Market snapshot: glass half full ahead of US-China talks

For the moment, the glass is half full in the US as renewed hopes of reconciliatory talks with China and a better-than-expected jobs report provided some solace to investors.

The non-farm payrolls report showed that 139,000 jobs were added in May, ahead of the estimated 125,000, with unemployment remaining unchanged at 4.2% as expected. Earlier last week other jobs related data pointed to a softening labour market, which could well continue over the summer, but there are no gaping chasms for the Federal Reserve to react to just yet, watchful though they will be.

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The Fed’s dual mandate means that it is charged with pursuing both maximum employment and stable prices. With the employment situation currently in hand, the focus is on inflation and the effects which have yet to fully wash through from the implementation of various tariffs.

As such, the Fed’s reticence to act over the last few months is both understandable and prudent, with the market currently pricing in either one or two rates cuts later this year, depending of course on the data to come. This may prove a delicate balancing act, with emerging signs of weakening in the manufacturing and services sectors, and with the OECD last week cutting its forecast growth for the US economy to 1.6% this year, from the 2.8% level achieved last year.

In the meantime, the prevailing optimism, however temporary, has been enough for markets to shake off the shock of the “Liberation Day” tariffs, with each of the main indices now in positive territory. In the year to date, the Dow Jones is up by 0.5% and the Nasdaq by 1.1%, while the benchmark S&P500 is up by 2% and around 2.4% away from its recent record high.

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Asian markets were also buoyed by the prospects of easing trade tensions between the world’s two largest economies, with the latest round of discussions due to take place later today in London. Despite the President’s previous rhetoric, there seems to be some possibility that some of this aggression will be dialled back, not least of which since China has an upper hand, especially with regard to its near monopoly on rare earth minerals which are so vital for components in the high-tech industry.

China may also be keen on conciliation since there are further signs that its economy is struggling to fend off the tariff pressures so far. There are signs of deflation, caused in part by weak consumer sentiment, while the country’s exports growth fell sharply in May to 4.8% compared to 8% the previous month, with US shipments in particular decline. Taken together, these seem to give some grounds for optimism on the imminent talks and investors took heart accordingly overnight.

UK markets reflected a more guarded approach at the open, as has tended to be this case this year as the primary index has generally taken the opposite direction to the likes of the US and Asia.

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Early features included a boon to the insurance sector as M&G Ordinary Shares (LSE:MNG) was subject to a broker upgrade which read across, with Prudential (LSE:PRU) receiving the additional bonus of its exposure to Asia given the strength in those markets overnight. 

Despite the unconvincing open, the FTSE100 is now within 0.4% of its previous record high, with the index having added 8.1% so far this year and continuing to cement its position as a preferred investment destination as markets elsewhere waver.