Weekly market recap

Markets are ending the week with US equities close to record highs after inflation data reduced fears that the Federal Reserve will need to tighten again in September.

 
The S&P 500 reached another record on Thursday and is up around 0.65% for the week, with the Nasdaq also looking to end in positive territory. Softer-than-expected producer inflation added to Wednesday’s relatively benign CPI report, strengthening the argument that the Fed can afford to remain patient following recent weakness in the labour market. However, the inflation story isn’t entirely comfortable. CPI is moving in the right direction, but remains above target, while longer-dated Treasury yields remain elevated amid concerns around fiscal borrowing and structurally higher demand for capital. That leaves equities in something of a sweet spot for now: earnings remain supportive and the immediate threat of another Fed hike has diminished, but the bond market continues to challenge the idea that borrowing costs are heading materially lower.

Meanwhile, oil has been the notable exception to the improving risk backdrop. Brent is heading for a sizeable weekly gain, trading around $88 as negotiations over reopening the Strait of Hormuz remain stalled. Iran continues to restrict commercial passage and tensions increased again this week, including reported attacks on UAE-linked vessels. That has forced traders to rebuild some of the geopolitical premium that had been removed earlier in August.

European equities have also remained relatively resilient. The region continues to benefit from attractive valuations and broader participation across financials, industrials, defence and other sectors, rather than relying on the handful of technology companies that dominate US performance. The STOXX 600 has recently been trading around record territory despite the geopolitical backdrop.

The calendar is quieter on the data front next week, but Wednesday’s FOMC minutes will be closely examined for the extent of disagreement within the Fed and whether policymakers are becoming more comfortable remaining on hold following softer employment and inflation data. Meanwhile, geopolitics remains the wildcard. The US-Iran dispute over Hormuz is unresolved, vessel traffic remains severely constrained, and Washington is threatening additional economic pressure on Tehran.