Stoxx Europe 600 index was up 0.3 per cent, while Japanese stocks — which bore the brunt of a global sell-off at the start of August — climbed 3 per cent on Friday. The MSCI World Index is on track for its best week since early November, having climbed 3.5 per cent this week.

The moves came after Wall Street’s S&P 500 gained 1.6 per cent on Thursday, with strong retail sales data bolstering confidence that the US economy is not headed for a downturn. Future markets indicated a steady open on Friday. The main US equity benchmark has climbed 3.7 per cent this week, its strongest showing in nine months.

The S&P 500 has recovered all of its August losses, which came after a weak jobs report sparked fears of a recession, and is only 2.2 per cent from its July all-time high.

“We are still in the soft landing camp. The market got too worried about [the prospect of] recession,” said Emmanuel Cau, head of European equity strategy at Barclays. “It’s not like everything is back to normal, but the stress we had earlier in the month has gone.”

The retail sales data followed separate figures on Wednesday showing an unexpected decline in US inflation in July.

Falling inflation has cemented investors’ expectations for multiple Federal Reserve interest rate cuts this year, although even more aggressive rate cut expectations have been priced out as optimism about the state of the economy returns.

On Friday morning, markets were pricing in a reduction of borrowing costs just short of one full percentage point by December. At the height of the sell-off last week, investors had bet that the central bank would deliver at least five quarter point cuts.

US two-year bond yields, which closely track rate expectations, have risen to 4.04 per cent on Friday, up 0.37 percentage points from their recent low on August 5. Yields move inversely to prices.

The recalibration of rate expectations comes ahead of the Kansas City Fed’s annual monetary policy conference in Jackson Hole, Wyoming, next week, where Fed chair Jay Powell is expected to offer further clues about the path of monetary policy.

Bank of America analysts said they expected Powell to skew towards “hawkish communication”.