Most major markets staged a minor relief rally, as investors continued to ponder the inflation and interest rate conundrum.
In the US, technology stocks posted gains despite further rises in bond yields, with the current AI poster child NVIDIA Corp (NASDAQ:NVDA) adding over 8% ahead of its earnings release tomorrow. The stock has risen by 228% this year after its last quarterly report ignited a surge in optimism for the semiconductor sector, with investors scrambling to put some figures on the monetary value of likely future demand. Although the bar has now been set significantly higher for the company to be able to surprise, excitement around the stock was enough to help propel tech stocks in general, with strong gains from the likes of Tesla Inc (NASDAQ:TSLA) and Meta Platforms Inc Class A (NASDAQ:META).
This in turn positively impacted the S&P500 given its large exposure to tech stocks, while the Nasdaq was the star performer as the more traditional Dow Jones index stalled. In the year to date, gains of 15% for the S&P 500 and 29% for the Nasdaq compare with a rise of 4% for the Dow, even though the general spectre of higher interest rates for longer continues to loom large.
US Treasury yields have risen to multi-year highs, with the search for both returns and shelter from inflation near the top of the investment agenda. Comments at the imminent Jackson Hole symposium from Federal Reserve chair Jerome Powell are likely to be the next acid test for markets, with particular scrutiny likely to land on any outlook comments. The battle against inflation, as evidenced by the recent consumer prices index, is not yet over, with the level still above the Fed’s 2% target.
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Further monetary tightening, or even a significant time of rates at these levels could begin to impact on demand, as well as the higher costs of borrowing for both consumers and companies. However, to date there has been little sign of such an impact on a resilient US economy, which could lead the Fed to consider that it may have more firepower in its arsenal to dampen inflation without tipping the country into a feared recession.
Asian markets also staged a small recovery, with the embattled China market attempting to make some progress after a further round of easing from its central bank, even of the scale of this measure disappointed many who consider that a more aggressive approach is required to underpin an increasingly ailing recovery and a dangerously brittle property sector. Meanwhile, Japan’s Nikkei edged up slightly after a recently weak run, although the index remains comfortably ahead in the year so far. The weakness of the yen has provided a boon for exporters, while the general upgrading of valuations and the return of some inflation has been positive for the index as a whole.
The tentative optimism also washed on to UK shores, where the main indices made some small progress in early trade. For the premier index, there was some relief provided by a cautious return to mining stocks following the small Chinese bounce, while the US tech effect pushed RS Group (LSE:RS1) to the top of the leader board.
Even so, progress was measured rather than unabated as the scale of the challenges to come remain in the sights of investors. In the UK, and despite the relatively positive open, any progress made over the past months has been wiped out, with the FTSE 100 and the FTSE 250 now showing declines of 2.3% and 4.5% respectively in the year to date.
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