Don’t fear the Fed is the new mantra for global markets.

Equities rose to a two-week high amid increasing investor optimism that the world economy can withstand higher interest rates from the Federal Reserve. Gold fell amid a retreat in the dollar, while oil maintained gains after a government report on crude inventories.

U.S. shares looked for consecutive climbs after alternating between gains and losses for seven sessions, European equities jumped and emerging-market stocks rose the most in six weeks. South Korea’s won led currencies higher even as China set the yuan’s reference rate at the weakest level since 2011. Crude pared gains after climbing above $49 a barrel as gold slid for a sixth day. Greek bonds increased, pushing the 10-year yield below 7 percent for the first time since November.

Improving confidence in financial markets is tempering anxiety over the Federal Reserve’s plans to raise U.S. interest rates, potentially as soon as next month. Recent polls show growing support for the U.K. to remain in the European Union, the rally in commodities is damping the risk of deflation, and a measure of economic surprises in the world’s largest economies hit its highest level this year. Still, faith in global growth prospects has been easily shaken, with global equities failing to make any gains in 2016.

“U.S. data is supporting the view that if we don’t see stellar growth, at least we don’t see a recession, and that’s a good thing,” said Michael Woischneck, who oversees about 300 million euros ($335 million) at Lampe Asset Management in Dusseldorf, Germany. “If the Fed has the chance to hike again then it should take this opportunity as the market is very prepared. We also have a deal for Greece that has helped perceptions change in the European market.”

David Fuller's view

We have seen a breakout in optimism this week.  This suggests that investors feel less uncertain.  Behaviourally, when the investor crowd is nervous, negative concerns need to be increasing to sustain pessimism.  However, this week polls have indicated that the risk of Brexit uncertainty is diminishing.  Additionally, mildly more favourable economic data indicates that the risk of US recession and deflation is waning, making a rate hike in June or probably July less worrying.  This mood change may prove to be ephemeral but it has steadied stock markets. 

It takes a long time for economies to recover from credit crisis recessions, let alone depressions, as I have often mentioned in the last several years.  Historically, it usually takes a minimum of six years to recover, and it can easily take longer.  Inevitably, these time periods will vary among economies, although developed nations should lead while primarily commodity exporting countries lag. If the economic trough for developed economies occurred around the end of 1Q 2009, on average, we are now in the seventh year of convalescence.  Among big economies the USA is leading, and that is good news.  

We have seen a breakout in optimism this week.  This suggests that investors feel less uncertain.  Behaviourally, when the investor crowd is nervous, negative concerns need to be increasing to sustain pessimism.  However, this week polls have indicated that the risk of Brexit uncertainty is diminishing.  Additionally, mildly more favourable economic data indicates that the risk of US recession and deflation is waning, making a rate hike in June or probably July less worrying.  This mood change may prove to be ephemeral but it has steadied stock markets.