Market snapshot: only one way for FTSE 100 to go

With little room for UK stocks to manoeuvre in early exchanges, our head of markets assesses the situation for a session when Wall Street stays shut for Labor Day. 

Despite an initial spike following an inoffensive non-farm payrolls number, US markets were unable to hold onto gains with the likelihood of further aggressive Federal Reserve tightening still in place.

The addition of 315,000 jobs was largely in line with expectations, while the rise of the unemployment rate to 3.7% from 3.5% offered brief hope that the labour market could be showing some signs of having reached a plateau. However, the mood soon changed with the consensus for a further 0.75% hike at the September meeting prevailing.

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The volatility of indices globally has been a factor of recent weeks, and the Dow Jones proved the point, finishing down by 338 points having been ahead by 370 points earlier in the session.

The latest lurch marked the third consecutive week of declines and leaves each of the main indices firmly in the red. In the year to date, the Dow Jones is down by 14%, the S&P500 by 18% and the Nasdaq by 26%.

Further volatility could also come from a catch-up session on Tuesday, with US markets closed for Labor Day today, while in the background the fractious relationship between the US and China continues to hamper sentiment.

On Friday, the US State Department announced a potential sale of military equipment to Taiwan, which the Chinese embassy in Washington described as a move which “severely jeopardises China-US relations and peace and stability across the Taiwan Strait.”

Asian markets were also in unsympathetic mood, struggling to recover from recent economic pressures. China’s services sector reported slowing growth in August, while a similar measure in Japan showed continuing weakness.

Although headline business activity in China remained in positive territory, the hurdles are still very much in place. There is an increasing backlog of work given the additional recent lockdowns, new business demand has weakened and export sales are also under pressure, exacerbated by some materials shortages.

The double whammy of weak US and Asian markets left the UK with little room for manoeuvre in early exchanges. The opening dip reversed some of the strong end to last week, although in the year to date the flagship FTSE100 is down by just 2.2%.

The ongoing weakness of sterling has provided support to an index largely reliant on overseas earnings – and therefore more valuable profits in translation back to pounds sterling – while the slight recovery in the oil price overnight has limited some of the damage.

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In relative terms, the FTSE100 has remained something of an investment destination of choice given its exposure to resilient defensive stocks giving some inflation-proofing, while the average dividend yield of 3.9% puts a more positive perspective on total return.

That being said, with sterling continuing to weaken on the UK economic outlook, the domestically-focused FTSE250 index has slipped further, down by 20% in the year to date and dipping into bear market territory.