The FTSE 100 was firmly in the red on Tuesday as growth concerns started to creep in after several weaker uS data points.
Apart from earnings and geopolitics, the main drivers for equity markets tend to be economic growth and monetary policy. Over the past year, the focus has almost exclusively been on interest rates, and markets have given the growth outlook little consideration.
Indeed, US growth has been reasonably strong, so there has been little for investors to be concerned about while they wait for the Federal Reserve to cut rates. This may be about to change.
A string of US economic data points has reminded us that economic growth dictates company earnings, and if growth rates slow, the outlook for earnings may be impacted.
The risk of such a scenario hit equities and oil prices on Tuesday, and the FTSE 100 was trading down 0.3% at the time of writing.
“The FTSE 100 started Tuesday in negative territory amid signs of US economic weakness and mixed trading in Asia,” said AJ Bell investment director Russ Mould.
“Also not helping matters was a fall in oil prices, as OPEC’s surprise decision to start rolling back some of its production cuts before the end of the year hit the market. Index heavyweights BP and Shell, as well as other resources names, were on the back foot.
“News of slowing activity in US factories is a double-edged sword as it could provide the Federal Reserve with more room for manoeuvre on interest rates. Job openings data later today could reveal if a softening economy is being reflected in looser labour market conditions. Friday’s non-farm payrolls release is also in focus as investors await the latest decision from the Federal Reserve next week.”
The fixation on interest rates will likely continue in the short term, but investors will become increasingly concerned about growth if we receive further weak data later this week.
As Mould alluded to, commodity companies were among the worst hit on Tuesday with miners Anglo America, Antofagasta, Rio Tinto and Glencore down between 1.7% and 3.6%. A soggy Asian session weighed on Standard Chartered which fell 4%.
Ocado was the biggest faller, down 6.4%, as the high-beta stock accentuated the wider market move.
Defensive utilities companies and consumer staple stocks were the best performers as the risk-off move drove allocations to ‘safer’ stocks.
