U.S. and European stocks rose on Thursday as investors balanced the risks of a global slowdown with the possibility of central banks scaling back their interest rate hike plans.
The S&P 500 added 1.2% by late morning, putting the benchmark U.S. stock index on track for its fourth straight day of gains after ending June with its biggest first-half drop in more than 50 year. The tech-heavy Nasdaq Composite gained 1.7%.
The moves came as the US Treasury market continued to issue a recession warning signal, with the yield on the benchmark 10-year note remaining below that of the two-year note, in a pattern known as the inverted yield curve.
For most of the year, financial markets were dominated by expectations of a rapid tightening of monetary policy by major central banks in response to soaring inflation. However, the mood has changed in recent weeks after purchasing managers’ indices showed a marked slowdown in the growth of business activity in the euro zone and the Institute for Supply Management reported that new orders and employment in the US manufacturing sector were down.
Meanwhile, a report on Thursday showed 235,000 Americans applied for unemployment benefits for the first time last week, beating expectations of 230,000.
“Over the past few weeks, recession fears have been so strong that markets are expressing that no matter what central banks say, they will not have the ability to raise rates to the extent that they have indicated they will. “, said Tatjana Greil Castro, co. -Head of Public Procurement at Muzinich & Co.
Minutes from the U.S. Federal Reserve’s June meeting showed its top officials believe tighter monetary policy remains necessary if inflation — which is currently at 40-year highs — continues to rise.
But since the last Fed meeting, investors have scaled back their expectations of the extent of rising borrowing costs. Futures markets indicate that the Fed should now raise benchmark rates to 3.41% by the start of 2023, down from expectations of 3.9% just over three weeks ago.
After global equities’ losses from April to June, Citi strategists led by Robert Buckland now forecast a 17% gain for the MSCI World Share Index by mid-2023. “However, near-term risks remain substantial,” they said, as corporate earnings come under pressure from weak consumer sentiment and inflation.
In Europe, the regional Stoxx 600 equity index gained 1.9%, remaining down nearly 15% since the start of the year. London’s FTSE 100 gained 1.1%.
The euro hovered just above a 20-year low against the dollar, having tumbled to $1.015 on Wednesday as recessionary jitters continued to drive investors toward the U.S. currency.
The pound rose 0.6% against the dollar to settle just below $1.20. British Prime Minister Boris Johnson confirmed on Thursday that he would step down following an exodus of government ministers, but traders held back on betting harder on Britain’s economy until his successor was appointed. The pound had fallen to a more than two-year low in the previous session.
Brent crude, which has found strong support this year thanks to sanctions against the top Russian producer over its invasion of Ukraine, rose 5.4% to $106.19 a barrel in choppy trading, remaining well below its levels of over $120 in mid-June.
In bond markets, the yield on the 10-year Treasury note, which moves inversely to the price of the benchmark bond and underpins loan pricing around the world, stood at 3%, up on the day but down from nearly 3.5% in mid-June. The two-year Treasury yield, which tracks monetary policy expectations, traded at 3.05%.