LONDON: Global stocks traded around record highs on Friday, set for a third weekly gain after benign inflation data dented expectations for a U.S. rate hike next month, although faltering talks to end the Iran war sent oil prices higher. Oil and gas prices were still set for sizeable weekly gains, as the impasse over a peace deal continued and the U.S. threatened to ramp up economic pressure on Iran, including extending a naval blockade.
Yet investors are showing no signs of alarm. Short-dated bond yields have risen this week, but only modestly, while several market-based measures of inflation expectations have continued to trend lower. And gold, which suffers in an environment of rising rates, has touched two-month highs.
Instead, the focus remains on the broad AI theme in the wake of strong earnings that have helped soothe investor worries about massive AI spending.
GEOPOLITICAL UNCERTAINTY REMAINS
The MSCI All-World index, which is up for a third straight week, traded just below record highs, while in Europe, the STOXX 600 gauge was a touch lower on the day, as losses in the tech sector were broadly offset by gains in capital-intensive shares such as defence and automakers.
"The markets round out the week on a positive note, with relatively thin event risk on the economic and corporate calendar. But of course, it’s a Friday, and the typical pattern has been for geopolitical risks, or at least bombastic rhetoric, to pick up between the U.S. and Iran going into the weekend," Capital.com strategist Kyle Rodda said.
"Currently, the geopolitical uncertainty remains the only major macro roadblock to a market experiencing strong tailwinds from earnings and the monetary policy outlook." Brent crude futures steadied around $87 a barrel, heading for a 6% weekly gain, while European natural gas futures were set for a 10% gain and U.S. gas futures, for a 3.2% rise.
Meanwhile, the VIX volatility index, which many view as the market's "fear index", was set for a fourth weekly fall, the longest such stretch since May 2025, in a reflection of the diminishing level of worry among equity investors, while a measure of bond market volatility headed for a second weekly drop.
John Sidawi, senior portfolio manager for fixed income at Federated Hermes, said a puzzling feature of markets in recent months has been the growing disconnect between geopolitical uncertainty and asset price volatility.
"For now, markets appear willing to tolerate a significant amount of uncertainty without demanding higher risk premiums. However, this equilibrium is unlikely to be permanent," Sidawi said.
"A meaningful escalation in conflict or a clear path toward resolution could finally force investors off the sidelines, potentially triggering a much larger volatility response than current market pricing implies."
YEN STUCK IN INTERVENTION LOOP
In currencies, the yen strengthened, leaving the dollar down 0.2% at 159.13, after a Reuters report that the Bank of Japan could raise rates as soon as September, according to three sources familiar with policymakers' thinking. However, it is still within sight of the 160 level that traders think could trigger another bout of yen buying from Tokyo, after a joint intervention with the U.S. last month failed to support the Japanese currency.
Padhraic Garvey, head of global rates and debt strategy at ING, said the yen's weakness comes from "an uber-cautious Bank of Japan and a policy rate that remains too low".
"This tension can be eased through rate hikes, and the sooner, the better," said Garvey. "While that could be construed as negative for the economy, it's also a choice. Prioritise the protection of the yen, or not?" In commodities, gold was up 0.1% at $4,352 an ounce, but is still set for its biggest monthly gain since February as central banks and investors alike have poured cash into the market as expectations for the Fed to raise rates aggressively have faded. - Reuters
