With a significant cloud overhanging financial markets now removed, stocks have powered higher. Our head of markets explains what's behind the optimism.
Markets powered ahead at the end of last week, with investors reacting to both the avoidance of a US debt default and a selectively positive non-farm payrolls report.
At a headline level, the non-farms number of 339,000 jobs having been added against expectations of 190,000 could have fallen into the camp of good news being bad news, in that the ongoing strength of the labour market could prompt the Federal Reserve to maintain its interest rate hiking policy.
However, underneath the headline number were two factors which gave some cause for cheer, with wage inflation showing some signs of weakening, while the unemployment rate rose to 3.7% from a previous 3.4%. These gave some indication of the current state of the jobs market and were exactly what investors wanted to hear, namely that a larger pool of workers is both limiting wage increases and in turn helping to dampen inflation.
As such, the current consensus remains that the Fed will use the June meeting to “skip” another hike, although a rise in July now seems a probability. At the same time, any previous thoughts of rate cuts before the end of the year have now largely disappeared, with rates likely to remain higher for longer as has been the Fed mantra all along. But, more positively, the general data points to an increasing possibility of a soft landing for the economy.
The strength of the market pulled the Dow Jones index back into positive territory for the year, with the index now ahead by 1.9%. Meanwhile, the S&P500 and Nasdaq continued their progress, both having technology exposure to differing degrees, where not only the emergence of the sector having defensive properties, but also some recent optimism on prospects for stocks allied to the growth of Artificial Intelligence have boosted prices. In the year to date, the S&P500 has now added 11.5%, while the Nasdaq has jumped by 26.5%.
The generally buoyant mood spilled into Asia overnight, where markets continued to move ahead, with Japan’s Nikkei index adding to its recent strength and briefly touching levels not seen for over 30 years. The situation in China remains more nuanced, with detractors pointing to a faltering economic recovery and ongoing geopolitical uncertainties. In contrast, there was a strong manufacturing index print suggesting that the recovery could simply be uneven as opposed to over. In any event, it is still thought that authorities stand poised to deliver further stimulus to the economy if and when required, particularly with consumers in mind.
The bullish baton was also passed on to markets in the UK, where the main indices made steady if unspectacular gains at the open. For the FTSE100, the impact of a stronger oil price following the possibility of large output cuts from Saudi Arabia fed straight through to the majors, with BP (LSE:BP.) and Shell (LSE:SHEL) adding 1.2% and 1.3% respectively.
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Elsewhere, the embattled telecoms sector showed some relief with rises for both BT Group (LSE:BT.A) and Vodafone Group (LSE:VOD), while B&M European Value Retail SA (LSE:BME) also rose following a broker upgrade. The slight tail off in Chinese trading had the effect of dampening both mining shares as well as companies with a pronounced interest in the area such as Prudential (LSE:PRU) and Burberry Group (LSE:BRBY), all of which leaves the FTSE100 standing ahead by 2.5% in the year to date.
The more domestically focused FTSE250 also edged ahead, still underpinned by a UK economy which has shown signs of surprising resilience so far this year and where some M&A activity of late has renewed interest in the index. Given the pressures which both global markets and economies have been facing, the measured growth of 1.9% so far this year is a hard-won achievement.
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