Market snapshot: more mixed messages for investors

US markets were off to a sprightly start this week, reversing some of the previous week’s losses as investors returned to the fray on an improving earnings outlook.

As the current reporting season begins to draw to a close, around 80% of US companies have outpaced expectations. This is set against extremely low expectations, and the relief is not unconstrained. A theme of the season has been the fact that corporates have drilled down on managing margins and containing costs, as opposed to outright earnings growth which is still set to finish at lower levels.

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Even so, many of the red flags which the market was expecting from companies on the ground have not materialised, which has tended to underline the broader economic data which suggest that the economy remains strong enough to withstand the barrage of interest rate rises so far. 

Indeed, as hopes for the idyllic economic soft landing grow, the Federal Reserve remains alert and data dependent, with the current consensus suggesting that there may be another hold decision at the next meeting in September.

The next data point of note will come on Thursday, with the release of the consumer price index for July. It is expected that the reading will have accelerated slightly to 3.3%, with the core rate remaining unchanged at 4.8%. This would vindicate the current level of uncertainty which investors are experiencing, in that the Fed’s target of 2% inflation is moving ever nearer, yet there remains some work to do in finally putting the issue to bed. As such, further rate rises cannot be discounted, although there remains a lagging effect which could yet play into reducing inflation further in the coming months.

Such uncertainty has not derailed the optimists, however, and the bulls currently have the upper hand. In the year to date, the Dow Jones is ahead by 7%, while the more tech-influenced S&P500 and Nasdaq have posted gains of 18% and 34% respectively.

Asian markets endured another mixed session, with China remaining the central work in progress. Sluggish economic growth and weaker overseas demand saw China slump to its largest exports fall in recent years, with a decline of 14.5% being both heavier than expected and nearing the 17.2% drop seen at the initial outbreak of the pandemic. Imports also fell by 12.4% against estimates of a 5% decline, and investors are increasingly crying out for some stimulus from the authorities to stem the economic slowdown.

China’s spluttering recovery has also weighed on commodity prices, which has fed through to the mining stocks within the FTSE100 which have had a punishing year. Glencore (LSE:GLEN) is the latest casualty in reporting a plunge in first-half profits which weighed heavily on its opening price, with the Chinese hangover generally impacting the premier index yet again.

The China effect rippled more widely to other exposed stocks, causing declines in the likes of Standard Chartered (LSE:STAN) and Prudential (LSE:PRU) and, in the absence of any positive catalysts, the FTSE100 has seen its gain for the year whittled down to just 1.1%.

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There was a more muted impact on the retailers, following a release which revealed an increase of 1.5% in total retail sales for July. However, this compares with growth of 2.3% the previous year and a three-month average of 3.5% and on an inflation-adjusted basis these numbers mask a decline in volumes.

Of itself, the release does not move the dial, but it nonetheless underlines the enigma of where investors can possibly look for sustained UK economic growth to offset some of the damage being caused by a relentless round of interest rate hikes.