Markets continued on a languid path as the list of concerns showed little signs of abating.
US markets have been slipping after a strong first half of the year and have now hit something of a brick wall in the absence of any positive catalysts. There are still signs of strength in the economy, with the corporate reporting season having widely beaten expectations and with the consumer still in rude health and in the mood to spend.
However, this very strength has altered the narrative for investors who had been hoping to factor in some interest rate cuts in the new year. The current persistence of inflation, although moving in the right direction, and the ongoing raft of strong economic data has heightened concerns that the Federal Reserve’s interest rate hiking policy may have further to go. The latest data showed stronger than expected manufacturing output and jobless claims which came in below estimates.
The caution is likely to continue amid a traditionally quiet trading month, and until such time as yields begin to fall or there are sufficient indicators that the Fed’s job is nearing completion. Even so, the recent qualms have done little to derail what has been a successful year for the main indices with hopes of an engineered soft landing for the economy still intact. In the year to date, the benchmark S&P 500 has added 14% and the Nasdaq 27%, while the Dow Jones remains ahead by 4%.
Asian markets have issues of their own and were again mixed to negative overnight. In sharp contrast to the strength of the US economy, the recovery in China following reopening appears to have all but petered out, with another red flag from the property sector coming in the form of developer Evergrande filing for bankruptcy protection in a US court. The move is designed to allow the company breathing space as it renegotiates deals with its creditors, although it is nonetheless the latest in a line of worrying developments underscoring the weakness of the sector.
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Recent moves by the Chinese authorities to ensure liquidity and the reduction of key interest rates may yet have an impact on the economy, but have yet to cut any ice with investors. Chinese markets are down some 10% from the levels at the turn of the year, and broader concerns over consumer spending, industrial demand and high youth unemployment are all adding to an increasingly toxic mix.
UK markets are also struggling to pull any investment rabbits out of the hat, with the FTSE 100 having lost much of its allure from earlier in the year. Its previous strengths of a high exposure to inflation-proof defensive stocks and overseas earnings are now being overlooked, while the average dividend yield of 3.9% for the index is seemingly insufficient to tempt investors with higher returns available elsewhere.
Another moribund opening was inevitable given the general direction of other global markets overnight, and in opening exchanges the premier index slipped to add to recent declines, leaving the FTSE 100 down by 2.5% in the year to date. The feeling of a recent washout was also echoed in the latest retail sales figures, with consumer spending and indeed confidence seemingly ebbing away. Given the likelihood of more interest rate rises, this pressure will increase and with little visibility for improvement, the FTSE 250 has also given up any gains and is now down by 3% so far this year.
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