Global stock markets experienced a notable uptick as investor confidence strengthened, buoyed by easing trade tensions between the United States and China. The rise in equities also coincided with a decline in gold prices, reflecting shifting investor preferences. In Asia, the potential ascent of Sanae Takaichi to Japan’s prime ministership propelled Tokyo’s Nikkei to reach record highs, while the Japanese yen faced downward pressure.
In a forthcoming meeting, US President Donald Trump expressed optimism about finalizing a fair trade agreement with Chinese President Xi Jinping. Trump downplayed the risk of conflicts regarding Taiwan, which further solidified investor sentiment. The announcement of a deal between Australia and the United States concerning the supply of rare earth materials also contributed to a positive market atmosphere.
Last week, investor confidence had been shaken by concerns over credit risks stemming from a surge in bad loans at US regional banks. This uncertainty, combined with the prolonged US government shutdown, weighed heavily on risk assets. Nevertheless, as these worries began to recede, investors capitalized on lower prices ahead of anticipated earnings reports from several major firms.
Chris Weston, head of research at Pepperstone, remarked, “The market has hurdled the wall of worry with ease, with new capital injected into risk and fresh oxygen into the market’s lungs.” This renewed vigor in the market was evident as all three major US stock indexes closed sharply higher, with technology stocks achieving record highs.
Warnings from European Central Bank and Market Reactions
Despite the positive outlook, caution remains among European investors. Philip Lane, chief economist of the European Central Bank (ECB), issued a warning regarding potential pressures on eurozone banks. He noted that a scenario in which dollar funding becomes scarce could pose significant challenges for these institutions. Lane highlighted concerns regarding substantial USD-denominated off-balance sheet exposures and the volatility of funding, referencing the extreme market turmoil in April that complicated eurozone banks’ reliance on dollar-denominated liquid assets.
Economist Chris Scicluna from Daiwa Capital Markets pointed out that Lane’s comments underscore growing investor anxiety about risks accumulating within the US financial sector. As capital flows into sectors like artificial intelligence and credit, a downturn could have ripple effects on European banks. Scicluna noted, “If there’s a sudden pullback in the US financial sector, it will have a significant impact on European banks and others.”
The ECB is set to convene next week, where no immediate rate cuts are anticipated. In contrast, the Federal Reserve may implement as many as three rate cuts within the next six months, as suggested by market expectations. The prospect of US rate reductions, alongside comments from White House economic adviser Kevin Hassett indicating a likely conclusion to the federal government shutdown this week, encouraged renewed investment in equities.
In Europe, the STOXX 600 index rose by 0.1 percent, trading just below its record highs, while US stock futures experienced a slight decline of 0.1 percent. Analysts predict an aggregate earnings growth of 9.3 percent year-on-year for the third quarter of the S&P 500, an improvement from the previous estimate of 8.8 percent.
In currency markets, the US dollar gained 0.7 percent against the yen, reaching 151.83. Takaichi’s anticipated pro-stimulus policies are expected to hinder further interest rate hikes, which may negatively impact the yen and bonds but benefit equities. The Nikkei’s record peak approached a significant milestone of 50,000 points as traders await the Bank of Japan’s meeting next week, with a 20 percent chance of a rate hike being considered.
Gold prices experienced a two percent drop, settling at $4,262 per ounce, just below Monday’s record high of $4,381.21 per ounce. The fluctuations in metal prices reflect the broader shifts in investor sentiment as the market adapts to the evolving economic landscape.
