Markets find their footing as rate fears ease

Markets are ending the week with a more constructive tone as concerns over aggressive monetary tightening have eased, allowing investors to refocus on economic growth and corporate fundamentals. Softer-than-expected US labour market data has tempered expectations for further Federal Reserve rate hikes, while comments from central bankers at the ECB Forum in Sintra reinforced a data-dependent approach rather than signalling a predetermined policy path. Although inflation remains above target, investors increasingly believe policymakers have greater flexibility than they did just a few weeks ago, particularly as energy prices continue to moderate.

US equities are attempting to stabilise after a volatile fortnight. Last week's technology-led weakness has faded, with investors encouraged by signs that the labour market may be cooling without deteriorating sharply. The softer jobs data has reduced some upward pressure on Treasury yields and eased concerns that the Fed would need to tighten policy again in the near term. While the AI and earnings narrative remains the primary long-term driver of Wall Street, the market now appears to be transitioning into a more balanced phase, where macroeconomic data once again plays a greater role in shaping sentiment.

STOXX 600 daily chart

Past performance is not a reliable indicator of future results.

European equities continue to outperform. The STOXX 600 has extended its recovery to fresh record highs, benefiting from lower energy prices and the fading geopolitical risk premium following the US-Iran ceasefire. Europe stands to gain more than many other regions from cheaper energy given its dependence on imports, while the ECB's message at Sintra suggested policymakers remain committed to fighting inflation without signalling an increasingly aggressive tightening cycle. That combination has provided a supportive backdrop for European risk assets.

Currency markets have also adjusted. The US dollar has eased from its recent 13-month highs as the softer employment data prompted investors to trim expectations of further Fed tightening. While Kevin Warsh reiterated at Sintra that the Federal Reserve remains fully committed to its 2% inflation target, his continued refusal to provide explicit forward guidance means markets remain highly data dependent. The longer-term outlook still favours the dollar if US inflation proves persistent, but near-term momentum has softened as rate expectations have become less hawkish.

Gold (XAU/USD) daily chart

Past performance is not a reliable indicator of future results.

In commodities, both gold and oil are showing signs of stabilisation. Gold has rebounded from recent lows as lower Treasury yields and a softer dollar reduce some of the pressure on the non-yielding metal, although it continues to face headwinds from the prospect of restrictive monetary policy. Oil, meanwhile, has found support around the $70 level in Brent after a sharp decline over recent weeks. Markets continue to price a normalisation of Middle East tensions, but with strategic inventories likely to require replenishment and uncertainty around longer-term negotiations still lingering, traders appear reluctant to push crude significantly lower. Together, these moves suggest markets are ending the week with a more balanced outlook—less driven by geopolitical headlines and increasingly focused on the interaction between growth, inflation and central-bank policy.