Our head of markets discusses what's moving US indices and events influencing UK share prices today.
A lack of fresh impetus is holding markets back, with both the US and the UK being buffeted by economic and political concerns.
In the US, the most recent failure to agree the next round of stimulus came into sharp focus as the number of US citizens on unemployment nudged 30 million. The divergence between Wall Street and Main Street has become a political issue in the midst of an election campaign where the rhetoric is starting to intensify.
At the same time, the main driver of the market recovery has also been the subject of some debate, as tech stocks on punchy valuations have come under review, given that the pandemic-fuelled rise of recent months may have reached a plateau for the time being. While the Nasdaq index remains ahead by a storming 22% in the year to date, sidestepping the economic concerns arising from Covid-19, there has nonetheless been a decline of 6% in the last few trading sessions.
In the background, negligible interest rates and excess liquidity from central banks have, of course, been a major support. The Dow Jones index has moved back into negative territory for the year, down 3.5%, although the broader S&P 500 remains ahead by just over 3%.
The oil price also remains under pressure as the demand/supply imbalance becomes more evident, and with its additional feature as an indicator of global economic health, there are inevitable worries that the pent-up demand seen in the early days of the easing of lockdown may, for the moment, have come to something of a standstill.
With this in mind, next week’s Federal Reserve meeting will take on extra significance against this rather brittle backdrop. Comments or clues on the Fed’s current reading of any further easing, interest rates, inflation and most importantly the immediate outlook, will be scrutinised. The previous warning that the US economy faces a highly uncertain path to recovery, with the health crisis not under control, will very possibly be echoed next week.
Despite the welcome news of a further improvement to the UK economy in July, sterling remains weak. Given the clouds of the end of the furlough scheme, a likely rise in unemployment on top of the current recessionary trend, plus negotiations faltering between the UK and the EU which threaten further to derail an economy that is desperately trying to recover, the immediate outlook poses more questions than answers.
Sterling weakness has in part provided a prop for the FTSE 100 index over the last week, given the constituents’ exposure to overseas earnings. While this has allowed the index to avoid some of the sharper recent falls, it remains down 20% in the year to date. Even at this level, with some regarding the index as one of the cheapest globally on valuation terms, the UK remains hampered by the lack of an immediate or obvious positive catalyst.
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