US markets endured a bruising session, with sentiment turning sour on reflection of this week’s hawkish developments.
Treasury yields popped higher once more as weekly jobless claims decreased by more than had been expected, and to the lowest level since January. The move apparently underpins the possibility that the labour market remains tight, which in turn puts upward pressure on pay. It also suggests that the economy continues to display the kind of resilience which enables it to withstand the prospect of higher interest rates.
The news came hot on the heels of the Federal Reserve meeting earlier in the week, which dashed investor hopes of an easing monetary environment. While the level of rates was left unchanged as widely expected, the Fed was clear that another rise before the end of the year was a distinct possibility. In addition, the so-called “dot plot” also suggested that rates would stay higher for longer, and that interest rate cuts might not even be on the table at any point before 2025.
Intensifying the downbeat mood was the possibility of a government shutdown. This added to rising Treasury yields and oil prices and an auto workers strike, any or all of which threaten to derail the economic soft landing on which investors are currently pinning their hopes.
Growth stocks again displayed vulnerability to the hawkish environment, with the Nasdaq the worst hit of the three major indices. General weakness over the last couple of months has taken some of the shine from an earlier show of strength, although the main indices remain for the most part comfortably ahead in the year to date. The Nasdaq has added 26%, the S&P500 13% and the Dow Jones 2.8%.
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Asian markets were mixed to lower as Wall Street weakness reverberated around the region. The possibility of stimulus to engineer a Chinese economic recovery remains in the balance, while in Japan interest rates were maintained at an ultra-low level as expected. It is unclear as to how much longer this extremely accommodative policy will last, although the consensus sees the situation remaining the same well into next year.
However, the general level of uncertainty within global economies, which inevitably affects the level of import and export activity continues to weigh across most of the local markets.
The surprise Bank of England decision to hold interest rates instantly begged the question of whether an additional hike was on the immediate horizon.
UK retail sales figures this morning for August sent a mixed message. While the number ticked up by 0.4% following a decline of 1.1% in July and attributed to improving weather, it also implies that there is still consumer resilience which defies the notion of a blanket cost of living crisis. Such resilience is likely to be tested in the next few months as energy bills rise and the immediate impact of wage rises wear off.
In addition, there also seems to be a “higher for longer” mantra in Threadneedle Street, putting more pressure on an economy which is only showing tepid growth at the moment. The uncertainty has been most keenly felt in the FTSE250 index, which is seen as a natural barometer for the domestic economy, and which has fluctuated between positive and negative territory this year, currently standing down by 1.5%.
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The FTSE100, meanwhile, reflected the sombre market mood globally and dropped at the open. The premier index has also had a chequered year, hitting a record high in February on elevated investor enthusiasm, only to slip into the red as investment trends swung back to growth opportunities offered elsewhere, such as mega cap technology stocks in the US.
There has been a slow and unconvincing recovery since then, with the index constituents largely at the mercy of international news, given their high exposure to overseas earnings. In the year to date, the FTSE100 is currently ahead by 2.8% but struggling to build on any positive momentum.
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