Market snapshot: a rising tide lifts UK stocks

The latest inflation reading in the US provided a pleasant surprise which resulted in investors flocking to interest-rate sensitive stocks and smaller companies.

The Consumer Price Index fell by 0.1% in June, annualised to 3%, against expectations of an increase of 0.1% and annual rate of 3.1%. The news convinced investors that a September rate cut is now firmly on the cards, with the consensus of a likely reduction now topping 90%.

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As such, the rotation out of the small concentration of mega-cap tech stocks, which has been almost solely responsible for this year’s market gains, began in earnest, with the real estate and utilities sector reaping the benefit.

In addition, smaller companies, which are seen as being hampered by higher rates due to the increased cost of capital, also attracted heavy buying interest, with the small-cap Russell 2000 index jumping by almost 4%.

The scene is now set for further potential confirmation with the release of Producer Price Index data later today. At the same time, banks such as JPMorgan Chase & Co (NYSE:JPM), Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C) will report quarterly earnings which could also confirm whether any cracks are beginning to appear in the face of higher interest rates, most notably with regard to consumer debt default levels. Consumers have also been hamstrung by higher rates when considering large ticket purchases in anything from houses to cars, as well as loading up on credit card debts.

The rotation out of technology resulted in share price declines of around 6% for NVIDIA Corp (NASDAQ:NVDA), 4% for Meta Platforms Inc Class A (NASDAQ:META) and 2% for Amazon.com Inc (NASDAQ:AMZN) and Microsoft Corp (NASDAQ:MSFT), dragging the Nasdaq some 2% lower, and the S&P 500 almost 1% down.

However, the moves did little to derail the performances of the more tech-exposed indices in the year to date, with the S&P 500 still ahead by 17% and the Nasdaq by 21.8%, while the Dow Jones index has progressed by 5.5%.

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Asian markets were dominated by speculation surrounding the Japanese currency, and whether the authorities had intervened to prop up the ailing yen after the release of the US inflation data. As such, the Nikkei fell by around 2% in a reversal of the fortunes which has seen a weaker yen providing a boost to the raft of Japanese exporters that are core to the country’s economy.

China continued to confound, with the release of conflicting data which did little to unravel the current state of any potential economic recovery. Exports grew at the fastest pace in well over a year, which was offset by a decline in imports on the back of weak domestic demand.

While the authorities in China tend to take a multi-year view on the stimulus required for the economy, investors have become increasingly impatient with the lack of action and have sought investment potential elsewhere in the Asian region.

Meanwhile, the UK continues to undergo an apparent transformation, driven in part by a country now seen as politically stable compared to the likes of the US and France, a situation which would have been unthinkable some months ago. In addition, the relative cheapness of the market on a historical valuation basis has also attracted overseas buying interest, most obviously in the mid-caps where any number of bid approaches have been made in something of an M&A frenzy.

Coupled with some optimism that the new government is looking to kickstart growth with a number of initiatives such as the “national mission”, the FTSE 250 has rallied strongly over recent weeks and now stands ahead by 7.5% so far this year.

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The FTSE 100 has also seen the benefit of this renewed buying interest, although gains have been slightly capped by the recent strength of sterling, which has worked against an index whose constituents largely draw their profits from overseas.

Even so, the premier index opened briskly ahead as there was a broad mark up across sectors, with the rising tide lifting most boats, leaving the index up by 6.9% in the year to date.