Markets globally continued to edge higher, with some of the prevailing concerns beginning to dissipate as economic news lifted spirits.
The US non-farm payrolls report provided some comfort on a number of fronts. The headline figure was that 187,000 jobs had been added against a consensus of 170,000, but the previous numbers from June and July were revised down by a combined 110,000. In addition, wage growth also increased by less than had been forecast, while the unemployment rate rose to 3.8% as opposed to a predicted standstill at 3.5%.
Overall, the release provides further optimism that the Federal Reserve is nearing the seemingly unattainable outcome of overcoming inflation without tipping the economy into recession. Recent economic data has for the most part gone in the Fed’s favour, and its previous comments that its policy would be data dependent have led investors to conclude that a no-change decision at the upcoming interest rate meeting is virtually guaranteed.
Even so, markets are not yet in a state of unbridled optimism, since the cumulative effect of the rate rises so far has probably not fully fed through to the economy, which could provide some unwelcome surprises in the following months. This could also ignite some of the lingering concerns that rates would then need to remain higher for longer. The current news is certainly positive, but neither the Fed nor investors are quite yet ready to declare victory.
There nonetheless remains an optimistic view that the central bank is beginning to get its ducks in a row which, all things being equal, could lead to a further switch to equities as the investment destination of choice. In the meantime, the main indices have maintained a positive performance despite a relatively weak August, with the Dow Jones having added 5%, the S&P500 almost 18% and the Nasdaq 34% in the year to date.
Asian markets also rallied given the improving sentiment towards China over the last couple of trading sessions. The property sector has been in the eye of the recent economic storm, but investors are coming to the conclusion that the cumulative effects of recent moves by the authorities may actually begin to move the dial.
Further relaxation of home buying restrictions is expected to follow imminently, which would add to recent moves such as the reduction of downpayments for first-time buyers and the lowering of rates on existing mortgages. News from Country Garden that it had secured approval to extend payments for an onshore bond was also of some comfort, while there were also reports of a rise in real estate transactions following Beijing’s moves last week. The next test of this renewed optimism will come later in the week as China reports its trade balance, imports and exports position on Thursday.
The generally optimistic momentum carried over to the UK in opening exchanges, with the main indices posting solid gains. The FTSE100 was buoyed by the more recent China news, with mining stocks attracting some risk-on buying interest and with the likes of Prudential (LSE:PRU) and HSBC Holdings (LSE:HSBA) also ticking higher given their Chinese exposure.
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It remains to be seen whether this risk appetite is sustained, but if the news from the two global economic superpowers continues to trend in the right direction, the premier index is likely to receive a knock-on benefit given the importance of overseas earnings to many of its constituents.
In the year to date, the FTSE100 has yet to recoup previous highs but remains ahead by 0.7%, while the FTSE250 remains in negative territory, having lost 1.4% as domestic economic concerns continue to weigh.
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