World equity markets started the week with confidence after a UN-brokered ceasefire between Israel and Hizbollah bolstered sentiment and helped drive oil prices sharply lower.
September Nymex crude was hovering around the $73 a barrel mark in late morning New York trade, down more than a dollar from Friday’s close and 7 per cent off the record high of $78.40 struck on July 14.
But analysts warned that oil might not have too much further to fall. “With prices already lower than they were immediately before the start of hostilities, we would see the degree of any sustainable further downside as being limited,” said Kevin Norrish at Barclays Capital.
The drop in oil prices helped share prices around the world put in strong performances. By midday in New York, the Dow Jones Industrial Average was up 1 per cent, or more than 100 points. The S&P 500 was 0.9 per cent higher and the Nasdaq Composite index was up 1.7 per cent.
In Europe, the FTSE Eurofirst 300 index rose 0.9 per cent and the Topix index in Tokyo climbed 1.5 per cent to finish above 1,600 for the first time in more than a month.
The main economic news on Monday came from the eurozone, where strong economic growth data heightened expectations for further interest rate rises this year.
Growth domestic product increased by 0.9 per cent in the second quarter of the year from the first three months, the strongest quarterly growth rate for six years. Germany’s economy expanded at its fastest rate in more than five years during the period, while France last week reported its strongest growth since the last quarter of 2000.
“The data will reinforce the view within the European Central Bank that interest rates are too low,” said Javier Perez de Azpillaga, European economist at Goldman Sachs. “We expect the ECB to raise [rates] 25 basis points on October 5 and 25 basis points to 3.5 per cent on December 7.” The figures helped the euro edge higher against the dollar and rise to within a whisker of its all-time peak against the yen. European government bond prices fell, pushing yields higher.
Treasury bonds also eased back as investors awaited the release of US producer and consumer price data on Tuesday and on Wednesday.
The outlook for US inflation remains one of the chief uncertainties for investors in the wake of the decision by the Federal Reserve’s Open Market Committee to leave interest rates unchanged last week after 17 consecutive quarter-point increases.
“Whilst the August FOMC statement was less hawkish than many had been expecting, the Fed did leave the door open for further tightening should it be needed,” said Zahra Ward-Murphy of Dresdner Kleinwort’s economics research team.
“The US inflation report, therefore, should remain in the spotlight for the immediate future.
But expectations that a slowdown in the US economy would be sufficient to keep inflation reined in were undermined by very strong July retail sales data, released last Friday. “The retail sales data suggest consumers have plenty of purchasing power,” said Ed Yardeni, chief investment strategist at Oak Associates.
“This was confirmed by several strong second-quarter earnings reports from the department stores. While payroll employment looks weak, purchasing power remains strong.”
In the metals markets, gold dipped to a two-week low before staging a modest rebound, while nickel rose to within striking distance of its recent all-time high.