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A look at the day ahead in European and global markets

By Vidya Ranganathan, Finance and Markets Breaking News Editor

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Global stocks are having their strongest weekly rally in a year, global yields are sliding and corporate earnings reports have been surprisingly robust.

If all goes to plan, markets end what has been a turnaround week with a U.S. jobs report that underpins the optimism around peak global rates.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, April 27, 2023. REUTERS/Staff

World stocks are up 4.2% for the week so far, their largest weekly rise since November 2022. The S&P 500 chalked up its best day in six months, also boosted by strong corporate earnings and guidance – Apple reported forecast-beating quarterly sales and profit, although shares fell slightly in after hours trade.

The premise is that the Federal Reserve, Bank of England, European Central Bank and other central banks are done raising rates.

If the Fed delivered a ‘dovish’ pause on Wednesday, the BoE delivered a ‘hawkish’ pause on Thursday. But the over-arching reaction across markets was the same – huge rallies in bonds, stocks and risk assets. Ten-year gilts had their sharpest rally in more than a month.

The three main Wall Street indexes are well on course to register their strongest week of the year, all eyeing weekly gains of around 5%. 

Investors are now looking to when the easing cycles start and how far they go. Around 70 to 75 basis points of Fed easing next year is priced into the U.S. curve, and almost 50 bps of expected rate cuts is reflected in the UK curve.

The U.S. 10-year yield is down around 40 basis points from its peak above 5% only a few days ago and the dollar is slipping. That’s music to emerging market ears.

Markets are now pricing in a less than 20% chance of a Fed rate rise in December compared with 39% a month earlier, CME FedWatch tool showed. Yet, some tensions remain after the resilience in factory orders data elevated 2-year yields even as Treasury borrowing plans and Fed Chair Jerome Powell’s inflation views bumped up 10-year notes.

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