Market snapshot: fresh optimism but investors remain on high alert

A strong end to the week on Wall Street has spilled over into Europe on Monday. Our head of markets explains why stocks are moving higher.

After a volatile week which ended on a high note, the positive momentum has spilled over across the major global markets Monday.

A rise of 1% in US retail sales in June, after a decline in May, showed the resilience of the consumer, and confounded expectations that the largest driver of economic growth would be hunkering down.

Spending increased across a number of areas, including furniture and at restaurants, although there was a decline within clothing and department stores. Even though some of the growth could simply reflect higher prices, it nonetheless kept the consensus intact for a 0.75% interest rate rise from the Federal Reserve next week, as opposed to the 1% rise which had initially been feared after the release of the latest inflation data.

In addition, the Michigan consumer sentiment index also ticked higher, even if it remains near all-time lows. The round of optimism, at least for the moment, was the fact that of the 35 companies within the S&P500 who have reported so far, 80% have beaten expectations.

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Investors will nonetheless remain on high alert this week, as further economic data provides further colour, while the need for caution against a further possible supply shock for oil and the likelihood of an interest rate hike from the European Central bank (ECB) increases.

It remains to be seen whether the momentum can be maintained and, in the meantime, the major indices still have some way to go before anything approaching a recovery can be called. The Dow Jones has fallen by 14% in the year to date, while the S&P500 has given up 19% and the Nasdaq 27%.

Markets also rallied in Asia, despite the possibility of further lockdowns in China amid increasing Covid-19 testing, as investors switched into risk-on mode as they leaned into the availability of more beaten down stocks, which could be providing attractive entry levels.

Given the US and Asian tailwinds, the UK markets also followed suit in early trade Monday, with a broad mark-up of prices building on Friday’s strong close. Early features included a bounce for oil and mining stocks, while there was also interest in retailers and those stocks with an Asian exposure such as HSBC Holdings (LSE:HSBA) and Burberry Group (LSE:BRBY).

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Even so, and as with other major markets, there is a considerable mountain to climb to reverse the declines from earlier in the year.

The FTSE100 still has a good chance of being one of the first to recover, now down by just over 2% in the year to date, while the FTSE250 is just out of bear market territory for the time being after a loss of 19%.

The earnings season has the potential to provide some relief, although the likelihood of a global slowdown is still the base case for many.”