Stocks Extend Rally as Risk-On Mood Sinks Dollar: Markets Wrap

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(Bloomberg) -- The risk-on mood in markets stretched into another day as stocks climbed and the dollar weakened to a 15-month low.

Investors are piling back into equities as concerns over higher interest rates and a potential recession ease. Data Wednesday showed the US inflation rate slid to a two-year low, while producer prices moderated more than analysts' expectations. First-time jobless claims undershot estimates, pointing to a still-resilient jobs market.

US equity futures rose after solid gains on Wall Street, with a positive start to earnings season also boosting sentiment. Delta Airlines Inc. climbed more than 4% in premarket trading after boosting profit expectations. Southwest Airlines, Co. American Airlines Group Inc. and United Airlines Holdings Inc. also rose. PepsiCo Inc. gained after raising sales and earnings guidance.

European shares extended Wednesday's rally, which saw the Stoxx 600 Index surge 1.5%. The benchmark is set to post its longest winning streak since mid-April, and as almost erased its second-half losses. Swatch Group AG, the maker of Omega and Longines watches, jumped more than 6% as China's reopening fueled a rise in profits. Watches of Switzerland Group Plc, the biggest retailer of Rolex watches in the UK, soared 13%.

UK Homebuilders, however, declined as rising interest rates hit the housing market. Barratt Developments Plc dropped as much as 5.4% after noting a “significant deterioration” in demand during the second quarter. Taylor Wimpey Plc fell more than 2%.

The MSCI Asia Pacific Index headed for the highest close in more than three weeks, with stocks in Hong Kong recording some of the biggest gains. Chinese Premier Li Qiang met with senior executives from firms including Alibaba Group Holding Ltd. and ByteDance Ltd., a sign that the government is ending its crackdown on the technology industry.

Some top money managers said the dollar is poised for further losses as US exceptionalism wanes. Hedge funds turned net sellers of the dollar for the first time since March, according to data from the Commodity Futures Trading Commission aggregated by Bloomberg.

‘Qualitative Shift'

“The recent USD underperformance reflects a qualitative shift in market comfort with being short USD as the terminal Fed policy rate looks increasingly capped,” Steven Englander, head of global G-10 FX research and North America strategy for Standard Chartered Bank, wrote in a note.

The British pound extended its rally to a sixth day, staying above the $1.30 level that it hit Thursday for the first time since April 2022, after data showed the UK economy shrank less than expected in May.

Bond yields were broadly lower as investors unwound bets that the Fed would raise rates again following an expected hike this month. The yield on two-year Treasuries, which is more sensitive to imminent policy moves, dropped around six basis points to 4.68% after sliding 13 basis points Wednesday on the inflation data. Germany's 10-year yield dropped nine basis points to 2.49%.

The US consumer price index slid to 3% in June year-on-year, down from 4% in May. The core measure — which economists view as the better indicator of underlying inflation — dropped to 4.8%, the lowest since 2021. While traders predict the Fed will still go ahead with one more rate hike this month, the likelihood of further increases appears to be receding.

Brandywine Global Investment Management expects the Fed to tighten by 25 basis points this month and then pause. “We've moved beyond that sort of crisis mentality around inflation,” portfolio manager Jack McIntyre told Bloomberg Television. “The rhetoric coming from the Fed post-FOMC should be a lot less hawkish.”

Focus this week is also on the second-quarter earnings season, with reports from the big US banks due Friday. Some strategists have warned that the bar for the rally to continue is high even if S&P 500 profits are better than feared.

Elswhere in markets, crude oil was steady even after the International Energy Agency said cut its forecast for demand growth. Iron ore rose as hopes increased that Beijing will deliver more economic aid for the beleaguered property sector and as investors shrugged off disappointing Chinese trade data.