A recovery in US consumer spending revived battered stock markets in Europe and New York on Friday, despite the latest eurozone GDP figures showing a broad slowdown across the currency union and Greece slipping back into recession.
The FTSE 100 soared 169 points to register the strongest daily increase since last August, before the Dow Jones index followed suit in New York, wiping out much of the losses from earlier in the week as January figures for US consumer spending beat expectations. The FTSE 100 still ended the week down 2.4%.
Nine of the 10 major sectors in Wall Street’s Standard & Poor’s index were higher, led by a 2.4% rise in the financial sector, which fought off concerns that low interest rates and risky lending had undermined the stability of some institutions.
Banks were helped by comments from Bill Dudley, deputy chairman of the USFederal Reserve, who said they were well capitalised and able to withstand a global shock. JP Morgan jumped 5.6% to $56.05 a share after chief executive Jamie Dimon bought more than $25m (£17.24m) of the bank’s stock.
For much of the week, investors feared that a contraction in US factory output, sluggish employment growth and persistently low inflation were signals that the US economy was heading for a recession.
Plunging oil prices, which slumped below $27 a barrel in the US, falling commodity values and a rush by investors to safe haven assets added to the gloomy picture.
James Knightley, an economist at ING Financial Markets, said resilient US employment, rising real incomes and a recovering housing market in a period of extreme volatility on global markets, were providing enough offsetting effects for now.
“However, equity markets don’t seem particularly interested unfortunately and the longer that this goes on the greater the risk that it feeds negatively into the real economy through weaker sentiment and tighter financial conditions,” he said.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said the health of the US economydepended on how well it could weather the global risks in the long term, especially a devaluation of the Chinese currency that would make US exports more expensive.
“Clearly, the tentacles of the Chinese slowdown are spreading and the lack of a clear enough policy is a red flag to ongoing volatility,” she said.
Fed chief Janet Yellen failed to calm markets during an appearance on Capitol Hill this week, when she said that it was possible the central bank would cut rates if the situation deteriorated.
Dudley waded into the debate on Friday, downplaying the likelihood of a rate cut: “To me, that’s not something that should be part of the conversation right now.”
The US economy has “quite a bit” of momentum that will help offset weakness from abroad, he said, even as he acknowledged he now expected inflation to take a bit longer to return to the Fed’s 2% target because of the drag from the falling price of oil.
The 19-member eurozone economy added another prop to market sentiment after figures showed it grew 0.3% in the final quarter of 2015 after German exports put in a strong performance.
But analysts continued to worry that the refugee crisis and the prospect of Greece defaulting on its loans, forcing it to seek further funds from Brussels and the International Monetary Fund, would halt the eurozone recovery.
France and Italy, which appeared to be recovering strongly last spring, showed that even the second and third largest economies in the currency zone were ailing.
France could only manage 0.2% growth in the final quarter while Italy registered 0.1% growth, despite benefiting from low energy costs, an export-boosting drop in the euro’s value and monetary stimulus from the central bank.
Jonathan Loynes, chief European economist at Capital Economics, said the downside risks had increased and as a result the European Central Bank will back “further decisive policy support” at its March meeting.
Greece, which has seen its debt to GDP ratio soar past 190% in recent months, fell into recession after recording its second quarter of negative growth.
The Syriza government, led by prime minister Alexis Tsipras, has struggled to maintain a recovery that followed an accord signed last summer for a third bailout.
Lenders are demanding that Greece scrap tax breaks for farmers and impose pension reforms that will lead to higher monthly contributions from the self-employed and salaried employees.
Farmers carried their protest to Athens on Friday, driving tractors through the centre of the city and rioting when blocked by police from approaching government buildings.