UK shares have made a strong recovery from Friday's drop as Wall Street stays closed for Labor Day. Our head of markets explains why.
A major miss from the US unemployment reading has had the ironic impact of reducing investor jitters.
The Delta variant of Covid-19, as largely expected, has continued to impact new job openings, particularly in the areas of hospitality and retail. At the same time, there may be a reluctance for some potential workers to seek employment until the variant subsides.
The non-farm payrolls figure of 235,000, as compared to the expected consensus of 750,000, was below even the lowest of estimates and is further proof that the strength of the US recovery may plateau until normal service can be resumed in society.
That being said, the July figure was also revised to 1.05 million jobs added from the initial reading of 943,000, and even the notoriously uneven August figure may yet be subject to revision. In contrast, the unemployment rate fell in August and wage inflation was muted, suggesting that the Federal Reserve narrative of no imminent stimulus tapering will remain in place, with December now being seen as the earliest possible time.
There will be no further domestic reaction today, with US markets closed for Labor Day.
As such, the year-to-date figures will remain strongly positive with the Dow Jones up by 15.6% and the S&P500 by 20.7%. As investors sought growth stocks, and in big tech in particular, the Nasdaq hit another record closing high and is now ahead by 19.2% so far this year.
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The progress of economic recovery in the UK will be further defined with the release of the latest GDP number at the end of the week. In the meantime, the success of the vaccine rollout and the general withdrawal of government assistance is, for the moment, staving off a hard landing, even though the winter months could bring new challenges both in terms of the virus and pressure on unemployment.
Even so, the achievements so far have been notably positive for the FTSE250, seen as a better barometer for the UK economy than the premier FTSE100. The index, still nudging record highs and ahead by 18.2% in the year to date, has added 86% since the lows recorded in March 2020.
The FTSE100 meanwhile is making more sedate progress, ahead by 10.8% so far this year. Gains have been driven by a combination of corporate progress following the slow but steady progress from Covid-19 and some international interest in the index as a whole on valuation grounds. The cyclical nature of the index and its particular exposure to the US in the form of its dollar earners will continue to be impacted by the uneven nature of the global economic recovery.
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