Despite the pandemic and concerns around inflation, investors continue to pile into American equities.
Markets have opened the new quarter in fine fettle, with the S&P500 hitting a record closing high for the sixth consecutive session.
The first test of the quarter will come later today with the release of the non-farms payroll data. The current consensus is for 690,000 jobs to have been added in June, as compared to a lower than expected figure of 559,000 in May, with the unemployment rate expected to dip to 5.7% from 5.8%. At such levels, employment would still be around 7 million jobs below the pre-pandemic peak in February 2020.
A particularly strong reading would raise fresh questions of the Federal Reserve policy, although there is mounting evidence that a shortage of labour could imply that wage inflation is on the way. This follows on from a reading of manufacturing activity which remained positive, but at a lighter clip than the previous month, partly fuelled by a lack of available workers.
Even so, the fact remains that for the moment the Fed is retaining its accommodative stance, with the likelihood of tapering, and particularly interest rate rises, not on the immediate horizon. Complemented by the multi-trillion dollar stimulus packages being introduced by the White House, conditions are set fair for further economic recovery.
This is also playing out with increasingly positive moves within the major indices. In the year to date, the Dow Jones is up by 13%, the S&P500 by 15% and the Nasdaq by12.7%.
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In the UK, a short-term boost was handed to the FTSE100 following some sterling weakness. The tone was also lifted by some dovish comments from the Governor of the Bank of England, echoing the Fed’s view that inflation is likely to rise from here before falling away once more in a temporary spike.
At the same time, there were also similar themes emerging from UK manufacturing data, with growth being hampered by issues with supply chains, raw materials and distribution issues. Nonetheless, as the UK approaches “freedom day” on 19 July, other parts of the economy will at last be able to join in with the general recovery.
The more measured appreciation in the UK markets this year still leaves plenty of room for further growth on valuation grounds, with the weight of investable money still searching for opportunities on a global scale. In the year to date, the FTSE100 has added 10.6% and the more domestically focused FTSE250 10.8%, with the potential for more upside still firmly in play.
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