The dollar steadied on Friday following a string of declines, but remained on course for its worst week since November after lower than expected US inflation caused traders to rein in their bets on further interest rate rises from the Federal Reserve.
European stocks dipped on Friday following muted gains in Asia, as traders looked ahead to a blockbuster day of US bank earnings that will reveal the extent to which lenders have benefited from rising rates.
Europe’s region-wide Stoxx 600 fell 0.1 per cent in early trading, having risen for five consecutive sessions, its best streak since mid-April. France’s Cac 40 added 0.2 per cent, Germany’s Dax fell 0.1 per cent and London’s FTSE 100 swung between gains and losses.
Asian markets were mixed after US economic data showed further signs of cooling inflation, with producer and consumer prices having fallen more than expected in June. South Korea’s Kospi advanced 1.7 per cent, Hong Kong’s Hang Seng index rose 0.2 per cent and China’s CSI 300 was flat. Japan’s Topix fell 0.2 per cent.
Equity markets have been boosted over the past week by smaller than expected increases in US inflation that analysts say are likely to ease pressure on the Fed to keep raising interest rates.
That trend has weighed on the dollar, however, with an index tracking the currency against a basket of six peers having slumped 2.5 per cent over the past five sessions, its worst run since it fell 4.1 per cent in a week in November. The index was steady early on Friday.
“Dollar long positions are evaporating rapidly, with [producer price] numbers all but confirming the disinflationary narrative in the US,” said Francesco Pesole, currency analyst at ING.
June’s inflation figures “reinforced our view that recent dollar weakness will persist,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. Sterling, the yen and the Swiss franc all stand to benefit, as does gold, which tends to rise in price as the dollar declines, Haefele added.
Investors will on Friday turn their attention to US lenders Citigroup, JPMorgan and Wells Fargo, whose second-quarter results come at a time of heightened scrutiny of lenders’ balance sheets following the collapse of three regional banks in the spring.
Banks are expected to report the biggest jump in loan losses since the onset of the coronavirus pandemic, as rising interest rates pile pressure on borrowers. Tighter monetary policy is likely to have simultaneously boosted banks’ returns from investment and lending.
Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 both fell less than 0.1 per cent ahead of the New York open. Both indices have risen steadily since the start of the year despite rising rates, stoking concerns of a potential sell-off if and when the economy sinks into recession.
“We’re due for a pullback but there’s an upside fever out there so we may not see it for a while,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “It’s going to take some really spectacular news or data to keep this upside momentum going. I personally don’t think earnings season can do it.”