Interactive Investor

Market snapshot: focus on the Fed and weaker UK GDP growth

9th July 2021 08:57

Richard Hunter from interactive investor

Expect more earnings noise in the US to move markets in the weeks ahead, while focus in the UK is on latest economic growth data.

Investors looking for negatives will sometimes find them, and the current lack of conviction is weighing on markets generally.

A move towards haven assets such as bonds has further depressed yields, suggesting that some believe that lower economic growth is on the horizon. This is largely driven by the dual concerns of the impact of the Covid-19 variant in some populous areas of the globe, alongside the inevitable Federal Reserve tapering of bond buying.

The Fed has not given any firm indications of timings on such a withdrawal of stimulus, but the minutes of the most recent meeting suggest that the discussion is nearing the top of the central bank’s agenda.

This led to a choppy day across the board, with the imminent second-quarter reporting season likely to provide further market noise. The season kicks off next week with the banks in what should be an early indication of economic health, and with loan demand and any further release of impairment provisions in the spotlight.

The general direction of travel remains positive despite the current stumble, however, and in the year to date the Dow Jones remains ahead by 12.5%, the S&P500 by 15% and the Nasdaq 13%.

The small gain of 0.8% for UK GDP growth in May was lower than had been expected, but the economy nonetheless saw the benefit of further reopening in the month, with a fuller positive impact expected to follow through in June. While the economy remains 3.1% shy of pre-pandemic levels, there are some promising signs underneath the bonnet.

The services sector increased by 23.4% against the easy comparatives of last year, but is clearly one which may have further to go. Quite apart from the benefits of “freedom day”, the elevated level of savings in the UK means that consumers have the financial firepower to spend. In addition, and despite the easing of restrictions on overseas travel, many will already have staycations booked in the UK which should provide a further boost to the domestic economy.

The news has provided some relief to indices which had been under similar pressure to other major markets, and in the year to date the more domestically focused FTSE250 has now added 10.8%, and the premier FTSE100 index 9%. The search for the next positive catalyst is ongoing, which would enable markets to build on the steady gains already made as a result of the slow return to normality.

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