Stock rally as euro gains on potential rate hikes

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NEW YORK / LONDON – US and European stocks rallied on Monday, clearing the S&P 500 of a bear market, as the euro jumped as the European Central Bank expected its deposit rate to move out of negative territory by September.

Oil prices have fallen and recent gains in gold have risen, but the dollar has fallen further as investors have lowered their bets on further progress in the greenback based on market expectations of higher yields from the Federal Reserve’s fiscal tightening.

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The MSCI All-Country World Index rose 1.47% but is still down about 17% from a record high in January. The pan-European STOXX 600 index closed up 1.26%, while the major British, French, German and Spanish indices rose more than 1%.

Wall Street stocks also gained more than 1%, although Nasdaq briefly retreated after trading red.

The Dow Jones Industrial Average rose 1.92%, the S&P 500 advanced 1.68% and the Nasdaq Composite rose 1.3%.

Price stocks rose 1.73% and growth stocks rose 1.63% Rally has lifted 11 S&P 500 sectors and set the benchmark for its first week of gains after seven consecutive weekly losses, yet many analysts say the equity slump is not over.

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Steven Richieuto, chief economist at Mizuho Securities, said stock investors were under the illusion that the Fed would simplify monetary policy to protect the market from further collapse, or what the Fed called “put”.

“This is going to be a very, very slow growth environment and will not stand in the way of the Fed,” Richto added. “You see, the bond market is declining. It tells the equity market that the put is not there and so the equity market needs to adjust. “

The yield on the 10-year Treasury note rose 7 basis points to 2.857%, down nearly 40 basis points from a multi-year high of 3.203% set two weeks ago.

Others have seen difficulties ahead. The BlackRock Investment Institute downgraded its advanced market equities rating from “overweight” to “neutral”, citing the Fed’s potentially more enthusiastic efforts to control inflation and signs of an economic downturn in China.

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In Europe, the focus was on ECB President Christine Lagarde, who has already hastened a sharp policy change but has now scrapped rate hikes in the face of record-high eurozone inflation.

The prospect of a higher rate pushed the euro up 1.24% to 0 1.0691. The single currency has risen about 3.3% since hitting a multi-year low 10 days ago.

“Pigeons are throwing towels,” said Holger Schmidt of Berenberg Bank, who expects the ECB rate to increase by 25 basis points in July, September and December.

A study by the IFO Institute on Monday found that German business sentiment rose unexpectedly in May, helping to calm investors right now.

“I don’t think we’ve reached the bottom of the rock yet, it’s a bear market rally. The market is still concerned about sticky inflation, ”said Michael Hewson, chief market analyst at CMC Markets.

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The World Economic Forum will hold its first private meeting in two years in Davos, Switzerland in the next four days, with central bankers and the International Monetary Fund participating in a panel on the economy and inflation outlook.

Peak dollars?

The dollar index, which tracks the greenback against other major currency baskets, was down 0.855%. In the 12 months to mid-May, the index rose nearly 16% to a two-decade high.

Commonwealth Bank of Australia strategist Joe Capurso said, “The dollar may be rising to the top due to the strength of Europe and the resilience of the potential relaxation of the lockdown in China.”

Asian stocks fell as investors worried that inflation and rising interest rates would hamper the performance of the global economy.

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Outside of Japan, the broader MSCI index of Asia-Pacific shares was slightly weaker.

Oil prices changed slightly due to concerns about a possible recession for high fuel demand, with plans to reopen during the upcoming US summer driving season and a two-month coronavirus lockdown in Shanghai.

US crude futures rose 1 cent to 110 110.29 a barrel and Brent rose 87 cents to 3 113.42.

Gold prices have risen as the dollar has weakened and concerns over economic growth have lifted the metal, although non-performing bullion has gained some ground as Treasury yields have risen.

US gold futures rose 0.3% to settle at 8 1,847.80 an ounce, while spot gold added 0.6% to settle at 8 1,856.56 an ounce.

(Reporting by Herbert Lash, additional reporting by Hu Jones in London; editing by Amelia Seithol-Mataris, Kirsten Donovan and Will Dunham)