ROUND TRIP FOR MARKETS AS BETTER ECONOMIC DATA HELPED ERASE EQUITY MARKET LOSSES

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Data Sourced from FE Analytics, and Bloomberg Finance LP

ROUND TRIP FOR MARKETS AS BETTER ECONOMIC DATA HELPED ERASE EQUITY MARKET LOSSES

This week we have seen how brittle market sentiment is at the moment. Trading is usually lighter in mid-summer, meaning large and unpredictable market moves are more common, but the scale of this week’s sell-off was notable. The long bull run for US equities has many investors concerned about how long the rally can last and markets still lack a clear view of where interest rates go from here.

What is perhaps more remarkable is the speed of the recovery. The Nikkei index fell 12% on Monday, but most of this was reversed by the end of the week. By Friday morning UK, European and US equities were close to positive for the week as some investors spotted an opportunity to top up their holdings and better economic data lifted the gloom. Meanwhile, the fierce rally in bonds at the start of the week helped offset the decline of equity markets for many investors, but yields have also returned to where they were a week or so ago. Data about the underlying strength of the US economy remains mixed and until markets see clearer signals then the potential for outsized and short-term market moves remains.

GLOBAL: RISING YEN AND FEARS OF US RECESSION SPARK SELL-OFF

Fears of a US recession and a sharp rise in the yen caused dramatic, short-term market moves. US and Japanese equities tumbled and the potential for recession and the attraction of a safe haven caused bonds to spike. Japanese markets saw some of the biggest moves as last week’s surprise rate hike from the Bank of Japan caused the yen to rise quickly and this sparked a bout of selling. US equities followed Japan down as weaker jobs data caused investors to rethink the resilience of the US economy and some corporate updates disappointed. Selling in equity markets also spread to the UK and Europe.

Bond markets experienced a sharp rally as investors considered whether the Federal Reserve would be forced to cut rates more aggressively in order to head off recession. However, the rally proved brief as bond yields reversed their drop. More encouraging economic data in the US and assurance from Bank of Japan that there would no further rate hikes in the short term helped equity markets recover most of their losses.

US: SOME EVIDENCE THAT CONSUMER DEMAND IS AFFECTING SALES

Concern about a recession in the US played a big part in the equity sell off. Although better jobs data helped markets recover, a drop in US consumer spending is showing up in company updates. Firms including Disney, Hilton hotels, Diageo and McDonalds have reported slowing sales as US consumers become more discerning about their discretionary spending. Wage growth continues to slow and is back in line with the long-term average and consumer sentiment has been declining since May. Disney reported a first annual profit from its streaming service, but said spending at its theme parks has fallen slightly. Hilton and Airbnb also reported more caution amongst consumers.

However, not all consumer-facing businesses have experienced a slowdown. Uber says consumer demand has never been stronger as sales at its taxi and home delivery businesses both increased. UK-based hotel group IHG said, with the exception of China, it is not seeing any drop in demand as it reported revenues rising in its last quarter.

HOUSING: UK RATE CUT EXPECTED TO BOOST PROPERTY SALES

House prices increased faster than expected in July as buyers turned more positive. Data from Halifax and Nationwide show prices increased more than 2% for the 12 months to the end of July. Prices have been steadily rising this year and the Royal Institution of Chartered Surveyors says estate agents expect to see sales and prices rise as buyers have turned more positive following the interest rate cut in early August. Mortgage approvals were already rising as lenders reduced mortgage rates in advance of the Bank of England’s interest rate cut and borrowing is expected to rise if mortgage rates fall further.

The improvement in buyer sentiment and the new government’s focus on building more houses have helped generate a more positive outlook from the UK’s construction sector. The latest Construction Purchasing Managers’ Index shows output continues to expand and the rate of growth is expected to increase. This is a sharp contrast to Europe where the construction industry expects activity to continue declining.

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