Global stock markets rally to end week higher as investors price in rate increases

Many have become more optimistic about the fight against soaring inflation as economists lower their forecasts

Wall Street has extended its positive run, after earlier stumbles, as investors come to terms with the inevitability of more interest rate increases. AFP

Global stock markets rallied on Friday, with investors largely pricing in more central bank interest rate increases aimed at taming surging inflation.

Wall Street extended its positive run for equities after earlier stumbles as investors come to terms with the inevitability of more rate increases.

The S&P 500 finished up 1.5 per cent and 3.6 per cent for the week, snapping a three-week losing run. The Dow Jones Industrial Average gained 1.2 per cent while the technology-heavy Nasdaq Composite Index jumped 2.1 per cent.

Many investors had viewed US stocks as oversold, after recent declines, with US Federal Reserve policies favouring aggressive policy tightening no longer generating fear.

Fed governor Christopher Waller on Friday was the latest to reaffirm the hawkish stance to combat rising prices. He said lowering inflation would take time and he expressed support for another “significant increase” in the benchmark lending rate at the policy meeting scheduled for September 20 to September 21.

Still, investors have become more optimistic about inflation.

“Economists are slightly lowering their inflation forecasts and that could mean the Fed won't have to take rates above 4 per cent,” said Edward Moya, a senior market analyst at Oanda.

Investors are awaiting August's consumer prices report on Tuesday for any signs that inflation may be easing. It is expected to show that prices rose at an 8.1 per cent pace over the year in August, compared with 8.5 per cent in July.

At the close in Europe, Britain's FTSE 100 rose 1.2 per cent while Germany's DAX and France's CAC 40 both climbed 1.4 per cent.

The London Stock Exchange is expected to be closed on the day of the funeral of Queen Elizabeth II, who died on Thursday.

“Markets are being very British about the whole thing, carrying on in a fashion that I suspect she would have approved of,” said Chris Beauchamp, an analyst at IG.

Earlier in Asia, Tokyo's Nikkei 225 settled 0.5 per cent higher, Hong Kong's Hang Seng jumped 2.7 per cent and the Shanghai Composite rose 0.8 per cent.

There was also some cheer from news that inflation in China eased slightly in August, giving the government more room to introduce more economy-supporting measures, although the recovery remains hostage to Beijing's strict zero-Covid strategy of lockdowns, which are affecting growth.

Hong Kong's Hang Seng was the best performer at the close of market trading on Friday, jumping 2.7 per cent. EPA

The more confident mood across equity and oil markets was reflected in a cooler dollar, which hit multi-decade highs against major peers in recent weeks owing to the US Federal Reserve's hawkish tone promising even more interest rate increases.

The dollar slid as much as 1 per cent against the pound and euro after recent hefty gains.

The euro was holding well above parity with the dollar, one day after the European Central Bank announced its own 75 basis-point rate increase as it warned inflation was “far too high” and expected to stay above the target rate for “an extended period”.

The yen strengthened as officials began speaking up after the unit approached a 32-year low against the greenback.

“There are hopes that the sharp rate increases from the Fed may already have dampened demand, causing US inflation to weaken,” said Fawad Razaqzada, an analyst at City Index and Forex.com.