The Dow Jone Industrial Average, meanwhile, was last higher by around 0.5% in the 31,500 area. Unlike the Nasdaq 100, the Dow failed on Monday to break above its 50DMA (around 31,650). Underperformance in the Health Care S&P 500 GICS sector, which was last down about 0.7% on Monday, is weighing somewhat on the Dow given its larger weighting.
What’s Driving the Gains?
Market commentators have cited a variety of factors as boosting risk appetite in the past few days. Firstly, it’s been a decent start to the earnings season. Earnings from US megabanks Goldman Sachs (on Monday) and Citigroup Inc (last Friday) were solid. Of the 35 S&P 500 companies to have reported earnings prior to Monday, 80% had beaten analyst expectations, Reuters earlier said citing Refinitiv data.
This week is set to be a busy one for major earnings releases, with IBM reporting after Monday’s close. Should earnings continue to surprise to the upside, that could be a catalyst that drives further US equity market gains.
Elsewhere, investor fears about a deteriorating macroeconomic backdrop have eased in recent days. June US Retail Sales and July University of Michigan (UoM) Consumer Sentiment data released last Friday both surprised to the upside, modestly easing US recession fears. Perhaps more importantly, the UoM’s survey showed 5-year consumer inflation expectations falling to a one-year low of 2.8% from above 3.0% in June.
That will ease fears at the US Federal Reserve that inflation expectations are becoming de-anchored, reducing the pressure they feel to hike interest rates quite so aggressively. Indeed, the Fed cited an upside surprise in the UoM inflation expectations guage back in June as a key reason why it opted to accelerate the pace of its rate hikes to 75 bps at last month’s meeting from 50 bps at the May meeting.
Fed Rate Hike Bets Pared
Speaking of Fed rate hikes; last Wednesday’s hotter-than-expected US Consumer Price Index numbers, which showed headline price pressures hitting a four-decade high above 9.0%, initially sparked fears that the Fed might implement an even larger 100 bps rate hike later this month. However, Fed policymakers speaking later last week (Christopher Waller and James Bullard) both pushed back against this idea and said a 75 bps rate hike later this month was most likely.
This, combined with Friday’s data, has seen markets pare back expectations for how aggressively the Fed is going to hike interest rates in the quarters ahead, supporting stock prices. According to the CME’s Fed Watch Tool, there is a less than 20% chance that the Fed will have raised interest rates to 3.25-3.50% by the September meeting from current 1.50-1.75% levels.
The market’s base case for where rates will be by the September meeting is 3.0-3.25% (seen as around 53% likely), a further 150 bps of tightening from current levels. That implies that a 75 bps rate hike later this month, followed by another 75 bps in September is the market’s base case.
European Stocks Pullback from Highs on Gas Crisis Worries
Most major European equity indices are also on course to post solid gains on Monday. The pan-European Stoxx 600 index was last around 0.9% higher in the 417.50 area, though has pared back from earlier session highs in 420 area. Unlike the Nasdaq 100 and Dow, the index was unable to test its 50DMA just above 422.
Analysts said that the risk of a worsening of the European energy crisis weighed on sentiment. European nations have imposed harsh sanctions on Russia for its invasion of Ukraine and, in response, Russia has been tacitly threatening to halt gas flows to the continent.
The Nord Stream 1 pipeline, which carries large sums of gas directly from Russia to Germany, is currently closed until Thursday as it undergoes routine maintenance, but there are fears that the Russians won’t restart flows. Worsening these fears were reports on Monday that Gazprom, Russia’s state-owned gas producer/exporter, had declared a force majeure to one of its major customers.