Market snapshot: positive vital signs for US and UK stocks

Promising corporate results have given Wall Street a boost, while share prices here received a much-needed lift following surprisingly good inflation data. Our head of markets explains what's happened.

Markets took some solace from the latest corporate and economic news, with hopeful signs that runaway inflation may be abating.

In the US, the likelihood of a further interest rate rise next week from the Federal Reserve is all but a done deal, although more recent indicators suggest that the hike could mark the end of its aggressive monetary tightening offensive. The current corporate reporting season is off to a strong start, albeit against low expectations, pointing to an economy which has yet to suffer from the rising interest rate environment.

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The banks have been large contributors to the early positive surprise, with Morgan Stanley (NYSE:MS) and Bank of America Corp (NYSE:BAC) the latest to breeze past expectations. Morgan Stanley shares spiked by almost 6.5% after reporting strong growth in its wealth business which offset lower trading revenue, while Bank of America revealed a 20% surge in second-quarter profit, driven by higher interest income and better than expected performances from trading and investment banking revenues.

While the reporting season is in its nascent stages, hopes are increasing that corporates in the US will be able to report resilient trading against a toughening environment.

At the same time, retail sales rose by 0.2% in June, with May’s figures being upwardly revised. A decline in building materials was offset by continuing strength at the consumer spending level, while elsewhere there were signs that car output accelerated last month. This seemingly additional proof of an unwavering US economy saw investors reacting warmly to the possibility that the end of the hiking cycle could be clearly coming into view.

The boost to the main indices further improved performances in the year so far, with the Dow Jones now ahead by 5.4% and the S&P500 by 18.7%, while the Nasdaq continues to be the poster child of the current waves of optimism, having added 37%.

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Asian markets remain hamstrung by the evolving situation in China, where the immediate post-pandemic economic recovery appears to have dissipated. Growth data continues to disappoint, while the revelation from property developer Evergrande that its debts have risen to some $340 billion provided another red flag. Investors are increasingly concerned that further stimulus may not be forthcoming from the authorities, while several economists are downgrading their shorter-term outlook on prospects.

The UK welcomed some unusually positive economic news, with inflation falling to 7.9% in June from 8.7% in May and better than the expected level of 8.2%. Of equal surprise was the performance of underlying inflation, which strips out food, energy, tobacco and alcohol prices, where a rise of 6.9% bettered both the expectation and previous month’s performance of 7.1%.

In normal circumstances, this could signal an easing monetary policy from the Bank of England, with inflation moving in the right direction, but with the 2% target in mind, this latest release represents victory in one battle, but not the war.

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Even so, the subsequent weakness in sterling provided the premier index with an early boost given its majority exposure to overseas earnings, with the FTSE100 clawing its way back into positive territory for the year.

Housebuilders were the stand-out beneficiaries of a potentially less threatening inflationary environment, while financials and retailers also rode the relief rally. The strength at the open leaves the FTSE100 ahead by 1.4% in the year to date, with the more domestically focused FTSE250 also returning to the black with a strong bounce which leaves the index ahead by 1.7%.