Markets stage impressive rebound as Fed easing hopes take hold

​​​Fed pivot drives equity recovery

​United States (US) equities delivered their strongest performance since late May yesterday, as investors seized on Friday's market weakness to add exposure ahead of what many now see as an increasingly likely September interest rate cut. The rebound was broad-based, with the major indices recovering smartly from last week's sell-off as traders reassessed the Federal Reserve's (Fed) next moves.

​The catalyst for this shift in sentiment came from Friday's disappointing payrolls data, which triggered a sharp reassessment of monetary policy expectations. Treasury yields tumbled in response, with the 2-year note posting its largest single-day decline in over a year, falling 25 basis points (bp) as markets priced in not just one, but potentially two rate cuts before year-end.

​The odds of a September move have now reached 94%, a dramatic shift from just a week ago. This represents a complete turnaround in market sentiment, with investors now positioned for a more accommodative stance from the central bank.

​FTSE 100 benefits from global risk-on sentiment

​The FTSE 100 joined in the global rebound, though gains were more measured than those seen across the Atlantic. United Kingdom (UK) equities have been benefiting from the weaker British pound, which makes British companies more attractive to international investors and boosts the overseas earnings of multinational firms.

​Banking stocks within the index found support despite concerns about the impact of potential rate cuts on net interest margins. The sector's recent underperformance means valuations remain attractive for those willing to bet on a more stable interest rate environment.

​Energy names within the FTSE 100 faced headwinds from the slight decline in crude oil prices, though the broader risk-on sentiment provided some support. The index's heavy weighting towards value sectors has been both a blessing and a curse this year.

​Political concerns add complexity

​However, the market's focus isn't solely on monetary policy. Political developments are adding another layer of complexity to the outlook, with concerns mounting over the independence of key economic institutions. The decision to remove the Bureau of Labor Statistics commissioner following the weak jobs data, combined with plans to nominate a new Fed governor, has raised eyebrows among market watchers.

​These moves have sparked fears about the politicisation of economic policy, potentially undermining the credibility of institutions that markets rely on for objective data and policy decisions. The traditional separation between political and monetary policy has been a cornerstone of market confidence for decades.

​Asian markets extend the rally

​The positive momentum carried through to Asian trading, where the MSCI Asia ex-Japan index gained 0.6% as regional markets followed Wall Street's lead. Japan and China both posted encouraging services purchasing managers index (PMI) data, providing fundamental support for the risk-on mood.

​Palantir surges on AI optimism

​Palantir Technologies delivered one of the standout performances among artificial intelligence (AI)-related stocks, gaining significantly as investors renewed their focus on the company's data analytics capabilities. The firm's government contracts and enterprise software solutions continue to position it as a key beneficiary of the AI boom.

​Recent contract wins with both government agencies and private sector clients have bolstered confidence in Palantir's ability to monetise its advanced analytics platform. The company's focus on mission-critical applications gives it a competitive moat that's difficult for rivals to replicate.

​The stock's performance reflects broader optimism about AI infrastructure companies that can demonstrate real-world applications and revenue generation, rather than just theoretical potential. Palantir's track record of working with complex data sets makes it particularly attractive in the current environment.

​Investors are increasingly focusing on companies that can show concrete AI implementations rather than just promises, and Palantir's established client base provides exactly that credibility.

​Market outlook remains cautiously optimistic

​While yesterday's rebound was impressive, investors will be watching closely to see whether this newfound optimism can be sustained. The combination of dovish Fed expectations and strong corporate earnings provides a supportive backdrop, but political uncertainties and the potential for policy interference in traditionally independent institutions could create volatility.

​The market's ability to shrug off these concerns and focus on the improving monetary policy outlook will be tested in the coming sessions, particularly as we await further economic data and policy announcements.