Market snapshot: investor optimism has records tumbling

A fresh bout of investor optimism sent records tumbling as markets in the US, UK and Japan all hit new record highs.

In terms of the wider backdrop, there were increasingly conciliatory noises coming from Washington and Beijing leading to hopes for a tariff truce extension at the very least, when the world’s two largest economic powers meet later in the week.

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Closer to home, the US inflation report, which had been delayed due to the government shutdown, came in marginally lower than expected. The headline number rose by 0.3%, annualised to 3%, below the 0.4% and 3.1% respectively which had been forecast. Core CPI of 0.2% and 3% was also lighter by a similar margin to expectations. Not only was the reading taken as cementing a rate cut from the Federal Reserve later this week, but also for a further reduction in December if the central bank now switches its attention to the labour market rather than inflation as part of its dual mandate.

An investing frenzy followed, with the prospect of stimulated economic activity lifting all boats, with the majority of the banks rising by 2% or more. It is now hoped that the “Magnificent Seven” do not dampen spirits over the next few days, with updates expected from Alphabet Inc Class A (NASDAQ:GOOGL), Amazon.com Inc (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc Class A (NASDAQ:META), where expectations are high given the latest bout of AI euphoria which has helped propel market indices to these levels.

Record closing highs for each of the main indices reflects healthy returns in the year to date, where the Dow Jones, S&P500 and Nasdaq have strengthened by 11%. 15.5% and 20.2% respectively.

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The renewed hopes for a lessening of trade tensions between the US and China inevitably spilled over to Asian markets overnight. In addition, preliminary agreements between the US and Thailand, Cambodia, Vietnam and Malaysia added to the general optimism, while for reasons of its own Japan’s Nikkei 225 index breezed past the 50000 level. The new Prime Minister is believed to favour market-friendly policies and an early indication that defence spending could be due for an injection lifted the likes of Kawasaki Heavy Industries, which enjoyed a near 9% gain.

The UK missed the party somewhat, with the FTSE100 flatlining after closing at its own record closing high at the end of last week. Gains were tempered by an announcement ahead of its third-quarter numbers tomorrow that HSBC Holdings (LSE:HSBA) has booked a provision of $1.1 billion relating to the Madoff fraud and some rare weakness in gold-related stocks given a slight dip in the underlying commodity given the risk-on approach being seen globally.

Separately, while the domestic economy is showing signs of creaking ahead of what could be a punishing Budget next month, consumer spending remained surprisingly resilient. However, this could simply be the result of purchases being brought forward which would represent no more than a temporary reprieve. Inflation may have plateaued for the time being, and companies seem to have scaled back hiring until the outcome of the Budget measures is known, although even in combination these are probably insufficient to change the Bank of England’s cautious stance on monetary easing.

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However, the premier index remains largely insulated from such domestic concerns given its international focus. Over the course of the last few months, the UK has slowly rebuilt its reputation as an investment destination, with the FTSE100 leading the way with a gain of 18% in the year so far. Its exposure to the mining, defence and banking sectors has contributed to the record rise, while an average dividend yield of 3.1% across the index is the investment equivalent of the icing on the cake.