Market snapshot: investors wait for rate cut clues

The US recovery rally paused, with stocks drifting lower as investors braced for comments from the Federal Reserve chair in Jackson Hole on Friday.

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The debate has now moved past whether there will be a rate cut to how aggressive the initial move could be. The latest estimates reveal a 70% likelihood of a 0.25% cut, with the outlier of a 0.5% reduction coming in at a 30% chance.

There will be other factors playing out before the next Fed meeting, not least of which will be the next non-farm payrolls report, due for release on 6 September, which will rekindle concerns given the shock reaction to the previous reading earlier this month. In the meantime, the Labor Department will today release revisions to its latest employment data for the year to March, with any significant downward change likely to consolidate calls for an interest rate cut next month.

At the same time, the latest Fed minutes will also be revealed, although the contents are likely to attract less attention than usual given subsequent events which briefly toppled markets this month. Nonetheless, investors will be looking for reassurance that the Fed is still on track and has not fallen behind the curve in cutting rates too late to avoid the economy entering recessionary territory.

Although further volatility cannot be ruled out given the many factors currently in play, the so-called fear index has retraced to more normal levels of around 15 having spiked to 65 on the back of the last non-farm payrolls reading. A sense of calm has emerged over the last couple of trading sessions, underpinned by what has been a largely successful quarterly reporting season, enabling the main indices to recoup most of their August losses. As such, the Dow Jones remains up by 8.3%, while the benchmark S&P 500 has added 17.3% and the Nasdaq 18.7%.

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Asian markets were also weaker overnight, with Japan seeing some pain from the weakness of the yen over recent months. Exports grew by less than expected even given that weakness, while imports rose by 17% leading to a trade deficit in excess of $4 billion. Even so, the Nikkei remains on the up for the year as a whole, although some way off the record highs of March and July.

Investor insouciance also led to a slight decline in Chinese shares, not helped by the perceived lack of aggressive stimulus from the authorities which has weighed heavily on local markets. In addition, shares of JD.com Inc ADR (NASDAQ:JD) fell sharply in Hong Kong after reports that Walmart was looking to sell its stake in the company, despite an upbeat earnings report, leading to questions of whether the exodus in the region is ongoing.

The FTSE 100 opened unconvincingly higher after a poor start to the week which saw the premier index fall by 1% yesterday. The constituents to which the index has a higher exposure accounted for some of the most recent pressure. Energy shares have been weaker following an oil price which has now all but given up this year’s gains, due to the potential for weaker Chinese demand as well as the possibility of an easing of supply pressures should the ceasefire deal in the Middle East come through.

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Similarly, the mining sector has also felt the weight of the tepid recovery and likely outlook in China, although there has been some compensatory relief as the price of gold has continued to scale new highs. Indeed, the miners were grouped together at the top of the leader board in early exchanges, led by the likes of Fresnillo (LSE:FRES) which is particularly concentrated on gold, as well as silver which has also seen a sharp increase in its price over recent months. However, despite these challenges the FTSE 100 is now up by 7.1% so far this year, and some 2% away from the record high achieved in May.

At a local level, much higher than expected government borrowing in July, coupled with a multi-decade high on national debt, could conceivably presage a tough Budget to come. Even so, the UK economy has displayed resilience which has surprised the doomsayers despite a brief and shallow recession earlier this year, and the more domestically focused FTSE 250 has responded accordingly, having now risen by 6.8% in the year to date.