Gren Invest: Your weekly snapshot of global markets
Global markets are tiptoeing through an upbeat period of cautious optimism, as investors take in new signals from central banks, fresh economic data and changes to risk sentiment across regions. Stocks in the United States and a number of international benchmarks rose after the Federal Reserve indicated that it might be closer to cutting interest rates, although officials stressed that a decision will be heavily influenced by inflation data in coming weeks. That uncertainty has left investors and traders on edge, particularly after a strong hiring report in June that showed 119,000 new positions created there and went against the view earlier this year that central bank policy makers would have an easy path to lower rates. The mix of rising confidence and mixed economic indicators is giving us a week where optimism and skepticism are at odds.
At the same time, movement in the market is still very much influenced by how our biggest companies perform. A big U.S. tech company inched closer to an all-time valuation high, lifting broader barometers and taking the megacap names that are defining U.S. equities with them across global markets. Markets in Asia continued to climb as foreign investors shifted capital out of the hot United States market and into a world with more attractive valuations. The move underscores a mounting appetite for emerging-market exposure as investors look elsewhere for growth beyond the usual suspects. The picture is more mixed in Europe. Financials and healthcare drew fresh money to their relatively cheaper valuations, but other industries faced pressure as companies grappled with slow demand and unremitting fiscal fears.
A number of themes are dominating trading this week, and one that is trumping a lot of the others is the continued discussion surrounding whether a rally in companies linked to artificial intelligence has seen valuations become too stretched. Analysts have raised red flags that some parts of the tech sector may be pricing in more spree growth than can reasonably be expected, at least in the near term. These discussions accelerated after there were wild gyrations in some of the world’s markets for fears that an AI bubble would burst. Investors are increasingly discerning, focusing on earning quality and cash flow strength rather than just buying every name that doth be technology.
The added wrinkle came from energy markets where oil prices were relatively stable after a stretch of weakness. Oil edges up after progress in peace talks to ease geopolitical tensions, but concerns over supply and changes to demand forecast keep the market on edge. The recovery in oil, no matter how modest, is significant because energy prices frequently feed into expectations around inflation, which influence outlooks for interest rates. With central banks monitoring inflation measures closely, the smallest movements in energy prices can impact policy decisions, making this an important market to watch for traders.
There’s also an important message coming from bond markets and currencies this week. U.S. and European yields have moved in answer to expectations for future policy easing, but uneven inflation between regions has produced some pronounced divergences. These movements in yields affect everything from mortgage rates to the cost of corporate borrowing, so even moderate shifts can ripple through financial systems around the world. Currency traders are studying how messages from central banks shape exchange rates, as investors weigh where capital flows go next.
For investors watching the world’s economy this week, a few things are worth paying attention to. The United States is set to publish data on retail sales, producer prices and initial jobless claims. Every report can alter expectations about interest rates and move market sentiment. And central bankers from the United States, Europe and Asia are scheduled to make public comments, which could help answer whether rate cuts are near or if monetary policy makers remain wary because of lingering fears about inflation. It is also earnings season: Companies across technology, consumer and industrial sectors are reporting their results in a parade of releases that can either buttress the recent rally or bring about abrupt pullbacks.
Commodities will still feature in the story. Looking ahead, oil, metals and agricultural commodities could experience more volatility amid geopolitical events and updates on supply and global demand. A sharp move in commodity prices could impact inflation expectations, something investors have been keeping an eye on due to the delicate state of monetary policy. Burnett said he would be watching flows into emerging markets as investors weigh whether the U.S. market has become too full or expensive compared with international counterparts.
All in all, the mood this week is one of hopefulness, tempered with caution. The possibility of lower rates; stronger earnings in key markets, and improving sentiment across regions are helping stocks. Meanwhile, risks linger with potential for inflation surprises and uncertainty around central bank actions as well as signs some fast-growing sectors may be priced for perfection. Investors are weighing a desire for loosening financial conditions against the reality that the global economy remains on unsteady footing.