A combination of factors boosted equity markets this morning, with all major indices trading in the green after a strong day in the US.
Yesterday evening, the US Senate passed the agreement to raise the debt ceiling while making significant spending cuts. This averts any immediate risk of US bankruptcy, which would have destabilized financial markets – although I don’t think that risk was ever material. Stocks in the US hit a nine-month high, with the S&P 500 up 1 percent and the Nasdaq up 1.3 percent.
That positive sentiment is now spreading across Europe, with the FTSE 100 up 0.6 per cent and the DAX and CAC 40 up 0.7 and 0.9 per cent respectively.
So yes, it’s definitely the reluctance to see global financial markets collapse that’s buoying traders, but it’s been likely for the past ten days or so that this would always happen, so there’s definitely more to consider. As discussed yesterday, comments from US Federal Reserve members about a rate pause at this month’s meeting are helping, as is falling euro-zone inflation, showing that the European Central Bank’s tough approach to raising rates has some merit.
But overarching it all is the simple idea that for negative Nellies, there’s just nothing to hold on to. Data out of the US showed an increase in jobless numbers, but oddly enough that’s actually a positive as it shows rates are working. And even then it was in line with expectations. So everything is fine then.
This week’s trading highlights why it’s been such a chaotic five months this year that we’ve gone through all the stages of processing a news cycle. ‘No news is good news’ to ‘Good news is bad news’, with positive economic data making traders worry about further rate hikes. The UK may still be stuck in this dilemma, but the US and the eurozone appear more confident about their position.
Of course, all this can change later. Nonfarm payrolls are due and any upside surprise, such as US job creation, will have traders panicking and dismissing claims from the Fed that it will be on hiatus this month. The reverse is also true and you can easily see that the economy is slowing down and people will immediately extend that pause to the late July decision.
Either way, stocks ended the week significantly better and certainly better than last week when fears of the debt ceiling really slowed things down. We’ll be releasing a number of PMIs next week, so there’s a lot more for traders to look at then.
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