By Herbert Lash
NEW YORK (Reuters) – Global stocks rose and the dollar strengthened on Wednesday after a surprising cooling of British inflation bolstered the risk-off sentiment across markets that anticipate the Federal Reserve next week will hike interest rates for the last time.
The dollar bounced after sentiment was boosted by inflation in the United Kingdom falling more than expected in June to its slowest pace in more than a year at 7.9%. The reading sent the pound sharply lower against other major currencies.
The dollar index rose 0.378% and the euro fell 0.3% to $1.1192.
Gold prices hovered near an eight-week peak hit on Tuesday and oil prices gained more than 1% on expectations that the Fed will have finished its most aggressive rate-hiking in more than four decades when it concludes a two-day meeting on July 26.
Stocks on Wall Street mostly rose as investors looked past poor second-quarter earnings from Goldman Sachs to take comfort in strong profits from smaller players in the banking sector.
Citizens Financial and M&T Bank beat Wall Street estimates for second-quarter profit, benefiting from the Fed’s rapid rate hikes. The KBW bank index rose 2.73%, its third straight day of gains.
“Clearly the market is looking through the Fed meeting,” said Rhys Williams, chief strategist at Spouting Rock Asset Management in Bryn Mawr, Pennsylvania.
“In the short term, we’re in this Goldilocks scenario where good news is good news and bad news is good news,” said Williams, adding that if the Fed were to indicate next week that more rates might be in store, it would upend the recent rally.
The pan-European STOXX 600 index rose 0.26% and MSCI’s gauge of stocks across the globe gained 0.13%.
On Wall Street, the Dow Jones Industrial Average rose 0.4%, the S&P 500 gained 0.24% and the Nasdaq Composite dropped 0.04%.
With U.S. stocks on a seemingly relentless climb – the Dow is on track to post its eighth straight session of gains – investors are concerned about the outlook for earnings and valuations.
“Analysts’ expectations for earnings are going down. That’s the biggest discrepancy in this rosy picture,” said Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co in Conshohocken, Pennsylvania.
“You’re not seeing the robustness in prices being confirmed by forward expectations and that’s the biggest, disconcerting fly in the ointment, if you will,” Conger said.
Treasury yields slid at the long end of the yield curve as investors bet that the Fed is near the end of its rate-hiking cycle.
The yield on benchmark 10-year Treasury notes fell 2.5 basis points to 3.764%. Fed funds futures are pricing the Fed’s overnight lending rate to be 4.5% a year from now, down from a peak of 5.4% in November.
The two-year Treasury yield, which typically moves in step with interest rate expectations, rose 1.5 basis points at 4.768%.
Eurozone bond yields fell after the British inflation data added to signs that price pressures are easing globally. Germany’s 10-year bond yield eased 0.4 basis points at 2.393%.
Oil prices gained, buoyed by tighter U.S. crude supplies, China’s pledge to reinvigorate its economic growth and expectations that the Fed will stop raising interest rates soon.
U.S. crude recently rose 0.36% to $76.02 per barrel and Brent was at $79.96, up 0.41% on the day.
Spot gold fell 0.08% to $1,977.04 an ounce.