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London markets ended Friday with mixed results as investors assessed a series of economic data from the UK and the US.
The FTSE 100 index edged down slightly by 0.04% to close at 8,376.63 points, while the FTSE 250 managed to post a modest gain of 0.26% to 21,086.54 points.
The FTSE 100 still managed to keep its head above the water this week though ending it with a modest gain of 0.59%.
In currency markets, sterling was last down 0.3% on the dollar, trading at $1.3128, while it dipped 0.1% against the euro trading at €1.1875.
August ended very differently to how it began. When the markets opened on Monday 5th we were looking down the barrel of a market collapse. The Nikkei had its biggest one-day drop since 1987. Somehow, it ended up only down 1.2% on the month - a significant achievement.
“The summer squall of early August has been forgotten, and with US economic data still looking strong, and rate cuts on the way, investors remain confident about the near-term outlook,” said IG chief market analyst Chris Beauchamp.
On London’s equity markets, there was a notable lack of corporate news headlines, although Burberry Group dropped 1.18% as the luxury fashion house faced potential demotion from the FTSE 100 in the upcoming reshuffle.
“A slowdown in consumer demand for luxury goods has weighed on the sector, with Chinese consumers particularly notable by their absence,”
“The demise will see Burberry lose its FTSE 100 status after a run which stretches back to 2009, with a turnaround strategy not yet obviously in place.”
Similarly, budget airline easyJet fell by 0.86%, also on concerns about its position in the index.
On the upside, Rentokil Initial managed a modest gain of 0.06%, even after JPMorgan placed the stock on a "negative catalyst watch" ahead of its third-quarter results in October.
Property stocks performed well, with LondonMetric Property rising 2.56%, Land Securities Group gaining 2.03%, and Segro advancing 1.28% after the Bank of England said net mortgage approvals in the UK rose to 61,985 in July, the highest level since September 2022. Net lending grew more than expected to £2.7 billion and Nationwide’s house price index rose 2.4% year over year up from 2.1% in July.
Close Brothers Group jumped 3.23% following an upgrade by RBC Capital Markets on Thursday, which raised its rating to ‘outperform’ from ‘sector perform’ and significantly increased its price target, citing several potential catalysts.
Grafton Group also saw a rise of 1.93%, buoyed by Berenberg’s upgraded target price, reflecting what analysts described as an "attractive opportunity" in the building materials company.
In Europe, the STOXX Europe 600 Index gained 1.34% on the week rising to a record high. The benchmark extended a rally for a fourth week as sharply slower inflation supported the case for the European Central Bank to cut interest rates in September.
Headline annual inflation in the eurozone decelerated to 2.2% in August from 2.6% in July—the lowest level in three years and a shade above the ECB’s 2% target. Higher energy costs a year ago were partly responsible for the decline. Core inflation, which excludes volatile food and energy costs, ticked down to 2.8% from 2.9%. However, services inflation—a data point that is closely watched by policymakers—quickened to 4.2% from 4.0%.
Among major European stock indexes, Germany’s DAX reached a fresh peak, climbing 1.47%, while Italy’s FTSE MIB added 2.15%, and France’s CAC 40 Index tacked on 0.71%.
In the US the major indexes ended mixed in a week of light trading ahead of the holiday weekend. The technology-heavy Nasdaq Composite fared the worst, dragged lower in part by chip giant NVIDIA, which lost nearly 10% of its value, or roughly $300 billion, at the stock’s low point on Thursday.
Relatedly, value stocks outperformed growth shares by the largest margin since late July. Markets were scheduled to be closed the following Monday in observance of the Labour Day holiday.
With earnings season nearly over, NVIDIA’s report following the close Wednesday being the major exception, the week’s fairly busy economic calendar appeared to play a large role in driving sentiment for those traders still in the office. The most closely watched data point was probably the Labor Department’s release of its core personal consumption expenditures price index on Friday morning.
The Federal Reserve’s preferred inflation gauge showed prices rising by 0.2% in July, largely as expected, although the year-over-year increase came in a tick lower than consensus, at 2.6%. Investors seemed pleased with confirmation that inflation was remaining subdued and near the Fed’s target, with Nasdaq futures, in particular, surging in the wake of the release.
The yield on the benchmark 10-year U.S. Treasury note drifted higher over the week, as hopes appeared to dim that the Federal Reserve would cut interest rates by a full 50 basis points (0.50 percentage points) at its mid-September meeting. The futures markets continued to price in the certainty of a cut of at least 25 basis points (0.25 percentage points).
In Asia the Japanese stock market wrapped up a volatile month by rising over the week, with the Nikkei 225 Index gaining 0.7% and the broader TOPIX Index up 1.0%. By the end of August, both indexes had recovered most of the ground lost in the steep sell-off around the start of the month, which followed the Bank of Japan’s late-July interest rate hike and was largely driven by renewed U.S. growth fears and the rapid unwinding of the yen carry trade.
In the fixed income markets, the yield on the 10-year Japanese government bond was broadly unchanged on the week at about 0.9%. In foreign exchange, the yen weakened to the high end of the JPY 144 against the USD range from JPY 144.35 at the end of the previous week. The Japanese currency strengthened for the second consecutive month in August on the divergent monetary policy outlooks for Japan and the U.S., weighing on the earnings prospects of Japan’s export-oriented firms.
Chinese stocks fell as a series of corporate earnings reports missed expectations and dampened buying sentiment. The Shanghai Composite Index lost 0.43% while the blue-chip CSI 300 fell 0.17%. In Hong Kong, the benchmark Hang Seng Index gained 2.14%, according to FactSet.
Several China economists reduced their 2024 growth forecasts as the country grapples with a prolonged property sector slump and weak domestic demand. Retail sales, a key consumption indicator, are estimated to grow 4% this year, down from estimates of 4.5% in July, according to a Bloomberg survey of economists. Fixed asset investment is expected to grow by 4.2%, lower than the prior month’s projection of 4.4%. Economists also trimmed their consumer price index forecast to 0.5% from 0.6%. The weaker outlook for China raised the prospect that the country may miss its official growth target of about 5% this year. It also raised expectations that the central bank may further loosen policy in the near term, including additional interest rate cuts and a reduction of the reserve requirement ratio for domestic lenders.
On the monetary policy front, the People’s Bank of China injected RMB 300 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.3%. The central bank also supplemented the banking system with RMB 471 billion via its short-term seven-day reverse repos and kept the lending rate at 1.7%.
The Week Ahead
For UK and European investors, there are purchasing managers index surveys, retail sales and house prices data to chew over too, but these will pale in comparison to the US non-farm payrolls report on Friday.
The official jobs report at the end of the week is seen as crucial in assessing the size of a potential Federal Reserve rate cut later in the month and so could spark big moves in bond and stock markets as well as for the dollar.
A month ago, the new July payrolls came in well short of expectations at 114,000, with a surge in the US unemployment rate to 4.3%, which sparked a dramatic flight from risk assets, with global stock markets plummeting.
If payrolls weakened much further in August, economists warn it could reignite recession fears, and with the Bureau for Labor Statistics having acknowledged its non-farm payrolls estimates in the last tax year were 818,000 too high and Fed chief Jerome Powell having said "the time has come" to begin loosening monetary policy, the jobs number on Friday could see an outsized reaction.
“It’s hard to deny how important the August NFP print (on 6 Sept) will likely be and could be the defining data point that settles the September FOMC rates debate, and whether the Fed cut by 25 basis points or 50 basis points,” said Chris Weston, head of research at Pepperstone.
Fireworks could be seen on both sides of the Atlantic when the NFP is released at 1.30 pm UK time.
More US jobs data is available on Wednesday and Thursday in the form of the monthly Job Openings and Labor Turnover Survey (JOLTS) and the initial weekly unemployment claims figure, respectively.
Markets are currently pricing around 120 basis points of cuts in 2024, up from 50bps just a month earlier. To clarify, this doesn’t mean the Fed will raise rates by 1.2%. It means the market is pricing in more than 1%, but slightly less than 1.25%; essentially saying there is an 80% chance of the extra hike, but this will move with market sentiment as we get closer to the date.
1.2% does seem like a lot to us right now, and we wouldn’t be at all surprised if they disappoint. Having said that, the market won’t be too upset if it does because the most important take is that rate cuts will begin shortly, and they should continue gradually until interest rate levels reach a more normal long-term level.
This won’t be the 0.5% of old though. Normal is likely to be in the range of 3% and 4% for some time. This is also true in the UK.
Have a great weekend and we’ll be back next week keeping you informed of market moves and how they can benefit your portfolio.
