European and Asian shares rose on Thursday, the dollar held near a seven-week peak against a basket of major currencies and Wall Street stock futures are hinting at a steady open after the S&P 500 index gained about 1.2% on Wednesday.
But while a debt ceiling reprieve could boost markets in coming days, the backdrop of a lackluster global economy is unchanged, with its twin engines, China and the United States, sputtering.
A dose of growth from China would help long-term risk appetite, but predictions of the world’s second largest economy leaping out of the straitjacket of COVID-19 restrictions are proving wide of the mark.
The Chinese renminbi has crossed 7 per dollar, down 1.4% this year, following underwhelming industrial production and retail sales reports and slowing home price gains, all despite property stimulus policies and the release of pent-up demand.
Citi’s China economic surprise index is at its lowest since January, a further sign that the growth outlook has weakened.
U.S. corporate earnings meanwhile are painting a grim picture of consumer caution as the lagged effect of interest rate hikes meets above-target inflation.
Big box retailer Target on Wednesday signaled a bleak second quarter as customers steer away from spending on non-essential electronics and home goods because of high prices, a day after Home Depot cut annual sales estimates.
Walmart, which may be on a stronger footing because of its focus on low-price basics, posts its own update later in the day.
The S&P 500 is trading at a rich 18 times forecast earnings, buoyed by the tech mega-stocks that dominate the index. Apple’s market capitalization exceeds that of the small-cap Russell 2000 index, and the tech-heavy Nasdaq 100 is up 24% this year.
Tech has boomed on predictions the U.S. Federal Reserve will start cutting rates from July, increasing appetite for rate-sensitive growth companies whose valuations are flattered when money gets cheaper. Further out-performance depends on markets being right about the Fed’s willingness to notch interest rates lower from July.
A plethora of Fed speakers argued this week, however, for keeping monetary policy tight while inflation remains high.
