Market snapshot: why investors are still skittish

The new week brought a spate of US bargain hunting as investors mulled over whether the declines of the last few trading sessions had been somewhat overdone.

Although the main indices were far from recouping the losses of last week’s bruising activity, there were some strong performances which were largely led by mega cap technology stocks. NVIDIA Corp (NASDAQ:NVDA) shares rose by 3.5% having dropped around 15% last week, although they remain ahead by more than 120% this year.

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The buying interest also extended to the likes of the retailers and banks as thoughts of a rate cut were seen to boost the fortunes further of what has already been a reasonably resilient consumer.

Even so, investors remain skittish not on the likelihood of a rate cut at the impending Federal Reserve meeting, but rather how aggressive the US central bank might be. Last week’s non-farm payrolls was not conclusive in cementing the possibility of a 0.5% cut, with 0.25% remaining most likely although there could be more to come.

Attention now switches to the other main part of the Fed’s mandate, namely inflation, with reports at the consumer and wholesale levels coming tomorrow and Thursday, with investors grappling for clues as to the size of the impending cut aiming at the perfect scenario of a soft economic landing.

The looming presidential election will also begin to garner attention as it begins to gather pace, with any uncertainties adding to the list of potential concerns. In the meantime, however, the main indices remain robustly in positive territory this year, with the Dow Jones having added 8.3%, the Nasdaq 12.5% and the S&P500 14.7%, giving some protection against the current volatility.

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Asian markets were mixed overnight, with Japan’s Nikkei showing some limited strength in technology following the Wall Street rebound for the likes of the Nasdaq in particular. However, China again grabbed the headlines with its economic recovery continuing to disappoint investors, who have sought alternatives in other regions for most of this year in the absence of any sustained stimulus from the authorities to counter the situation.

Following Monday’s inflation figure which suggested that consumer demand was still fragile domestically, a further report overnight consolidated the view, showing that China’s imports had missed expectations. On the other hand, exports grew at their fastest pace since March of last year, although this was seen as being a sign of manufacturers accelerating orders ahead of tariffs and even exclusions by other countries coming into play in the near future. Indeed, the US House passed a bill yesterday which seeks to limit more of the tech coming from China on national security grounds, in a further escalation of trade tensions between the two powers.

The release of unemployment and wage growth numbers came in largely in line with expectations, which in turn lessened the likelihood of an immediate further interest rate cut from the Bank of England next week. Another reduction is still expected before the end of the year, however, should these figures continue the current trend. Unemployment fell slightly from 4.2% to 4.1%, but wage growth continued to grow at 5.1% from the previous year.

The figure suggests some stabilisation, but the central bank is mindful that rising wage pressures are themselves inflationary and that any further loosening of monetary policy could be damaging if implemented too early. The release left sterling largely unchanged, which would tend to correspond with the likelihood of a no-change decision next week.

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Meanwhile, the FTSE100 gave up any gains from yesterday in opening lower, with scant evidence of any focused buying interest. Themes were limited in terms of the early weakness, with marginal markdowns applying to the retailers and banks.

Stocks, specifically AstraZeneca (LSE:AZN) shares, fell by around 5% in reaction to news last night that its next generation cancer drug had failed to meet the necessary targets. Meanwhile, Hikma Pharmaceuticals (LSE:HIK) also dipped slightly as it announced the completion of $135 million acquisition of Xellia Pharmaceuticals of the US.

Ahead of any immediate positive catalysts, the premier index remains some way off its recent record high, although in the year to date its gain of 6.2% shows some elements of a generally warming sentiment towards the UK, particularly during times of elevated market stress.