A look at the day ahead in U.S. and global markets from Mike

Dolan

Record stock market highs have lit up across the world once

again - though not yet for the usual suspects in the S&P500

and Nasdaq.

Despite a rare stumble for the artificial intelligence theme

after Nvidia's ( NVDA ) results underwhelmed this week, the rest of the

stock market complex shrugged it off and has instead lapped up a

tasty diet of brisk economic growth along with falling inflation

and interest rates.

So much so that if you adjust the S&P500 for the outsize

contribution of Big Tech megacaps, it now shows the

equal-weighted index hitting record highs with

year-to-date gains of more than 10%.

Underlining the point, the Dow Jones Industrial Average

hit another record close on Thursday and both Germany's

DAX and Europe's broad STOXX 600 hit new highs

on Friday too.

And that broadening of what many had feared was an overly

concentrated market is another sign of some normalisation of

market behaviour, along with a return of volatility gauges back

closer to long-term averages and a resumption of the negative

correlation between stock and bond returns.

For many, that's a much more sustainable constellation and

the economic picture backs that up going into Monday's Labor Day

holiday.

Second-quarter U.S. GDP growth was revised higher on

Thursday, while embedded PCE inflation gauges were marked lower

and weekly jobless readings were little changed.

The release on Friday of the July monthly PCE reading is

next up and is expected to be similarly benign, allowing the

Federal Reserve to go ahead with its first quarter-point

interest rate cut next month - while market pricing retains a

total of 100 basis points of easing to year-end.

Wall St stock futures were higher again ahead

of the final trading day of the month and Treasury yields fell

back a touch from Thursday's slight gains.

Soothing the bond market in a week of heavy new debt sales

was an affirmation late Thursday of Fitch's AA+ U.S. sovereign

credit rating with a stable outlook.

Borrowing costs across the economy are ebbing more

generally, with the average rate on popular U.S. 30-year

mortgages falling to 6.35% this week, the lowest since May 2023.

Pointedly, Fitch's review said the U.S. fiscal profile is

likely to remain largely unchanged regardless of who wins the

upcoming presidential election, citing structural strengths

including high per capita income and financial flexibility as

bolstering the credit rating.

And despite a flurry of election trades earlier in the

summer, the dramatic switch of fortunes in opinion polls and

betting markets has barely flickered on the overall setting of

buoyant U.S. markets at large.

Democratic Vice President Kamala Harris' late entry in the

presidential race after President Joe Biden's withdrawal in July

tightened the race against Republican candidate Donald Trump. A

Reuters/Ipsos poll this week showed she leads 45% to 41% and

another published in Friday's Wall Street Journal confirmed she

was marginally ahead - with betting markets now seeing her as

clear favorite.

Harris' first interview with a major news organization since

becoming the Democratic nominee was aired on CNN on Thursday,

but there was little to disturb market views of what her

Presidency would look like.

In Europe, the inflation and interest rate picture was

arguably even better.

Euro zone inflation fell to its lowest level in three years

at 2.2% this month, just shy of the European Central Bank's 2.0%

target and boosting the case for a second ECB interest rate cut

of the year in September - even before the Fed gets going.

A day earlier, Germany's EU-harmonized headline inflation

rate actually hit the 2.0% target for the first time in almost

3-1/2 years.

Money markets currently see a 60% chance the ECB will cut

rates a third time by October - slightly lower than on Thursday.

Euro/dollar steadied as a result following this week's

sharp recoil from one-year highs.

The inflation picture in Japan is slightly different.

Core inflation in Japan's capital accelerated for a fourth

straight month in August, tracking comfortably above the central

bank's 2% target and backing market expectations of more

interest rate hikes ahead.

Dollar/yen held steady just above 145.

But China's yuan was a much bigger mover - hitting

its best levels in more than a year and authorities battle to

shore up recently sliding government bond yields and August

business surveys are due for release on Saturday.

Increased dollar selling by Chinese corporates - triggered

by shifting dollar expectations - could morph into a "stampede"

in the short term, boosting the yuan further, China

International Capital Corp said in a note.

In corporate news, AI refused to be left out of the

limelight. Apple and Nvidia ( NVDA ) are reportedly in

talks to invest in OpenAI as part of a new fundraising round

that could value the ChatGPT maker above $100 billion, according

to media reports on Thursday.

Key developments that should provide more direction to U.S.

markets later on Friday:

* US July PCE inflation gauge, personal income and consumption,

Chicago August business survey, final Aug reading for University

of Michigan sentiment; Canada Q2 GDP revision

* European Central Bank board member Kerstin af Jochnick speaks

in Frankfurt

* US corporate earnings: Marvell Technology

(Editing by Andrew Heavens

)