U.S. and global stock markets gained ground on Monday, recovering from losses sparked by a strong U.S. jobs report last week that bolstered the case for sharp interest rate hikes, while the dollar weakened and government bond yields fell.
On Wall Street, the Dow Jones Industrial Average rose 0.69% to 33,029.18, the S&P 500 gained 0.70% to 4,174.11 and the Nasdaq Composite added about 0.8% to 12,759.00 in early trading.
Those gains echoed the broad Euro STOXX 600, which gained about 1% on Monday, led by cyclical and growth stocks, helping recover losses from Friday. Miners and technology stocks, hit hard in the previous week, led the gains.
The MSCI world equity index, which tracks shares in 47 countries, added 0.75%, also recovering from losses on Friday.
Yet higher rates remained squarely in focus for investors.
"The rise in inflation and the Fed's reaction to it has been a real headwind for valuations this year," Morgan Stanley strategists wrote in a note on Monday.
"However, it's also been a tailwind for earnings. Now, we are on the other side of that mountain, and operating leverage is rolling over likely more than the consensus expects."
Indeed, business investment appears to be an early victim of red-hot U.S. inflation and rising interest rates, according to fresh U.S. government data.
The strong U.S. jobs data raised the stakes for the July U.S. consumer prices report due on Wednesday, which could see a slight pullback in headline growth, but likely a further acceleration in core inflation.
"Our economists expect the headline (annual) rate to finally dip after energy prices have fallen of late," Deutsche Bank analysts wrote.
U.S. Treasury yields dipped on Monday as investors continued to digest the jobs report and how the Fed will react. Fed funds futures traders are now pricing for a 69% chance of another 75-basis-point rate increase in September, and for the fed funds rate to rise to 3.65% by March, from 2.33% now.
Benchmark 10-year note yields fell to 2.794% on Monday, after getting as high as 2.869% on Friday, the highest since July 22. Two-year yields were last 3.232%, after reaching 3.331% on Friday, the highest since June 16.
Bonds also got a safe-haven bid due to unease over Beijing's sabre rattling against Taiwan as China conducts four days of military exercises around the island.
The U.S. dollar fell 0.4% versus a basket of currencies to 106.23, giving up some gains after strengthening on the jobs boom and the jump in yields.
FX analysts were bullish on the greenback's prospects.
"Data like this will further any thoughts about 'U.S. exceptionalism' and is very positive for the USD against all currencies," said Alan Ruskin, global head of G10 FX strategy at Deutsche Bank, referring to the U.S. jobs statistics.
The euro squeezed out slim gains to reach $1.021.
Bitcoin and other cryptocurrencies, which tend to act as a barometer for risk appetite, gained. Bitcoin was last up 4.3% at $24,190.
Gold broke higher on Monday as the dollar and Treasury yields retreated, with focus on U.S. inflation numbers this week that could influence the Federal Reserve's next rate hike. Spot gold rose 0.5% to $1,782.36 per ounce by 1252 GMT, after dropping 1% in the previous session. U.S. gold futures edged 0.4% higher to $1,798.40.
Erasing earlier gains, Brent crude futures fell about 0.8% to $94 a barrel. U.S. West Texas Intermediate crude CLc1 was at $88 a barrel, down about 1%.
(Reporting by Lawrence Delevingne in Boston, Tom Wilson in London; additional reporting by Wayne Cole in Sydney; Editing by Andrew Heavens)