World markets hit record ahead of US data

Traders await easing inflation to signal potential Fed rate cuts by September

LONDON:

World stocks hit new all-time highs on Thursday as traders counted down to US data that is expected to show inflation easing and pave the way for the Fed to start its long-awaited interest rate cut cycle as soon as September.

It was a busy day. As well the upcoming US CPI figures, Wall Street earnings season was kicking off. Britain had robust GDP data and some European soccer success to cheer, and a number of central banks were juggling interest rates. Europe’s main bourses had moved 0.4%-0.7% during their morning, which after records in both the US and Tokyo overnight, meant MSCI’s main all-country world index notched its own new peak and a near 14% gain for the year.

Bond markets and the dollar were broadly steady, keeping the yen on the weak side of 161 per dollar and near its lowest levels in decades, whereas it gave sterling the room to climb to a 4-month high after a good couple of days.

“Don’t be too surprised that because we’ve had some good GDP numbers, we have a seemingly stable government and we are into a European final that we have an outburst of marginal post-election optimism for sterling,” Societe Generale’s Kit Juckes said after a better-than-expected 0.4% rise GDP and England had triumphed over the Netherlands in Germany.

The last 24 years shows that hoisting the European Championship trophy also tends to lift a stock market, as evidenced by Italy, Spain and Greece in recent years, although Portugal’s 2016 title was followed by a notable underperformance that time.

Overnight, Japan’s Nikkei had risen 1% to a record high of 42,426 points, Taiwanese stocks did the same, and Australia’s ASX 200 closed within a whisker of its all-time top. That was after another surge in Nvidia and other Wall Street heavyweights had seen both the Nasdaq and S&P 500 close at new peaks.

“The main driver is really the prospect of interest rate cuts,” said Shane Oliver, Chief Economist and Head of Investment Strategy at AMP in Sydney. “If we get a good inflation read, it will tick one of Powell'’s boxes.” US Federal Reserve Chair Jerome Powell told lawmakers on Capitol Hill on Wednesday that “more good data” would build the case for the US central bank to cut interest rates. Futures pricing implies about a 75% chance of a cut in September.

Economists forecast annual US CPI slowed to 3.1% in June from 3.3% in May. The Bank of Korea stood pat on interest rates but left out a warning on inflation, while Governor Rhee Chang-yong told reporters that it was time to prepare to pivot to rate cuts. Malaysia held its rates steady too.

US earnings season was also kicking off, though it wasn’t the best of starts. Both consumer bellwether PepsiCo and Delta Air Lines landed some disappointing numbers. The first flurry of bank results follows on Friday.

China’s yuan rallied from an almost eight-month low to 7.2701 per dollar. China stocks chimed with the market momentum, but a drumbeat of disappointing data and talk of tariffs in its major export markets have made rallies hard to sustain. China GDP print is due on Monday.

Back in Europe, sterling’s 4-month high of $1.2874 came after British GDP data beat expectations and after the Bank of England’s chief economist on Wednesday had sounded vaguer about the timing of rate cuts than many traders had expected.

The euro also ticked higher to $1.0847. The yen slipped as far as 161.7 per dollar. Data showed Japan core machinery orders unexpectedly fell for a second month running, challenging expectations for interest rates to rise.

The New Zealand dollar found support at its 200-day moving average and traded at $0.6095. The Australian dollar rose 0.2% to a six-month high of $0.6763.