Global stocks gain on cooler US inflation despite Hormuz oil spike
A sharp slowdown in US inflation boosted global equities and weakened the dollar, though escalating US-Iran military strikes threaten to push oil prices higher and undermine future rate relief.
Global equities advanced on Tuesday as a cooler-than-anticipated US inflation print tempered expectations for Federal Reserve tightening. MSCI's global index rose 0.42 per cent to 1,121.57, driven by strong financial sector earnings that helped investors look past rising geopolitical tensions in the Middle East.
The US Consumer Price Index rose 3.5 per cent year-over-year in June, down sharply from 4.2 per cent in May, and fell 0.4 per cent on a monthly basis. The data pushed the two-year Treasury yield, which tracks near-term rate expectations, down 6.75 basis points to 4.196 per cent, while the dollar index dropped 0.33 per cent to 100.94.
Federal Reserve Chair Kevin Warsh used his first semi-annual monetary policy report to Congress to reaffirm the central bank's 2 per cent inflation target. He emphasized that his commitment to the employment mandate remained equal to his focus on price stability.
While rate fears eased, supply concerns pushed crude higher. Brent crude settled up 1.7 per cent at $84.73 a barrel and US crude rose 1.5 per cent to $79.34, adding to a 9 per cent surge on Monday. The gains followed three successive nights of US strikes on Iranian targets and Iranian ballistic missile attacks on a US air base in Jordan.
President Donald Trump stepped back from a proposed 20 per cent transit fee on the Strait of Hormuz in favor of pursuing investment deals with Gulf states. However, Iran's Deputy Foreign Minister Kazem Gharibabadi warned that the strait was a matter of national security, stating Iran would exercise sovereignty "whatever the cost."
Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, noted the conflict remains a heavy liability for equities. "Right now the market is discounting this issue but it's lingering. It's dampening market strength from the very strong results we saw from financial companies," Ghriskey said. "The favorable CPI number we see could be very different next month given what we're seeing in the oil market."
The technology sector faced its own distinct pressures, with IBM plummeting 25 per cent to become the largest drag on the S&P 500. IBM warned of a significant second-quarter earnings hit as it struggles with a corporate spending shift away from software and toward data-center infrastructure.
On the major US indexes, the S&P 500 rose 0.38 per cent to 7,543.59, the Nasdaq Composite added 0.90 per cent to 26,107.01, and the Dow Jones Industrial Average edged up 0.02 per cent to 52,508.27. In Europe, the STOXX 600 closed up 0.17 per cent after recovering from an intraday drop of 0.9 per cent triggered before the US inflation data released.
Peter Cardillo, chief market economist at Spartan Capital Securities, said the US price data "should relieve some worries in the bond market." The benchmark 10-year yield fell 2.06 basis points to 4.589 per cent, while spot gold rose 1.29 per cent to $4,051.79 an ounce.
