What a difference a week makes in financial markets. Seven days ago, the Dow Jones Industrial Average had just suffered its worst weekly loss for more than two years and investors were running scared over the prospect of a slowdown in US economic growth.

But by the close on Friday, the Dow, despite a late-session sell-off, had rebounded 0.7 per cent over the week, recording its best single-session advance for two years in the process. The other main US stock indices staged even more powerful rallies. The S&P 500 was up 0.8 per cent and the technology-heavy Nasdaq Composite index was 1.3 per cent higher.

By contrast, European equities had another grim week, with the FTSE Eurofirst 300 index declining by 1 per cent to 1072.41.

Tokyo suffered even more, with the Nikkei 225 Average ending the week with a loss of 2.9 per cent.

The gains in the US came as investors switched their attention from slowing consumer demand and fears of rising inflation to some positive news on the corporate results front.

“Contrary to fears of imminent earnings disappointments, the first-quarter earnings reporting season has seen a continuation of the prolonged spell of positive surprises,” said Abhijit Chakrabortti, global equity strategist at JPMorgan.

“The most impressive aspect of the reporting season is positive surprises ex-energy against a backdrop of disappointment in overall economic growth due to the negative effect of the high oil price.”

Anais Faraj, global equities strategist at Nomura International, said: “It has become almost normal for markets to sell ahead of the earnings reports, only to buy back aggressively.”

But Stephen Lewis, chief economist at Monument Securities in London, suggested that the rapid changes of mood witnessed in recent trading sessions were consistent with the market’s coming to terms with a downward shift in the trend rate of growth in the economy.

“It may be that gross domestic product growth stumbled in the first quarter and will be no more than 2.5-3 per cent in the rest of the year. If productivity growth has subsided, that could still be fast enough to generate unwelcome inflation pressures,” he warned.

The latest US inflation data did come as something of a shock to the markets, although their impact was relatively short-lived.

Core consumer prices, which exclude food and energy, increased by 0.4 per cent in March, twice as much as expected. The figures sparked a sell-off in equities and initially prompted a sharp rise in Treasury bond yields and the dollar as the debate over the pace of US interest rate rises was rekindled.

At its last rate meeting, the Federal Reserve indicated that it was becoming more concerned about inflation, sparking fears that it could raise the cost of borrowing more aggressively.

However, Citigroup argued that the basis for recent inflation worries, specifically labour costs, seemed muted given slack global labour conditions. “Even the inflation scare tied to oil and commodity prices may be easing in light of recent sharp pullbacks in energy and material prices,” said Tobias Levkovich, Citgroup’s chief US equity strategist.

The dollar resumed its downward path against most leading currencies by the end of the week, touching a one-month low against the Japanese yen yesterday and falling back below the $1.30 barrier against the euro.

Meanwhile, Treasury bonds had an extremely volatile week, with the yield on the 10-year note swinging wildly between 4.18 per cent and 4.31 per cent.

ING Financial Markets noted that, at its lowest, the yield was near to the level at which Federal Reserve chairman Alan Greenspan in February described the behaviour of the bond market as a “conundrum”.

The oil market, for once, took something of a back seat despite a steady rise in crude prices through the week. By the end of trading, the benchmark crude future on Nymex was trading just below $55 a barrel, up $3 over the week but well off the all-time high of $58.28 at the start of the month.

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