Market snapshot: relief rally as two hurdles set to test the mettle of investors

It's a big week for US retail, with updates due from Target, Walmart and Home Depot, plus the latest minutes from the Federal Reserve meeting, says our head of markets.

Economic news from China threatened to spoil the party after US markets staged a strong rally at the end of last week.

Hopes that inflation may have peaked in the US drove all the major indices higher, with a notable recovery in high-growth and big technology stocks, which bore the brunt of inflation concerns earlier in the year. While the indices remain lower in the year to date – the Dow Jones is down by 7%, the S&P 500 by 10% and the Nasdaq by 17% - there has been a significant recovery from the previous lows.

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At present, the US economy looks set fair to withstand the aggressive pace of Federal Reserve interest rate rises, with a tight labour market still creating jobs and keeping a lid on the rate of unemployment.

This week, two further tests are due which will test the mettle of investors. The latest Fed minutes on Wednesday are likely to reinforce a hawkish stance, until such time as a measurable and sustained fall in inflation can be seen, In the meantime, expectations have eased for the next interest rate decision on September, with the consensus predicting a rise of 0.5% following the previous months’ hikes of 0.75%.

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The second and possibly larger hurdle will be the release of retail sales data, accompanied by updates from a number of major retailers such as Target (NYSE:TGT), Walmart (NYSE:WMT) and Home Depot (NYSE:HD). With the consumer core to the strength of the US economy, news from the ground on the latest impact of inflation, supply challenges and consumer demand will drive sentiment in the nearer term. Retail sales are expected to reveal a sharp slowdown in July, however, which would put an additional question mark over the level of consumer sentiment.

Amid geopolitical tensions as a delegation of US lawmakers arrive for a further trip to Taiwan, Chinese economic data revealed the ongoing impact of Covid-19 lockdowns and an escalating property crisis. Retail sales and industrial output both rose, but by less than expected in July, alongside a disappointing showing from bank lending. In response, China’s central bank unexpectedly cut key lending rates overnight in an effort to stimulate activity, which removed some of the pain resulting from the releases.

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The UK market chose to take its lead from Wall Street, notwithstanding the fact that the Bank of England is set to maintain its aggressive interest rate stance in the face of persistent inflation in the UK. Even so, underpinned by some inflation-resilient sectors, stronger commodity prices, a generous average dividend yield and weaker sterling, the index remains up by 2% in the year to date, in sharp contrast to many of its global peers.

Pharmaceutical shares were marked sharply higher in early exchanges, following an announcement from AstraZeneca (LSE:AZN) regarding the trial success of its breast cancer drug, Enhurtu. The news had a positive read across to the rest of the sector in underlining the potential strides, which the major pharmaceutical companies are now making, while an oil price which remains ahead by 25% in the year to date gave some further support to the oil majors.