Global stock markets experienced a notable upswing as investor confidence returned, largely fueled by easing trade tensions between the United States and China. The rebound in sentiment also coincided with a decline in gold prices, which fell after reaching record highs earlier this week.
In Asia, the Japanese stock market reacted positively to the near-certainty of Sanae Takaichi becoming the next prime minister, briefly propelling Tokyo’s Nikkei index to a record peak. The market’s surge was also influenced by comments from US President Donald Trump, who expressed optimism about reaching a fair trade agreement with Chinese President Xi Jinping during their upcoming meeting in South Korea.
Investor anxiety had intensified last week due to a series of bad loans at US regional banks, which raised concerns about credit risks that could impact broader markets. Additionally, the prolonged US government shutdown weighed heavily on investor sentiment. However, these worries began to ease, prompting a wave of buying activity as investors looked to capitalize on potential gains ahead of impending earnings reports from major companies.
“The market has hurdled the wall of worry with ease, with new capital injected into risk and fresh oxygen into the market’s lungs,” stated Chris Weston, head of research at Pepperstone. This renewed confidence was further bolstered by a deal between Australia and the United States for the supply of rare earth materials.
Despite the positive market movements, Philip Lane, chief economist at 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 create significant challenges. Lane highlighted the turmoil in April, when the dollar and safe-haven US Treasuries experienced sharp sell-offs, complicating eurozone banks’ reliance on their dollar-denominated liquid assets.
Economist Chris Scicluna from Daiwa Capital Markets remarked that Lane’s comments reflect growing investor concerns about risks accumulating within the US financial sector. He pointed out that if a sudden downturn occurs in the US, it could have serious repercussions for European banks. “One of the big focuses has been on the private credit strains recently in the regional banks,” Scicluna explained.
The ECB is anticipated to maintain its current interest rates during its upcoming meeting, contrasting with the Federal Reserve, which is projected to implement multiple rate cuts in the near future. The likelihood of these cuts, alongside remarks from White House economic adviser Kevin Hassett that the federal government shutdown may conclude this week, encouraged investors to return to equities.
In the United States, a broad rally resulted in all three major stock indexes closing sharply higher, with semiconductor stocks achieving record highs. In Europe, the STOXX 600 index increased by 0.1 percent, remaining close to its record highs, while US stock futures dipped slightly by 0.1 percent.
Analysts are currently predicting third-quarter earnings growth for the S&P 500 of approximately 9.3 percent year-on-year, an improvement from the earlier estimate of 8.8 percent as of October 1, 2023.
In currency markets, the US dollar strengthened by 0.7 percent against the yen, reaching 151.83. As Takaichi is expected to adopt a pro-stimulus approach, her potential premiership may negatively impact the Japanese currency and bonds but could provide a boost for equities. The Nikkei index has already approached a significant milestone of 50,000 points.
Next week, the Bank of Japan will hold its meeting, with traders currently assigning a 20 percent chance to an interest rate hike, although Governor Kazuo Ueda has provided few hints regarding the timing of any potential increases.
Gold prices fell by 2 percent to settle at $4,262 an ounce, retreating from Monday’s record high of $4,381.21 an ounce. The decline in gold reflects shifting investor preferences as confidence in equities rises.
