Sentiment is fragile and economic data in the US is mixed, so why is the UK market fighting back on Friday?
Despite falling filings for jobless claims numbers in the US, the overhang of last week’s non-farm payrolls miss is still weighing on fragile sentiment, perpetuating concerns of stalling economic growth.
Markets were unable to break a succession of losses over the last few trading sessions as risk sentiment ebbed throughout the day. Fears of the impact of the Delta variant were underlined by statements from several of the leading American airlines that sales had slowed in the face of the new outbreaks as they cut revenue forecasts.
With the economic data currently providing mixed messages, investors are increasingly battening down the hatches, with the next leg of growth yet to emerge. At the same time, the impact on the ground will be seen over the next few weeks as the third quarter ends and corporates begin to report on how they have fared against this difficult backdrop, especially compared to the extraordinarily strong second quarter which most enjoyed.
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A bright spot came in the form of gains in the oil price, partially driven by concerns about the fallout from Hurricane Ida, but tempered by the news that China may sell crude from its strategic reserves. Nonetheless, a 39% rise in the oil price in the year to date implies that investors continue to believe that strong demand in the face of economic recovery has far from dissipated.
The current bout of fragile sentiment has not derailed a successful 2021 for markets however, where the Dow Jones remains ahead by 14%, the S&P500 by 19.6% and the Nasdaq by 18.3%.
In the UK, GDP growth slowed in July to 0.1%, against expectations of a rise of 0.6%. Despite the fact that the month marked the time when most social restrictions were lifted, the well reported headwinds of disruptions to supply chains, staff shortages and even rising Covid-19 case numbers in some regions limited the gains. More positively, however, growth in the three months to July came in at 3.6%, and was ahead year-on-year by 7.5%.
As such, the UK economy remains a work in progress, with news of tax hikes earlier in the week playing against previous investor optimism with its threat of crimping both corporate profits and consumer sentiment. The domestically focused FTSE250 nonetheless remains the star of the show within UK indices, having risen by 16.3% in the year to date, despite some recent weakness.
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The FTSE100, however, has been unable to break out of its current trading range as the proliferation of cyclical stocks weighs on progress given a stalling global recovery. While the index remains ahead by 9% in 2021 and still attractive on valuation grounds relative to many of its global peers, the current pinch point of geopolitical and recovery concerns may linger in the shorter term.
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