Global stocks near record highs, benign US inflation eclipses oil rally

Global stocks reached record highs on Friday, poised for a third weekly gain as investors reacted to benign inflation data, dampening expectations of a U.S. rate hike next month. However, faltering talks to end the Middle East conflict boosted oil prices. Despite the oil rally, investors remained unperturbed, with short-dated bond yields modestly up and inflation expectations continuing to decline. Gold touched two-month highs amid lower rate expectations.

The MSCI All-World Index, up for three consecutive weeks, flirted with record highs, while Europe's STOXX 600 slipped slightly. Tech sector losses were balanced by gains in capital-intensive shares, including defense and automotive companies. The markets concluded the week on a positive note, with limited economic and corporate event risk.

Geopolitical uncertainty, primarily stemming from U.S.-Iran tensions, remained the primary obstacle to a market fueled by strong earnings and monetary policy expectations. Capital.com strategist Kyle Rodda noted that geopolitical risks are likely to intensify over the weekend.

Brent crude futures surged 1.7% to $88.5 a barrel, targeting a 6% weekly increase. European natural gas futures were expected to rise 10%, and U.S. gas futures 3.5%. The VIX volatility index, viewed as a market fear gauge, fell for a fourth consecutive week, the longest such streak since May 2025, reflecting dwindling investor apprehension. Bond market volatility also dropped for two consecutive weeks.

John Sidawi, a senior portfolio manager at Federated Hermes, highlighted the unusual disconnect between geopolitical uncertainty and asset price volatility. For now, markets seem prepared to endure uncertainty without demanding higher risk premiums. However, a significant escalation in conflict or a clear resolution path could force investors out, potentially triggering broader market volatility.

In currency markets, the yen strengthened, pushing the dollar down 0.2% to 159.18. A Reuters report suggested the Bank of Japan might raise rates as early as September. However, this move was still near the 160 level, which could trigger more yen buying from Tokyo following a joint intervention with the U.S. last month. Padhraic Garvey, ING's head of global rates and debt strategy, attributed the yen's weakness to a cautious central bank and a policy rate that remains too low.

While this could be economically detrimental, it represents a deliberate choice between protecting the yen or not. Gold slipped 0.1% to $4,346 per ounce but was still on track for its largest monthly gain since February, as central banks and investors poured funds into the market amid fading expectations of aggressive Fed rate hikes.