The FTSE 100 trundled sideways on Monday as US interest rate hike odds rose following a strong Non-farm payrolls jobs report on Friday.
A reading of 162,000 US jobs added in August was much higher than estimates of 55,000 and so strong that markets chose to focus on the associated economic growth rather than a potential rate hike.
The S&P 500 closed lower on Friday but looked set to open flat when cash markets reopened on Tuesday. US stock markets are closed for Labor Day on Monday.
“Following mixed fortunes across the main Asian equity markets, UK stocks made a lacklustre start to the trading week,” said Dan Coatsworth, head of markets at AJ Bell.
“Many of the headlines from the dominant AI theme remain positive, and that supported gains for South Korean stocks, but investors are having to contend with the potential for an interest rate hike at the US Federal Reserve’s meeting later this month.
“Friday’s much stronger than expected US jobs numbers pushed market pricing on an increase in interest rates to a 58%-60% probability.”
As we reported last week, the odds of a US rate hike had fallen to around 38% after comments from Fed officials. Investors will keep a close eye on how these odds develop over the next week.
But a rate hike in September may not be the negative outcome that investors will fear, with global economies showing signs of strength and company earnings remaining robust.
“The rise in bond yields is something to monitor closely, but not something that is automatically bearish for equities. The key point is why yields are rising,” said Ben Ritchie, Head of Developed Market Equities at Aberdeen Investments.
“Aberdeen’s Global Macro Research argues that the recent move has been driven primarily by higher real yields, fiscal concerns, rising government borrowing requirements and heavy private-sector funding needs linked to AI investment, rather than by a loss of confidence in central banks or a surge in long-term inflation expectations.
“Historically, equities can cope surprisingly well with higher yields when those yields reflect resilient economic growth, strong corporate investment, rising productivity expectations, and improving earnings prospects.”
In London, there was a broadly even split between the winners and losers, reflecting a quieter day with US markets closed.
Standard Life was the FTSE 100’s top riser after reporting the positive impact of the integration of Aegon into the business. Shares were 2% higher at the time of writing.
Diploma was also having a good session, rising 2%. Fresnillo was the FTSE 100’s top faller as precious metals prices eased back.