US stocks cap global market rally with best week in 3 months

US stocks recorded their biggest weekly advance in three months on Friday as investors on both sides of the Atlantic welcomed signals that major central banks remain on course to cut interest rates.

The S&P 500 slipped 0.1 per cent in the final trading session of the week but the index gained 2.3 per cent since last Friday’s close, after Federal Reserve chair Jay Powell on Wednesday indicated a preference to cut rates by three-quarters of a percentage point this year.

The index last rose by as much in a week in mid-December, and it has now climbed more than 27 per cent since a low in late October. The tech-dominated Nasdaq Composite added 0.1 per cent on Friday, and gained 2.9 per cent over the five trading days, also its best week since mid-December.

Despite two months of stubborn inflation data, Fed officials were “never going to come out and spook the market”, said Steven Blitz, chief US economist at TS Lombard.

“Their first rule is ‘don’t create a recession’ and the best way of starting a recession is tipping equities into a bear market,” he added.

Friday’s gains came amid a global stock rally that followed this week’s Federal Reserve meeting, and after Bank of England governor Andrew Bailey told the Financial Times that markets were right to expect more than one reduction in UK borrowing costs this year.

London’s main stock index notched its best week since September, rising 0.6 per cent to close at 7,930.92. The FTSE 100 had already climbed 1.9 per cent on Thursday after the BoE left interest rates on hold and is closing in on its February 2023 peak of 8047.06.

Europe’s region-wide Stoxx 600 was steady on Friday, up 1 per cent for the week.

Florian Ielpo at Lombard Odier Investment Managers said the prospect of lower borrowing costs made the rally more “sustainable” than in recent months, when indices climbed on the back of a few large stocks such as US tech giants.

“We’re seeing a better balance in the equity rally, which is good news for markets,” he said.

Traders in swaps markets are now fully pricing in three quarter-point interest rate cuts from the BoE by the end of 2024.

The implied probability of a first cut by June has risen to about 80 per cent, from 50 per cent at the start of the week. Pricing is similar for the Fed, with cuts forecast to begin in June or July.

The Swiss National Bank became the first big central bank to start loosening monetary policy on Thursday when it unexpectedly cut its headline interest rate by 0.25 percentage points to 1.5 per cent.

Bailey said rate cuts were “in play” at future BoE meetings this year adding that the fight against inflation was “an increasingly positive story”.

The BoE governor said things were “moving in the right direction” in tackling inflation. At this week’s Monetary Policy Committee meeting, two previously hawkish policymakers dropped their demands for a rate rise, instead voting with the majority to keep them on hold.

Japan’s Nikkei 225 index rose 5.6 per cent this week, even though the Bank of Japan increased borrowing costs for the first time since 2007. Traders were reassured by signals that the BoJ’s benchmark rate, which remains just above zero, will not increase sharply following Tuesday’s rise.