Stocks climbed and bonds steadied Wednesday after a surprise slowdown in U.S. inflation scaled back expectations for interest rate hikes, while oil took a breather as President Donald Trump scrapped a plan to levy shipping through the Strait of Hormuz. South Korea's KOSPI index surged 6% and Japan's Nikkei rose 1%, though volume was light and the mood nervous as AI stocks' momentum has started to stutter.
The U.S. headline consumer price index fell 0.4% in June, its first decline since the COVID-19 pandemic, while core inflation for the month was flat. Bond yields and the dollar fell on the figures, leaving the euro comfortably above $1.14 on Wednesday and 2-year Treasuries at 4.2%, about 9 basis points below Tuesday's 17-month high of nearly 4.3%.
J.P. Morgan analysts said in a client note: "For market bulls this is even better than Goldilocks could have imagined." They added: "This print should remove any fears over a July rate hike and may assuage fears on September, too. This sets up the market to move higher and to broaden as it does so."
China's Growth Stumbles
China's annual economic growth slowed sharply to 4.3% in the second quarter, official data showed Wednesday, missing analysts' expectations as weak domestic demand outweighed stronger production and exports. A rebound in Chinese retail sales in June, relatively strong nominal GDP and hopes that authorities will respond were the positives for investors.
UOB economist Woei Chen Ho said: "I don't think they will be worried enough to announce any big stimulus, but it is going to be targeted, since they are aware that growth is only for the tech areas whereas the broader economy is continuing to underperform." China's yuan traded at a one-month high of 6.7635 to the dollar.
Fed Caution and Market Jitters
Further moves were dampened by Federal Reserve Chair Kevin Warsh, who told Congress that one data point was not enough to declare victory over inflation. A 25% drop in IBM's share price after the technology company's revenue forecast missed analyst expectations also showed how stretched and skittish the market's rally in AI-related stocks has become.
Damien Boey, portfolio strategist at Wilson Asset Management in Sydney, said: "It doesn't take much for people to say, look, I've made a good profit here, I'll cut and run." He said: "It's a winner-takes-all dynamic. So if you're looking like you're going to be left behind in this AI boom, you get absolutely hammered." Boey added: "AI uncertainty is actually the highest of all the categories of uncertainty at the moment, and the sharp stock market reactions that you're seeing to results reflect that."
ASML, Europe's most valuable company and the world's biggest supplier of chipmaking equipment, beat revenue expectations and was likely to set the tone at the European open. European futures were down 0.2% and FTSE futures fell 0.3%, while Nasdaq futures rose 0.8%.
Stellar profit at Wall Street banks was the highlight of Tuesday's earnings calendar and on Wednesday Morgan Stanley, BNY, BlackRock and Johnson & Johnson were due to report earnings before the morning bell.
Middle East Tensions and Oil Markets
Brent crude futures steadied around $85.80 a barrel, having gained almost 13% this week on a flare-up in Middle East fighting. President Trump reimposed a naval blockade of Iranian ports on Tuesday and threatened to attack power plants and bridges next week unless Iran resumes negotiations to end their conflict, though he scrapped a plan for a 20% fee on shipping through the Strait of Hormuz.
Elsewhere in currencies, the Australian dollar was testing resistance around 70 cents and the struggling yen was pinned to the weak side of 162 per dollar.
Why This Matters:
The cooling inflation data provides markets with breathing room after months of rate hike fears, but Fed Chair Warsh's caution reflects the reality that one month doesn't make a trend. China's weaker-than-expected growth signals structural problems in the world's second-largest economy that targeted stimulus won't easily fix. The Middle East standoff adds a wildcard to energy markets just as global growth concerns mount. Trump's decision to scrap the Hormuz shipping fee removes one immediate threat to oil prices, but his reimposed naval blockade and threats against Iranian infrastructure keep geopolitical risk elevated. The AI stock sell-off after IBM's miss shows how quickly momentum trades can reverse when reality doesn't match expectations. Investors face a complex picture: improving inflation, slowing China, volatile tech, and Iran tensions that could flare at any moment.