The FTSE 100 continued yesterday’s decline early on Friday after optimism around a rate cut was quickly replaced by concerns about global growth.
London’s leading index was down 0.4% at the time of writing. “So much for the big equity rally when interest rate cuts take centre stage,” said Russ Mould, investment director at AJ Bell.
“Investors thought rates cuts – which have just happened in the UK and looked poised to take place next month in the US – would energise stock markets. The opposite has happened with a bad day on Thursday and weakness extending into Friday, meaning August is so far off to a bad start.
“Weak economic data from the US spooked the market and reminded investors there are negative reasons why central banks might cut rates, not simply lowering the cost of borrowing because the rate of inflation is easing.”
We have previously alluded to global markets’ capacity to focus on only one big theme at a time. The fixation on global interest rates and when they will be cut diverted attention away from underlying growth rates and the consequences for equities.
Now that two major central banks, the Bank of England and the European Central Bank, have cut interest rates, and the Federal Reserve looks set to cut rates in the very near future, investors have quickly shifted their focus to growth rates, which aren’t fantastic.
The UK’s unemployment rate is slowly ticking higher, Europe’s GDP is growing at a snail’s pace, and the US manufacturing sector is in contractionary territory.
With markets free of the preoccupation of when central banks will cut rates, they are now looking at growth, and they don’t like what they see. The result is sharp declines in US equities that spilt over into the European session on Friday morning. Poor results from Amazon overnight has further dampened sentiment.
Investors will do well to hold on to their hats for the rest of the session. The Non-Farm Payrolls report, due for release at 1.30pm this afternoon, promises fireworks. A miss of expectations could see further downside, while a much better-than-expected read has the potential to spark a sharp rally after all the losses of late.
The risk-off approach to Friday’s trading was evident in a clear divide between the winners and losers. Safer defensive sectors such as pharmaceuticals, utilises, and precious metals were well-bid, while pretty much everything else was in the red.
Endeavour Mining, GSK, Haelon, and Fresnillo were among the top gainers. The only anomaly in the risk positioning was IAG’s decision to abandon its pursuit of the takeover of rival Air Europa. IAG shares were 6% higher.
Mondi was the top falling following the slashing of its price target by a plethora of brokers.