World stock markets gained ground on Monday, recovering from losses sparked by a strong US jobs report last week that bolstered the case for sharp interest rate hikes, while the dollar weakened and government bond yields fell.
On Wall Street, the Dow Jones Industrial Average rose 0.84% to 33,079.21, the S&P 500 gained 0.89%, to 4,181.88, and the Nasdaq Composite added 1.28%, to 12,820.00 in late morning trading. Those gains echoed the broad Euro STOXX 600, which gained about 1% on Monday, led by cyclical and growth stocks, helping recover losses from Friday.
The MSCI world equity index, which tracks shares in 47 countries, added 0.83%.
Yet, higher rates remained squarely in focus for investors.
“The rise in inflation and the Fed’s reaction to it has been a real headwind for valuations this year,” Morgan Stanley strategists wrote in a note on Monday.
“However, it’s also been a tailwind for earnings. Now, we are on the other side of that mountain, and operating leverage is rolling over likely more than the consensus expects.”
Indeed, business investment appears to be an early victim of red-hot US inflation and rising interest rates, according to fresh US government data.
The strong US jobs data raised the stakes for the July US consumer prices report due on Wednesday, which could see a slight pullback in headline growth, but likely a further acceleration in core inflation.
“We see inflation staying above the Fed’s 2% target through next year,” BlackRock Investment Institute strategists wrote in a note on Monday.
“We think the Fed will keep responding to calls to tame inflation until it acknowledges how that would stall growth.” US Treasury yields dipped on Monday as investors continued to digest the jobs report and how the Fed will react.
Fed funds futures traders are now pricing for a 69% chance of another 75-basis-point rate increase in September, and for the fed funds rate to rise to 3.65% by March, from 2.33% now.
Benchmark 10-year note yields fell to 2.782% on Monday, after getting as high as 2.869% on Friday, the highest since July 22. Two-year yields were last 3.211%, after reaching 3.331% on Friday, the highest since June 16.
Dollar expectionalism?
The US dollar fell nearly 0.5% versus a basket of six major currencies to 106.19, giving up some gains after strengthening on the jobs boom and the jump in yields.
FX analysts were bullish on the greenback’s prospects.
“Data like this will further any thoughts about ‘US exceptionalism’ and is very positive for the USD against all currencies,” said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank, referring to the US jobs statistics.
Asia shares subdued, dollar encouraged by US rate risk
The euro squeezed out slim gains to reach $1.021. Bitcoin and other cryptocurrencies, which tend to act as a barometer for risk appetite, gained.
Bitcoin was last up 4.3% at $24,194. Gold broke higher on Monday as the dollar and Treasury yields retreated. Spot gold rose 0.8% to $1,787 per ounce by 1252 GMT, after dropping 1% in the previous session.
US gold futures added 0.56% higher to $1,782. Oil prices hovered near multi-month lows on Monday as lingering worries about demand weakening on the back of a darkened economic outlook outweighed some positive economic data from China and the United States.
US crude fell 0.26% to $88.78 per barrel and Brent was at $94.95, flat on the day.
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