Stocks rally as euro gains on likely rate hikes

US and European stocks rallied on Monday, with the S&P 500 (.SPX) for the moment moving away from a bear market, while the euro leapt after the European Central Bank said it was likely to lift its deposit rate out of negative territory by September.

Oil prices slid and gold extended recent gains, but the dollar fell further as investors cut their bets on more greenback advances based on market expectations for rising yields as the Federal Reserve tightens money supply.

The MSCI all-country world index (.MIWD00000PUS) gained 1.54 per cent, but is still down about 17 per cent from its record high in January. The pan-European STOXX 600 index (.STOXX) rose 1.26 per cent, with the major British (.FTSE), French (.FCHI), German (.GDAXI) and Spanish (.IBEX) indices rising more than 1 per cent each.

Stocks on Wall Street also gained more than 1 per cent, though the Nasdaq Composite (.IXIC) initially lagged after briefly trading in the red.

The Dow Jones Industrial Average (.DJI) rose 1.98 per cent, the S&P 500 (.SPX) advanced 1.86 per cent and the Nasdaq Composite (.IXIC) added 1.59 per cent in choppy trade. Growth stocks rose 1.98 per cent, outpacing a 1.74 per cent gain in value stocks (.IVX).

The rally lifted all 11 S&P 500 sectors and put the benchmark on track for its first week of gains after seven consecutive weekly losses on fears of a looming slowdown, yet many analysts say the equities downturn is not over.

Stock investors are under the illusion that the Fed will rescue the market from further decline by easing monetary policy, or what has become known as the Fed “put,” said Steven Ricchiuto, US chief economist at Mizuho Securities.

“It’s going to be a very, very sluggish growth environment and the Fed’s not going stand in the way of it,” Ricchiuto added. “You’re seeing the bond market go down in yield. That’s been saying to the equity market that the put isn’t there and therefore the equity market needs to adjust as well.”

The yield on 10-year Treasury notes rose 7.7 basis points to 2.864 per cent after a more than 40-basis-point decline from a multi-year high of 3.203 per cent set two weeks ago.

Others also see the equity market in difficulty.

Given that a majority of S&P 500 constituents have already fallen by more than 20 per cent from 52-week highs, it is safe to assume the bears are firmly in control of the market, said Anthony Saglimbene, Ameriprise’s global market strategist, in a note.

BlackRock Investment Institute cut its ratings of developed market equities to “neutral” from “overweight,” citing the Fed’s potentially overzealous efforts to curb inflation and signs of an economic slowdown in China.

The focus in Europe was on ECB President Christine Lagarde, who accelerated an already sharp policy turnaround from all but ruling out interest rate hikes to now penciling in several in the face of record-high euro zone inflation.

The prospect of higher rates lifted the euro 1.24 per cent to $1.0691. The single currency has risen about 3.3 per cent since hitting a multi-year low 10 days ago.

“The doves are throwing in the towel,” said Holger Schmieding of Berenberg bank, adding that he expects ECB rate hikes of 25 basis points in July, September and December.

A survey from the Ifo Institute showed that German business morale unexpectedly rose in May, helping to calm investors for the moment.

“I don’t think we have reached rock bottom yet, it’s a bear market rally. The market is still pretty concerned about sticky inflation,” said Michael Hewson, chief markets analyst at CMC Markets.

The World Economic Forum holds its first in-person meeting in two years in Davos, Switzerland over the next four days, with central bankers and the International Monetary Fund taking part in panels on the outlook for economies and inflation.

PEAK DOLLAR?

The dollar index , which tracks the greenback against a basket of other major currencies, slid 0.855 per cent. The index rose about 16 per cent to a two-decade high over the 12 months to mid-May.

Asian stocks fell overnight as investors worried inflation and rising rates would hamper the global economy’s performance.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was slightly weaker.

Oil prices were little changed as worries over a possible recession offset an outlook for higher fuel demand with the upcoming US summer driving season and Shanghai’s plans to reopen after a two-month coronavirus lockdown.

US crude futures settled up 1 cent at $110.29 a barrel and Brent rose 87 cents to settle at $113.42.

Gold prices climbed as weakness in the dollar and economic growth concerns lifted the metal, though non-yielding bullion pared some gains after Treasury yields rose.

US gold futures settled up 0.3 per cent at $1,847.80 an ounce.

Bitcoin fell 3.55 per cent to $29,189.85.