Stocks Surge as Economic Fears Ease: S&P 500 Extends Rally, Global Currencies Gain Amid Positive Data | Daily Market Analysis

Key events:

• UK - Core Retail Sales (MoM) (Jul)
• USA - Building Permits (Jul)
• USA - Michigan Consumer Sentiment
• USA -Housing Starts (Jul)

The S&P 500 extended its winning streak to six sessions on Thursday, as concerns over a potential economic slowdown eased after stronger-than-expected labor market and retail sales reports.

The Dow Jones Industrial Average climbed by 555 points, or 1.4%, the S&P 500 increased by 1.6%, and the NASDAQ Composite saw a 2.3% rise. 

Walmart (NYSE: WMT) shares surged nearly 7% after the retail giant exceeded analyst expectations in its second-quarter earnings report, fueled by strong e-commerce growth and improved profit margins. As a major indicator of retail demand, Walmart's performance reassured investors.

Earlier in the week, competitor Home Depot (NYSE: HD)  saw its stock rise by 1%, despite forecasting a weaker annual profit and reporting a larger-than-expected drop in annual comparable sales.

Cisco Systems (NASDAQ: CSCO)  gained more than 5% following its better-than-expected fourth-quarter earnings and the announcement of a new restructuring plan.

The Japanese Yen regained strength against the US Dollar on Friday, likely boosted by Japan’s second-quarter GDP growth. This economic improvement supports the possibility of a near-term interest rate hike by the Bank of Japan.

Despite this, the Yen could face headwinds due to political uncertainty in Japan following reports that Prime Minister Fumio Kishida may step down as party leader in September, effectively ending his tenure as prime minister.

Meanwhile, the Australian Dollar extended its rally for the second consecutive day against the USD. Hawkish comments from Reserve Bank of Australia Governor Michele Bullock fueled the Aussie Dollar’s gains, supporting the AUD/USD pair. Bullock emphasized that the RBA remains vigilant about upside inflation risks and does not foresee rate cuts in the near future. According to ABC News, the RBA board is confident that it has achieved a balanced approach to managing inflation while ensuring economic stability.

The British Pound also continued its upward trajectory, with the GBP/USD pair trading around 1.2870 during Asian market hours on Friday. The improved risk sentiment, bolstered by stronger-than-expected US Retail Sales data, alleviated fears of a US recession and benefited risk-sensitive currencies like the Pound. In addition, the UK economy showed resilience with a 0.6% quarter-on-quarter growth in the second quarter, meeting expectations. On an annual basis, the UK GDP rose 0.9% in Q2, slightly exceeding Q1's 0.3% growth.

Traders are now focused on upcoming UK Retail Sales data, with expectations of a month-on-month rebound of 0.5% in July, following a 1.2% drop in the previous month. Annual growth is also projected to rise by 1.4%, reversing a 0.2% decline.

In the US, the Dollar weakened as markets priced in a likely 25 basis point interest rate cut by the Federal Reserve in September, although there remains a 26% chance of a more aggressive 50 basis point cut according to the CME FedWatch tool. Despite this, the Greenback received a boost from Thursday's positive economic reports. The US Census Bureau revealed that Retail Sales surged by 1.0% in July, far surpassing the forecasted 0.3% increase, following a 0.2% decline in June. Initial Jobless Claims for the week ending August 9 also came in at 227,000, below the expected 235,000 and down from the previous week's 234,000.

The New Zealand Dollar rebounded on Friday, breaking a two-day losing streak as the USD softened. However, gains for the Kiwi may be capped due to the dovish outlook of the Reserve Bank of New Zealand after its unexpected rate cut on Wednesday. Additionally, geopolitical tensions in the Middle East could weigh on risk-sensitive currencies like the NZD.

Gold prices struggled to maintain momentum from the previous day's gains, slipping slightly during Friday's Asian session. However, the downside risk for the precious metal appears limited. A global risk-on sentiment, reflected by the generally upbeat tone in global equity markets, pressured gold, a traditional safe haven. Still, concerns over a possible escalation in Middle East tensions and expectations for an upcoming rate cut from the Federal Reserve are likely to prevent a significant drop in gold prices.

Additionally, expectations of a dovish Fed contributed to a modest decline in US Treasury bond yields, which in turn failed to boost the US Dollar, despite Thursday’s strong US macroeconomic data. This, combined with gold’s non-yielding nature, should continue to provide support for the metal. Overall, XAU/USD is on course for modest weekly gains, with traders eyeing upcoming US economic data, including Building Starts, Housing Permits, and the Preliminary Michigan Consumer Sentiment Index, for potential short-term market opportunities.