Fed doves, AI fuel global risk rally

In just one sentence: yesterday’s fresh data from the US gave the green light for next week’s Federal Reserve (Fed) cut. It’s not that the inflation data matters much at this stage – all attention is shifting toward the weakening US jobs market – but yesterday’s CPI figures, broadly in line with expectations, combined with a jump in initial jobless claims, gave full justification to those calling for a Fed cut next week. Two more cuts are already fully priced in before year-end. That’s the good news.

The bad news is, unless a Fed official hints at the very last minute that rates could be cut by 50bp – as happened last September – next week’s move will almost certainly be limited to 25bp. Markets put the odds of that scenario above 90%, versus just 7.5% for a half-point cut. The reason is that tariff- and weather-related price pressures remain visible. Coffee prices jumped 20% in a year, beef more than 16% and apples nearly 10%. Both headline and core inflation rose to their highest levels of the year – though without the kind of surge we’ve been seeing in the jobs data for more than a month.

Jobless claims spiked yesterday to their highest in four years. Many see that as confirmation of a crumbling US labour market, though others note the rise was concentrated in Texas with declines elsewhere – which is certainly less worrying than a broad-based increase.

Long story short: inflation is rising, but not spiking. That argues for cuts at a cautious pace. Inflation risks haven’t vanished. Any sudden flare-up could spoil dovish Fed expectations.

But investors are calm: the US 2-year yield barely moved, the dollar failed to clear offers near the 50-day moving average, while the S&P 500 leapt to a fresh all-time high. On one hand, strong earnings reassure investors about corporate health. On the other, a weaker jobs market and the prospect of lower rates inflate valuations. For now, whatever the news, markets find a reason to celebrate.

Across the Atlantic, the European Central Bank (ECB) was less dovish. The Bank kept rates unchanged, as expected, and Christine Lagarde said economic risks are abating and deflation fears are mostly behind– in other words, no more cuts for now. The probability of another move before mid-next year fell below 50%, from over 60% prior to the meeting. Still, the Stoxx 600 climbed on the back of dovish Fed expectations, while the EURUSD rebounded from its 50-day moving average on Fed/ECB policy divergence. Resistance remains firm near 1.18, with French budget concerns lingering in the background.

Elsewhere, gold continues to benefit from dovish Fed bets, a softer dollar and yields, and ongoing geopolitical unease, pushing toward record highs. US crude, by contrast, slipped below $62 per barrel, shrugging off heightened tensions after Russian drones violated Polish airspace earlier this week. Next support sits near $60pb.

In Asia, Chinese equities rallied strongly. Alibaba jumped 8% yesterday after announcing a $3.2 billion convertible bond issue, with 80% of proceeds going into data centers and 20% into international commerce. Normally, such fundraising weighs on shares. But this time, investors cheered the signal of heavier investment in AI – now the company’s fastest-growing business line amid weakness in e-commerce and trade war headwinds. Despite a 140% rally this year, Alibaba still trades at half its 2020 valuation. The shift toward local chips to keep Beijing’s support also fueled gains at SMIC, up around 10% this week.

Speaking of chips: South Korea’s SK Hynix rose nearly 7% after announcing completion of the world’s first HBM4 memory development – a technology that stacks memory chips vertically with ultra-wide input/output paths, enabling massive data throughput at far higher energy efficiency. The company says it is now ready for mass production. For investors eyeing opportunities beyond US tech, SK Hynix trades on a modest ~7 PE ratio.