Global Markets React to Stimulus Hopes and Strong Earnings, US Stocks and Gold Prices Show Mixed Sentiments | Daily Market Analysis

Key events:  

• USA - Building Permits
• USA - New Home Sales (Jun)
• USA - Crude Oil Inventories
• USA - FOMC Statement            
• USA - Fed Interest Rate Decision
• USA - FOMC Press Conference 

European markets have had a cautiously optimistic start to the week, with hopes of additional stimulus measures from Chinese authorities following recent poor economic data. As a result, the FTSE 100 experienced a significant boost, reaching a two-month high yesterday.

The improved sentiment has also been supported by a retreat in short-term yields, driven by the belief that central banks may not need to implement aggressive rate hikes as previously anticipated a few weeks ago. Notably, both German and UK 2-year yields have declined sharply from their highs this month, partly due to inflation showing signs of slowing down more rapidly than initially projected.

US stocks are experiencing moderate gains on Tuesday as investors react positively to a better-than-expected Consumer Confidence survey and a series of earnings reports that have surpassed expectations.

Several factors have contributed to the current Wall Street rally. The strong US consumer confidence, growing belief in an economic 'soft landing,' and increased optimism surrounding Artificial Intelligence initiatives have all played a role. Additionally, better-than-anticipated earnings results from major tech companies have added to the positive sentiment.

This week marks the first of the two busiest weeks of the earnings season, with nearly 800 US companies, including over 150 in the S&P 500 Index, reporting their earnings. The stock performance today is being driven by these earnings results, and the initial reactions to the numbers from companies like Microsoft and Alphabet suggest that optimism is justified, particularly in light of the resilient US economy and the Federal Reserve appearing to be nearing the end of its rate-hiking cycle.

Today's expected 25bps rate hike by the Fed, following last month's pause, is likely to be the final rate increase this year, despite any attempts by Fed policymakers to make a case for additional hikes. Recent trends around US inflation, including the likelihood of Producer Price Index (PPI) going negative in July, may hinder the Fed's efforts to justify further rate hikes.

Federal Reserve Chairman Jerome Powell might advocate for more rate hikes, but the prevailing market sentiment favors the idea of rates remaining higher for an extended period. The focus will be on projecting when the Fed expects to meet its 2% inflation target. Despite headline CPI sitting at 3%, core prices remain elevated, and it is this aspect that will likely draw both the Fed's and the market's attention.

If headline CPI continues to decline as it has been, the Fed will face challenges convincing the markets to support further rate hikes under such economic conditions.

On Wednesday, gold prices remained within a narrow range ahead of the Federal Reserve's meeting later in the day. Bullion prices have experienced fluctuations this week due to uncertainty surrounding the Fed meeting. While it is widely anticipated that the central bank will raise interest rates by 25 basis points (bps) during the meeting, there is caution among markets regarding any indications of further rate hikes for the rest of the year.

Gold had seen a robust recovery over the past month, driven by weak US economic data, particularly inflation figures, which led to speculations that the Fed's ability to continue raising interest rates would be limited. However, this rebound stalled in recent sessions as uncertainties grew in anticipation of the Fed meeting's outcome.

Aside from the Fed meeting, the European Central Bank (ECB) and the Bank of Japan (BOJ) are also expected to make decisions on their respective interest rates later this week. The ECB is likely to hike rates by 25 bps on Thursday, while the BOJ is expected to maintain its ultra-dovish stance on Friday.

Amidst these developments, the euro and pound have remained at moderately weaker levels against the US dollar, having declined further following the release of weaker-than-expected PMI surveys from Europe.

Market sentiment currently indicates that the Fed is expected to implement a single rate hike and then pause, while the ECB may have further rate adjustments to make. Any shifts in either or both of these views could have a significant impact on the value of the euro in the currency markets.