Equity rally remains grounded

Markets are broadly maintaining a risk-on tone, although the pace of the rally has moderated.

 
The tension between strong growth and persistent inflation eemains a key driver. Recent US inflation data has been mixed, with PCE coming in slightly softer than feared while still pointing to inflation that remains above target.

Markets have increasingly shifted away from debating rate cuts and are now focused on how long central banks will need to keep policy restrictive.

Expectations for further tightening remain particularly elevated in Europe, where the ECB is widely expected to raise rates again next week as policymakers respond to the inflationary impact of higher energy prices.
On the geopolitical front, markets continue to price a gradual move toward a US-Iran agreement, although negotiations remain complicated. Hopes of a peace deal have helped remove some of the geopolitical premium from oil prices in recent weeks, but periodic setbacks in negotiations continue to generate volatility.

The Strait of Hormuz remains constrained, and energy markets are still operating with a degree of disruption, leaving crude prices elevated relative to pre-conflict levels.

Looking ahead, attention will increasingly turn toward incoming economic data, particularly US labour market figures, as investors assess whether the current combination of strong earnings, resilient growth and elevated inflation can continue.

For now, risk appetite remains supported, but with stretched valuations and shifting monetary policy expectations, markets appear increasingly sensitive to any signs that the earnings and growth story may begin to soften.